Rising steel prices are wreaking havoc on the competitive bidding process for commercial construction projects in southeastern Wisconsin, where builders and fabricators are often faced with the choice of absorbing those costs or passing them along to their customers.
According to a March 22 report by Atlanta-based Boyken International Inc., steel prices at American mills have risen 40% to 60% in the past four months, depending upon the type of steel.
According to Boyken and other sources in the commercial construction industry, the rising costs are being fueled by the rapid growth of demand for steel in China and the U.S. war in Iraq.
In 2003, China became the largest consumer and manufacturer of steel in the world, replacing the United States, according to the Boyken report.
"The Chinese steel industry cannot keep up with the demand for steel within China," the Boyken report stated.
The construction industry consumes 41.5% of all steel produced or used in the United States.
The impact of the world equation is being felt severely in southeastern Wisconsin, according to architects, contractors and steel fabricators.
"It’s a universal truth at this point, all the steel’s going over to China, and it’s going over to Iraq," said Paul Rushing, project architect for The Kubala Washatko Architects Inc., Cedarburg. "It’s being sucked up in the market to go over there, and it has an impact on the domestic steel market."
The rising steel costs are changing the sequence of progression for the Historic Third Ward Public Market construction project in Milwaukee. C.G. Schmidt Inc. is actually placing its bids for the steel it will need for the project sooner than it expected.
"We’re trying to cut our losses. We already know that steel costs have risen ahead of where we thought they’d be," said Rushing, who designed the Public Market.
The rising steel costs prompted some minor alterations in the planned design of the Public Market, according to Einar Tangen, chairman of the Third Ward Business Improvement District.
"We’re continuing to manage our cost side. We’re talking things like diameters, sizings and spaces," Tangen said.
The Third Ward agency recently received final approval from the federal government for a grant that will enable the project to proceed.
Steel costs are playing a role in determining which raw materials are used for some commercial building foundations in the region.
"There’s a Grafton commercial project we’re probably going to structure in wood, where maybe two or three years ago, we would have structured it in steel," Rushing said.
"I can tell you we are certainly looking at value-added engineering ideas" said Craig Coursin, project principal at C.G. Schmidt. "If you are going to order steel months from now, I’d be concerned."
Steel parts in commercial buildings can include beams, joists, rebar for concrete, braces, fasteners, electrical conduit and even partitions for bathrooms. Those parts traditionally can comprise 15% of the costs of a typical 100,000-square-foot distribution warehouse, according to Jim Parks, executive vice president of Butler-based Berghammer Construction Corp.
Berghammer’s costs for such steel parts have increased 20% to 30%, Parks said.
Those costs are wildcards for a contractor submitting a competitive bid for a construction project. Does the contractor try to absorb the costs or does it incorporate the costs into its bid, passing along the costs to a developer – at the risk of losing a competitive bid? Further, how much will steel costs rise from the time a project is bid to the time the steel is actually purchased?
"That’s basically what we’ve had to use our crystal ball to do," Parks said. "There’s only so much risk you can assume in a competitive environment. It can be unnerving … It’s thrown another curve into the process."
Hunzinger Construction Co. has seen its prices for some steel construction products increase 60% in the last four months, according to Tony Gabrysiak, vice president and chief estimator for the Brookfield-based firm.
If steel prices keep skyrocketing, more commercial buildings could be built with frames made primarily of wood or concrete, Gabrysiak said.
"Will that come to pass? Yes. The industry is going to find its way to what is the most cost-effective way to serve its clients," Gabrysiak said.
Contractors such as C.G. Schmidt, Berghammer and Hunzinger buy their steel from metal fabricating businesses such as Cardinal Fabricating Corp., a Milwaukee firm that buys the metal from steel mills or warehouses.
Being the middleman in the process of a steel price war is not fun, according to David Kaczynski, president of Cardinal Fabricating. Kaczynski also faces the same dilemma: Does he absorb the higher costs from the mills, or does he pass them along to the contractors at the risk of losing a competitive bid?
"In some cases, we’ve had to eat some increases that we couldn’t pass on because contracts were firm," Kaczynski said. "In some cases, we’ve negotiated (increases). We’re trying to keep our existing customers and trying to work with them."
Manufacturers considering building a new factory or warehouse need to keep the rising costs of steel in mind before proceeding with their plans, according to James Bodi, principal and owner of Madison-based Bodi Engineering.
Bodi’s clients in southeastern Wisconsin often tell him they need a new building with clear space – no columns. Clear space will require more steel support in the roof structure and can increase the construction costs, Bodi said.
"The tendency is to build a 40,000-square-foot building and they figure out a layout. It’s better to do the layout first," Bodi said.
Often, a building’s columns can be strategically placed without impeding a company’s operations, thereby reducing construction costs, Bodi said.
April 30, 2004 Small Business Times, Milwaukee
