Commercial builders feel pain of skyrocketing fuel costs - then they pass it along
If you think high gasoline prices are putting a hurt on your wallet, imagine if your business used 60,000 gallons per year. "Our trucks are on the road all the time, constantly hauling materials," says Jack Healey, president of City Point Construction Co. Inc., explaining his company's insatiable thirst for fuel. "We have a bulldozer that uses 150 gallons a day." The West Haven subcontracting company does site work - roads, sidewalks, curbs, parking lots and they lose money, just to get cash flow. We're trying to figure out ways to bid a little higher."Healey says he is also getting hit by fuel surcharges from suppliers who deliver materials such as pipes and lumber.
Indeed, rising costs for petroleum in its various forms - crude, diesel or gasoline - is socking it to the construction industry. According the Bureau of Labor Statistics' July 2006 Monthly Labor Review, the 2005 producer price indexes (PPIs) rose dramatically: 49.6 percent for crude petroleum, 46.7 percent for diesel fuel, and 41.5 percent for gasoline.
And public works projects like roads are suffering the most. According to a March 2006 report from the Associated General Contractors of America (AGC), a national trade association for the construction industry, "In 2005, the PPI for highway and street construction rose 14.1 percent, pushed up by further large increases in diesel and asphalt prices."
Skyrocketing fuel and rising materials costs equals a double-whammy in Connecticut. "Energy and transportation are the two biggest challenges facing Connecticut right now," says Bob Gonyeau, assistant director of the Construction Institute at the University of Hartford.
Oil prices also impact the prices of some plastics, such as PVC pipe, moisture membranes, plumbing fittings and insulation, says Ken Simonson, AGC chief economist. "The PPI for plastic construction products rose 19.6 percent between July '05 and '06," he says.
Rapid increases in oil and other construction costs are driving the speed at which project decisions must be made, says Thaddeus Stewart, community affairs director for the Milford office of national firm Turner Construction Co. Stewart says he has observed the prices of petrochemical products, steel, iron and metal ores nearly triple over the past four months.
"Now owner bidding requirements are coming in at 15 to 30 days, whereas it used to be 45 to 90 days," he says. "Subcontractors and contractors are now carrying built-in escalation costs - a separate line item of two to 15 percent - if we can't come to terms within [that time period]."
As a result, he says, "Contractors are pre-purchasing long-lead items much sooner, like elevators, mechanical units and products that require heat-based processing, like stamped and extruded metals."
Stewart does not see this situation slowing down construction in the commercial market. "There are more ways of financing multi-million-dollar projects," he says. "Real estate investment trusts are becoming much more prominent." He sees continued construction growth in the areas of research and development and multi-family residential construction.
Tom Beebe doesn't see a slowdown, either. He is the director of business development for Petra Construction, a medium-size general contractor based in North Haven. The rise in oil and gas prices "hasn't caused any delays - it's not adversely affecting us," Beebe asserts. "We've diversified our target market enough so that we've spread the risk out." For example, he says, luxury homes and the growing private education market are able to absorb the higher costs.
"Private non-residential construction is increasing," says Simonson, speaking from a nationwide perspective, "It's worth going ahead. And public agencies often don't have any choice."
But some public agencies have been proactive in their response to higher oil prices. "We saw this coming ten years ago," says Peter Shmigelsky, who oversees operations, maintenance and capital improvements of government buildings for the city of New Haven.
Gasoline and oil prices are a tremendous drain on the budget, he acknowledges. "But the city has a very progressive energy management policy," Shmigelsky says. "What we're doing in New Haven is being modeled by other communities."
"We're trying to reduce our energy consumption through smart building," he explains, "for example, by minimizing waste and throttling back on heating and cooling. One of our main criteria when making improvements is: How does it relate to energy efficiency?"
Beyond smart building, higher oil prices in part are driving the rise of other philosophies of construction, observes Adam Ney, president of Auctor Verno in Bethany, a company that markets green buildings and other businesses.
"Increased gas prices are leading to an increased interest in working in a facility located close to transportation as well as living in traditional neighborhood developments," Ney says. A recent trend in town planning, such communities are designed so that residents can easily walk to stores, schools and transportation.
Nevertheless, it's difficult to predict the future. "We're also likely to see some of these prices going down," says Todd Martin, economic advisor to Bridgeport-based People's Bank.
But ultimately, "There's only so many dollars out there," says Shmigelsky. "[Higher energy prices] put other things on the back burner." Is there a ripple effect? "Absolutely," he says.
Impact of Rising Fuel Costs on Residential Construction
Architect Russell Campaigne of Guilford-based Campaigne-Kestner Architects has noticed a significant impact of rising gas and oil prices on residential construction.
"Materials all travel by truck," he says, "which is passed through to the sale price of all construction materials. Furthermore, anything that uses petroleum, such as asphalt, is being affected."
Campaigne also cites products such as roof shingles ("rising five percent every quarter"), driveways, rigid insulation and concrete ("in the cost of running kilns"). "Energy cost is the major contributor we're seeing in the building material market," he says.
Is it having a dampening effect on the market? "It will," Campaigne asserts. "For me, there's a challenge in getting the most value for my clients. For them, there's shock at first, then a 'sobering' of the project."
Jonathan Shweky is president of Wallingford-based Shweky Developers and president of the Home Builders Association of New Haven County. High gas prices are being especially felt by deliveries from suppliers, with the most affected being those doing the rough outside framing, he says.
How do high gas prices contribute to the slowdown in residential construction? "They might be a small aspect, but not the major catalyst," Shweky says. "It's more of a psychological effect. But it's less of an issue now. Our mentality is, 'When it goes down to $2.70 a gallon - wow, that's great!'"
Connecticut's Petroleum Profile
Connecticut is home to two of the four Northeast Heating Oil Reserve sites established by Congress in 2000 to help cushion the risks presented by home heating-oil shortages. The combined reserve capacities of the two New Haven sites total 750,000 barrels.
Connecticut is one of five states that require reformulated gasoline statewide. Beginning January 1, 2004, both New York and Connecticut banned the use of methyl tertiary butyl ether (MTBE) as a smog-reducing gasoline additive.
Connecticut's ports provide an important point of supply for petroleum products, particularly for distillate fuel oil during the winter heating season. Heating oil is the dominant fuel used for home heating in Connecticut, with about 52 percent of all homes in the state using heating oil as their primary heating fuel. Natural gas accounts for the second largest share of the home heating fuels market with a 29 percent share.
Connecticut is required to use reformulated gasoline for the entire state.
Source: U.S. Department of Energy
