Illinois Business Journal - Steel price hikes hammer commercial construction

At the end of 2003, his vendors forewarned Doug Von Alst that steel prices could climb 8 percent during the first quarter of 2004. But by March 2004, his prices were running 80 percent to 100 percent higher than what he was originally quoted, and product availability and delivery had become as unpredictable as the prices.

"A letter came saying that quotes were no longer being honored," said Von Alst, who is vice president of Von Alst Operating, a Swansea-based business that supplies key steel products ranging from structural studs to acoustical ceilings to the commercial construction industry. Steel was being allocated to the manufacturers, and they didn't know what type of steel they would be receiving, he said.

"The price is way out of control, and the product isn't there if you want it," Von Alst added. "By far, this is the worst thing that has ever happened to commercial construction."

The worldwide demand for steel, which is driving prices up and creating shortages, is playing havoc with commercial construction projects, hammering contractors hard. Material that used to be delivered within five to 10 working days is now taking up to eight weeks for delivery, Von Alst said.

The uncertainty of steel prices, combined with shortages, has basically left the contractors blindfolded for their bidding process, struggling to earn a profit on bids they submitted several months prior to the dramatic price hikes.

"There has been at least a 40 percent increase on conduit prices, and we have been warned that prices could increase up to 80 percent," said Mike Kemper, project manager with Pyramid Electrical Contractors in Belleville. "If a project is on schedule, you have to eat it," he said about the plight of contractors whose bids fell below the actual cost by the time the project was under way. "If it is not on schedule, you have some recourse to go back and talk with the customer."

The market conditions have made it nearly impossible to develop realistic bids. "We have no idea what our prices will be," Von Alst said. "We are just guessing and cannot commit to a time frame."

It's a common scenario being played out among contractors in the region and across the nation. Bids are typically held firm for construction projects, but because of the sharp and rapid increase in steel prices, the Associated General Contractors of America recently approved a resolution "urging public and private owners to permit steel price adjustments in both new and existing contracts."

"It's an unbelievable dilemma," said Ron Randle, owner of R. Randle Construction Inc. in Belleville. "Plywood has gone up for four to five months, but it was a gradual thing, not the increases we're seeing on steel." Randle said he had two projects under way that were being negatively impacted by the 40 percent increase in rebar prices. "The government needs to step in," he said.

Hank Hart of Hart Contracting Inc. said the situation is hurting the bidding market this spring, a traditionally active season for construction planning.

"If this trend continues, it will jeopardize future construction," Hart said, adding that he heard concerns from architects that the projected cost estimates were higher than anticipated just six months ago. "One architect I was talking with said he saw over a 20 percent increase for the same building from one year ago."

Some projects have been put on hold in hopes that prices will come down, said Mark Darr, president of Federal Steel & Erection Co. in East Alton. His firm is a supplier and erector of structural steel. Darr said his raw material cost for fabricating structural steel doubled during the past couple of months.

"All the mills are applying surcharges," he said. "You don't know what it's going to cost in three months. There's been a decrease in long-term orders in larger construction projects. Some customers are waiting to see what will happen."

Darr said the prices will probably gradually increase before leveling off.

Jim Hudson, president of H&H Construction Services Inc., agreed.

"By fall, this is supposed to simmer down," he said. Hudson has seen some customers deciding to delay their projects until fall as well. "We cannot get a firm steel price. The biggest problem is that work is contracted for hard dollar. We're trying to work proposals now to protect us in the future."

When the company pays a price for rebar that is double what it figured into the bid, the money comes out of the company's bottom line, he said.

However, Hudson said steel prices had been constant for nearly 25 years, and historically, the industry increases its prices in large steps before reaching a plateau.

Hudson emphasized that it is important to keep the big picture in mind for construction projects.

"In the typical profile of general construction, steel cost is 10 percent to maybe 20 percent of costs. It is not that severe to postpone a project for an entire year to see what a particular product will do. People tend to get panicked over one issue, but there is no better time to finance construction than right now," he said.