Keeping Your Project on Budget Despite Rising Steel and Lumber Costs

By Kathleen Goolsby
Steel, lumber, cement, copper tubing and plastic plumbing products are the primary materials used in the structure of homes and other buildings. They are commodities; and as such, they are subject to dramatic price fluctuations based on supply and demand. Since 2004, the costs of these commodities have dramatically increased, causing many construction budgets to become inadequate. This article looks at the drivers for the soaring materials costs, their true impact on construction projects, and offers some tips for staying on budget.

Soaring Costs and Their Impact

Lumber: U.S. environmental concerns for preserving trees, as well as wildfires in British Columbia’s timberlands, have created a shortage in available wood. At the same time, homeowner demands for decks, paneling, hardwood flooring and wood-composite products have increased the demand for wood. Price increases are also due to the Environmental Protection Agency mandating the use of only arsenic-free chemicals to protect lumber from rot and pests. Rising gas prices involved in transporting lumber (and steel) are also to blame for more costly lumber. As wood, according to the National Association of Home Builders (NAHB), accounts for one-third of the total cost of materials in a house, price increases can dramatically impact a project’s bottom line.
Steel: With an 80 percent increase over the period of a year, the cost of U.S. scrap steel and metal products rose quickly in 2004 to historic heights. These costs were driven primarily by demand from China to accommodate its massive building projects for the Beijing Summer Olympics in 2008. At the same time, homeowner demands for finished-steel appliances and countertops, as well as stainless steel products, grew. With any commodity, when demand rises, prices rise and supplies fall. Steel, however, accounts for less than three percent of the total cost of a new building in the United States. The biggest impact of the Chinese steel demand is shortages. This causes delays in construction. Some companies are no longer able to take advantage of guaranteed pricing through long-term steel supply contracts and are facing rising transportation costs, which has forced them to add surcharges.
Concrete: This commodity, according to the NAHB, accounts for about four percent of overall home construction costs. China’s demand for cement to build its new bridges and highways outpaced U.S. production inventories. U.S. homeowners feel the pinch as they demand concrete for house foundations, patios, driveways, sidewalks, and fireplaces. As is the case with steel, shortages are the main challenge. One impact of shortages is that businesses and government entities have to consider whether to scale back or put on hold large public projects, like hospitals and schools, where sky-high steel and cement costs were not included in the bid estimates or subsequent appropriations for funding.
Tips for Staying on Budget

Alternative cost savings achieved in some other areas can compensate for unanticipated costs that soar over budget. Kitchens and bathrooms are usually the most expensive areas in home construction or remodeling projects. For example, less expensive toilets might be considerations when trying to find ways to save money.

In addition to supply and demand challenges for commodity materials, budget overruns often result from bids based on incomplete plans and specs, inclement weather challenges, poor project management, design changes, labor relations with contractors’ crews, and waste. Allowing for an extra 10 percent of padding for overruns is a good practice.

Two other practices are effective ways to help to prevent budget overruns:

1. Maintain close supervision of a contractor and crew throughout the project; obtain detailed progress reports. A delay in one part of the project will have a domino effect through the rest of the project. Using checklists to monitor whether all work is done on a particular task before proceeding to the next stage of the project will prevent costly mistakes and back-tracking.

2. Use a fixed-cost contract, which will force the contractor to adhere to the costs mutually agreed upon up front.

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 Construction Guide

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