Riding the Roller Coaster:Coping With Today's School Construction Market Takes Some Preparation

According to School Planning & Management’s 10th Annual 2005 School Construction Report, 2004 was a bounce-back year in school construction with nearly $20 billion spent on completed projects. Of that amount, 60.5 percent was devoted to new buildings, the highest percentage earmarked for new construction in the last 20 years, with bigger numbers forecast for 2005.

At the same time, costs for materials have skyrocketed. Driven by strong domestic and international demand, prices have spiraled for petroleum-based products, cement-based products (up 30 percent) and lumber (up 25 percent to 35 percent). Most notably, metal-based products experienced 25 percent to 200 percent increases, exerting the greatest upward pressure on material costs.

Also influencing costs, the abundance of work in the education and public works sectors has pushed professional consultant fees upward and limited the number of contractors willing and capable of building schools.

A methodical process, master plans for education projects are typically developed up to five years before construction begins, including two or more years that elapse following voter approval of the bond. While the education market typically experiences four percent to six percent annual cost escalation during this period, districts have been unprepared for overall increases of 25 percent to 45 percent occurring in the last two years. As a result, many districts are faced with the predicament of not being able to fully accomplish commitments made to voters. The bottom line is school districts can’t buy as much for their dollars as originally planned.

Once price escalation seemed to have leveled off, districts again needed to brace themselves for a second round of unanticipated escalation, the rise in the cost of construction as a result of hurricanes Katrina and Rita. When you look at the materials and labor force that has been required to rebuild the devastated areas of Mississippi, Louisiana and Texas, we should anticipate that supply and demand issues will keep prices high.

Learning that funds available won’t support their proposed projects, the initial reaction of many school boards is,“Why is this happening to us?” At this point, district administrators must educate their boards by presenting historical data and cost comparisons, proving that they aren’t alone. Then, focus on the problem by implementing best practices that will deliver the optimum chance of achieving a successful bid and project.

Following are best practices that will help school districts prepare for and deal with the challenges of today’s roller coaster bid market.

• Prioritize everything in the program. Early in the design process, enlist a task force representing the facilities department, general public, PTA and teachers association to prioritize the improvements, so that in the event that the funding is not adequate, you have an established direction of how to scale back the program. These sectors are crucial for measuring the community pulse. When the bids come in, target receiving bids that are roughly five percent below budget, identifying simple but significant alternates that can be added back in.

• Examine all soft costs that will impact the program. For example, architect or construction manger fees are often based on a percent of total construction value. If construction value goes up 25 percent, soft costs will increase accordingly. Often times, districts lock in the fees paid to such consultants based on the budgeted funding, and they hold the team accountable to maintain the design within the established budgets.

• Plan early for costs such as interim housing (portable classrooms). A limited number of companies make and install portable classrooms during the summer months when demand is highest. Careful planning prior to the implementation of your program will minimize the extent that portable facilities ultimately reduce the funds available for the bricks and mortar construction. Consider constructing new facilities prior to modernizations, so that those facilities may be utilized in lieu of interim facilities. Also take into consideration special programs that are not cost-effective to house in modular facilities, such as arts, science tech labs and libraries, so that they may be scheduled without interim housing facilities.

• Determine if the contractor has calculated escalation clauses for unforeseen conditions into his contract. For example, while steel costs continue to soar, the steel contractor may only honor his bid for three days because in 10 days the costs of steel may go up 10 percent. Because it is a public works bid, the general contractor will be asked to hold the bid for 60 days. He can gamble that prices won’t go up or calculate potential increases and include those escalations in his bid. As opposed to paying these estimated costs, some districts are tying the bid to a material cost standard, a published criteria that is measured like a commodity. If the standard goes up, there is an automatic change order based on a proportion of that percentage. It’s a way districts can obtain the best buy today without contractors padding their bid.

• Plan for the inevitable:

1) Build flexibility into bond language. If possible, be as general as possible. For example, use the term modernization rather than listing every detail.

2) Use value engineering continuously throughout the design process. Identify items in question, test your budget and keep your designers on track. Once designed, changes are costly. The key is to stay involved in the design and test your budget with detailed estimates at key milestones in the design process. Get it right the first time by closely managing the design.

3) Perform constructability reviews to minimize costly change orders.

4) Consider deferring work that may not fit within your budget by possibly bidding out pieces of the project separately. If you don’t think your budget will allow for the new gymnasium or performing arts facility, why not bid the balance of the project and then scale the new facility back to what your remaining funds will afford you. Talk to experts. Look at the project from all angles. There may be other ways to accomplish your goals. For example, are you trying to force the project into an unrealistic schedule? Consider a phased opening plan prior to the bid, in order to get what you absolutely need without expending unnecessary funds for what you don’t need.

5) Manage bond issuance and cash flow based on your program and community needs. With local bonds, the speed at which districts can extract the money or sell bonds and charge it back to the tax base is governed by the community’s tax rate. Usually, the money isn’t available all at once. Consider staggering construction until the money is available or look into bridge financing. Sometimes price escalation, interim housing issues or disruption to the operating school campus may have a greater financial effect on the program and the educational environment than the added interest costs of bridge financing. Bring in financial consultants to help determine the right course of action.

• Plan the bid to generate the best competition. Consider:

1) Bonding capacity of contractors. There is a group of contractors that can get bonds for up to $5 million. Others can get bonds up to $10 million. Above $15 million, the bidder market shrinks considerably. You may want to peel off a part of the project, creating two projects, or you may want to procure the project by phase if the overall duration is too extensive. Open up the bidding to more competition by using a strategy for procurement.

2) Phasing and duration. A 14-month project worth $2 million is considered slow construction. Weigh the options of utilizing additional interim housing or alternative facilities to speed up the schedule against the cost of portable classrooms. There is no“one-size-fits-all” solution. You need to evaluate your options with your team.

3) New construction versus modernization… multiprime versus general contractor. Analyze how you want to buy the project. Do you want to hire 20 contractors or one general contractor that will take responsibility and be liable for possible delays? Research the complexities of the job, availability of manpower and what’s going on in the marketplace. Is it saturated, overloaded? Will the local contracting community be able and willing to provide the required payment and performance bonds?

4) Other opportunities in the market. Generally, if contractors can only bid one or two jobs, they will bid the most enticing project. Don’t bid the same day as the neighboring school district. The contracting community generally can’t handle two bids in one week, so make yours more appealing.

• Avoid the bid day surprise.

1) Have a good sense of how the bids will come in beforehand. Don’t be surprised. Recent, accurate cost estimates are critical. If one bid is 20 percent lower, you must know if that number is realistic.

2) Keep the bid process simple. Many districts require 10 alternate plans, unit prices on all items and hourly rates submitted with every quote. These requirements push the price up and increase opportunities for errors in the bid.

The key to successfully riding today’s bid market is first recognizing the challenges. Don’t bury your head in the sand. Then, manage the situation. Leave some options open. Determine the best practices to implement that will give you the best chance for the success of your bid and project.

Mark M. Mardock is senior vice president, education services for McCarthy Building Companies, Inc. www.mccarthy.com. During the past 15 years, McCarthy has built or managed construction of more than 300 school projects nationwide, totaling more than $1.5 billion in construction value.