The announcement earlier this month that the low bid for the construction of Missoula’s proposed aquatics centers project had come in $2.2 million over estimates—and over a citizen-approved bond to finance it—has residents scratching their heads and project planners scrambling.
According to Ken Simonson, chief economist for the Association of General Contractors in Alexandria, Va., Missoula is simply getting a taste of what’s happening all over the country.
“Public agencies are having to juggle construction budgets more and more,” Simonson says.
According to Missoula Finance Director Brendtt Ramharter, project planning has been especially difficult in the last year.
“We’ve had to redo a number of bids,” Ramharter said. “In the end we either have to scale projects back or come up with more money.”
Simonson says project planners are finding it increasingly difficult to estimate construction costs because of record-high commodity prices and volatile markets, largely due to booming growth in China, which is consuming materials at an unprecedented rate.
The Producer Price Index (PPI), released monthly by the U.S. Bureau of Labor Statistics, measures the average change over time in prices paid to domestic producers of goods and services. According to Simonson, the overall PPI rose 4.9 percent overall from March 2004 to March 2005. The PPI for construction materials for that same period rose 8.2 percent. “Prices are not only going up quickly, but they are quite volatile,” Simonson said.
That volatility can lead to higher quotes from contractors who are forced to submit firm dollar amounts when bidding on public projects. In the past, contractors often secured a price from vendors on certain construction materials, says Simonson. But in today’s economic climate that’s not possible. Unpredictability and uncertainty in steel, cement and petroleum markets, for example, have made suppliers wary of committing to a price one day only to have it skyrocket the next.
“If a contractor puts in a low bid and gets the job, and then prices go up, the contractor is left holding the bag,” says Simonson.
Ramharter said the city has been planning around market increases since steel and concrete prices jumped beginning last year.
However, elevated material prices combined with a strong economy, high demand for construction services and increased transportation costs make it even more difficult for governments and municipalities to plan for complex projects like the proposed aquatics centers.
Cary Hegreberg, executive director of the Montana Contractors Association, says it’s not uncommon to see low bids in Montana come in 20 percent higher than project estimates on large-scale projects like the aquatics facilities.
“There are a lot of factors that contribute to that,” Hegreberg says. “I imagine in Missoula it was probably a ‘perfect storm’ of factors that resulted in the discrepancy.”
One of those factors is the availability of contractors at the time of the bid letting.
According to the Bureau of Labor Statistics, construction employment in Montana rose to 26,400 employees in March 2005, compared to 24,100 employees in March 2004.
“The economy is doing quite well, and there has been a pent-up demand for construction in Montana,” Hegreberg says.
He added that a high demand for construction and a shortage of qualified workers is adding to the bidding crunch, especially on large-scale public projects that require more expertise.
“You can’t just hire a guy off the street and throw him in the driver’s seat of a backhoe,” Hegreberg says. “The worker shortage is having a significant impact on builders’ costs. [Builders] usually have to hire employees away from another builder...that means they are going to have to offer those workers higher wages and better benefits. That all adds to the costs of construction.”
Combine those market factors with the restrictions placed on bureaucracies and you have a recipe for budget overruns.
“I think it’s a real struggle for local governments,” says Donna Gaukler, director of Missoula Parks and Recreation.
Gaukler, who has spearheaded Missoula’s aquatics project for two years, said that while the city was giving the project due process, construction prices continued to rise.
In an ideal world, voters who said “yes” to the $8.1 million bond in 2003 would have known what the design was, along with an estimated price tag, before they went into the voting booth. Instead, the people voted on a concept and an estimation based on the best available information the city could provide without actually designing the project. Skyrocketing construction costs and volatile commodities markets have since altered the bidding landscape.
Gaukler and the designers now have to decide how to pare the project down to fit the budget or redesign it altogether. Meanwhile, they have to make good on the promise to voters to provide all of the amenities citizens approved in 2003. And there’s no guarantee that construction costs won’t continue to soar in the meantime.
Hegreberg says it’s a common problem for municipalities dealing with voter-approved funds.
“When [local governments] get voter approval for a specific project, and they’ve already secured the revenue, finding out later than they don’t have enough money to complete the project can be a major problem,” Hegreberg says. “The recourse is often to trim back the project or find additional sources of revenue.”
The Friends of Missoula Parks, a nonprofit organization dedicated to improving the city’s park system, is embarking on an effort to do just that.
“We’ve got about 56,000 people in the city of Missoula–that comes to about $30 per person,” says Tim Bechtold, president of the Friends of Missoula Parks. “We’re going to ask the people, who overwhelmingly supported the bond, to step up and help get it built.” Bechtold says he knows it’s unrealistic to expect every resident to pitch in the $30 needed to make up for the deficit, but he hopes that by targeting the “usual suspects,” the facilities can yet become a reality.
“Basically this is tantamount to begging…but if you believe in it, we’re asking you to put some money into it,” Bechtold says. “We have to try to do something.”