Kitchen Construction Costs Are Still Rising

As the crisis in the financial markets has deepened, upward pressure on construction prices, in general, and commercial kitchen construction, in particular, has weakened. That will come as welcome news to colleges, universities, and culinary schools planning new facilities. On the other hand, if you were shocked by construction prices earlier this year, price declines produced by the weakened economy probably won’t matter to you. The truth is that prices are still sky-high.

Back in May, Ed Norman, president of Chicago-based MVP Services Group, Inc., a foodservice-consulting firm that provides food facilities layout and design and management advice, observed that the cost of steel had risen, on average, about seven percent per year since 2002. Cumulatively, that’s nearly 50 percent. So even if steel prices level off or decline a bit, they will still be high. In addition, tight credit is driving up interest rates charged by lenders. So any relief found on the materials side will likely be lost to higher borrowing costs.

According to Steel Business Briefing, for example, the price of hot rolled coil steel charged to small- and medium-size customers fell 11 percent to 14 percent between September 3 and October 3 of this year. While that sounds like a lot, the price per short ton stood at $1,000 at the beginning of September. The decline brought the price down into the range of $860 to $890.

As Costs Rise, Kitchen Costs Rise Even Higher
Compared to the general commercial construction market, where costs have risen, too, commercial or culinary program kitchen construction costs have risen even higher. “Kitchen equipment and construction materials use a tremendous amount of stainless steel, aluminum, and oil-based products,” said David Chislett, a principal in the New York City office of Ricca Newmark Design, a firm that specializes in interior and culinary facility design.

Prices for all of those materials have been surging. Chislett estimates that the cost of constructing a kitchen to commercial or culinary-program standards has risen 30 percent in the last three years.

Norman’s advice to those putting together construction plans today: “Cushion your numbers out over 12 to 18 months,” he said.

In addition, you may have to manage prices, continued Norman. Suppose a college is one year out from opening a new facility. Before the financial meltdown, dealers that sell kitchen equipment to contractors were refusing to guarantee prices for more than 60 days. To lock prices in, schools had to take possession of the equipment during the guarantee period. “The institutions would say that they would purchase now and store the equipment — at the dealer’s warehouse or, in some cases, on campus — until it could be installed in the facility,” Norman said. “The institutions would also negotiate with the manufacturer to begin the warranty period on the day of installation instead of purchase.”

Whether these precautions are necessary today depends on the availability of price guarantees from manufacturers.

Schools that get stuck with a price hike that breaks the budget can fall back on value engineering. “We do a lot of custom fabrication of stainless steel worktables to help control costs,” Norman said. “We typically specify 14-gauge tops, 16-gauge shelves, and 20-gauge face panels. If a bid amount gets out of kilter, we can modify those specifications down. Of course, it will have an impact. You’ll be trading a lower price for a noisier kitchen.”

If the economy eventually goes into a modest or steep decline, prices may go down as well. Keep in mind, however, that the prices of construction materials, such as steel, have risen in response to demand pressures created by construction booms in developing countries such as China and India. While the domestic economy will affect the price of materials and equipment, so will the performance of the economies of developing countries.

“It’s my opinion that no price relief will be reflected in the short term due to recent market conditions,” added Norman. “Manufacturers are still forecasting price increases for 2009 to be between 12 percent and 18 percent over 2008 pricing. If things continue to slide downhill, slowing demand in the industry will eventually affect pricing. To date, however, major project work has not slowed down.”

Norman goes on the note that he has seen some resistance among consumers to purchasing replacement equipment. For now, though, he is holding to the existing price forecasts made by manufacturers earlier in the year.

Don’t Count on Predicted Changes
Of course, things may change. In its third-quarter cost report entitled “Steel Price Spike Meets Credit Crunch,” Engineering News Record (ENR) reported in its September 29/October 6 edition that “Materials prices with a high-end use in housing are in a free fall.”

In the report, Robert Murray, chief economist for McGraw-Hill Construction, of which ENR is a unit, said that he had predicted a 13 percent decline this year in new non-residential square footage, with a seven percent decline to follow in 2009.  Since that prediction, the credit markets have clogged up and Murray now indicates that the decline in new non-residential square footage may be even greater.

While these events are driving construction material prices down, ENR noted that global demand — from developing countries — continues to support prices and even push prices up. As an example, ENR noted that rebar prices have declined but that they nevertheless remain $1,000 per ton higher than last year.

Engineering Efficient Design
While the cost of facilities will probably remain high, observers also say that it is possible to fight high costs by lowering operating costs, especially with new efficient equipment designs.

New exhaust hood systems, for instance, can cut down on the cubic feet of air exhausted from the building, lowering heating, ventilating, and air-conditioning costs. Emerging refrigeration systems use scroll compressors, which are more efficient than piston-operated equipment. Today’s refrigeration technologies can also tap into free geothermal energy. New dishwashers save water with low-flow spray nozzles.

“Selecting more efficient equipment makes it possible to calculate a return on your investment,” said Norman. “How much will a new piece of equipment save per year? How long will it take to pay for itself? How much will you save thereafter?”

And the big question: Can you cut operating costs far enough to fund a new culinary kitchen facility?