Tough Times, Silver Lining: Builders Lower Their Bids

Chronicle of Higher Education

By SCOTT CARLSON

Now is a great time for colleges to get bids on construction projects — if they have the money to pay for them.

Over the past several years, colleges have endured eye-popping escalation in the cost of campus construction, with the budgets swelling by more than 40 percent in some cases. The increases resulted from similarly rising costs for energy and petroleum-based building materials, and from growing demand for staples like steel and cement amid a booming construction market, both overseas and in the United States. Construction firms consistently bid high because of the demand for their work and to cover the risk of escalating costs on materials.

But times have changed. As the financial, housing, and major-construction markets have headed toward meltdowns, those same construction firms are looking for jobs, even while the prices of energy and materials have fallen. The prices of essential construction materials like structural steel, cement, and lumber are all expected to decline through 2009, according to Engineering News-Record, a trade magazine for the construction industry, published by McGraw-Hill. Because of those declines, building costs are likely to go down slightly this year.

Commercial, nonresidential construction markets fell 17 percent in 2008, including a 28-percent drop in shopping-center and warehouse construction, a recent McGraw-Hill report said. Among the top five construction markets, only New York City showed an expansion in 2008, largely because of projects started at the former World Trade Center site. Atlanta, Chicago, Miami, and Washington were all in decline: as much as 56 percent in the Windy City.

'Firms Are Getting Hungrier'

Those numbers may mean that firms are turning to higher education for business — and that may translate into bargains for colleges.

"We are getting bids that are significantly under budget — and by significantly, I mean a $40-million job that comes in at $35-million" or even lower, says Larry H. Eisenberg, executive director of facilities planning and development at the Los Angeles Community College District. The district is pushing forward with $400-million in scores of construction projects as part of a $5.7-billion expansion plan.

"The firms are getting hungrier," he says, noting that almost 40 construction firms bid on one recent project. "That is completely unprecedented. Early last year, if we got seven or eight bids I would be really happy. The year before that, we were challenged to even get a few bidders."

Some of the most aggressive bidders are high-end companies that had never bothered to bid on community-college projects before, he adds.

Richard Stockton College of New Jersey saw a similar trend in bids on a new campus center. Michael C. Shatken, a partner at KSS Architects, which designed the center, says his firm had worked to keep the building under budget. In an effort to shave the price tag, they had even pushed some costs — like millions of dollars for kitchen equipment — off the building budget and onto the plate of the college's food-service provider.

But when bids finally came in, they were about 25 percent below a figure predicted by two cost-estimate firms. (The budget for the project has not been made public, and a contract on the bid has not yet been signed.)

"What was impressive about the bidders was that they were from a wide range of contractors," Mr. Shatken says. Companies that normally bid only on private-sector work were part of the mix, he says.

Donald E. Moore, associate vice president for operations at Richard Stockton, says that having monitored school-construction prices, he anticipated in August that they would drop for the college's projects. "That is when I put the pedal to the metal to push the project out faster, to take advantage of the market," he says.

Hands Tied

Of course, the economic downturn has brought benefits for relatively few colleges — mainly those that had money reserved for projects. The Los Angeles district, for example, is paying for construction from bonds backed by property taxes.

But many institutions just are not able to build right now. In recent months, states including Colorado, Indiana, and Missouri have either frozen public construction projects or have proposed doing so. More than 130 building projects on California State University campuses, worth about $850-million in all, have ground to a halt amid California's cash-flow problems.

And while construction costs might be coming down, other colleges are experiencing rising costs in debt service and other financial costs. Molloy College, in Rockville Center, N.Y., is planning a $53-million residence hall and student union. On the basis of a $50-million bond issue, "we are looking at a substantial increase in our annual debt service — a minimum of $700,000," says Michael McGovern, vice president for finance. "We are looking at numbers in the 7-percent range, which is unheard of in tax-exempt financing."

Estimated construction costs for Molloy's project rose almost 30 percent over the past three years. Recently the residence-hall portion went out for bid, and early bids are coming back 5 percent lower than expected, Mr. McGovern says. Molloy, which is not far from New York City, may not see the bargains that other institutions are getting because it is subject to the city's relatively steady construction market.

At institutions like the Los Angeles Community Colleges and Richard Stockton, administrators plan to push projects out to bid as fast as possible to take advantage of the market. Mr. Moore says he would like to get bids on a science center and a couple of renovation projects at Richard Stockton, in addition to the new campus center, by the end of the year.

The Los Angeles Community College District recently put out a call for bids on five projects, each worth around $40-million. The district will try to put 20 to 30 projects out for bid in the next six months, Mr. Eisenberg says. "We're spending about $80-million a month. I am expecting that will ramp up to $100-million a month."

There are uncertainties about what will happen to prices in the near future. The federal government's multibillion-dollar stimulus bill, being debated in Congress, includes many billions for school construction, higher-education maintenance, and infrastructure. But experts say those amounts, even if they remain in the legislation's final version, are not likely to reinvigorate the construction market and drive up prices.

Mr. Eisenberg sees the economic turmoil leading to a shakeout in the construction industry. On the upside, the best firms will be left standing; on the downside, fewer firms will be around to bid on jobs and help keep costs down.

Mr. Shatken, the architect, says the current market is fundamentally unsustainable. "I think this is a short-lived opportunity," he says. "The trend on costs can only go one way."