Unexpectedly steep increases in construction expenses strain bond plans
TS Gray Construction workers build classroom space in early July next to the Tigard-Tualatin School District’s 1920 Durham Education Center building. The 2016 bond project will allow the district to serve all its alternative program students at one site. (Photo by Jake Arnold, OSBA)
An unexpectedly sharp rise in construction costs is straining school bond campaign plans made just a few years ago.
School districts typically build inflation into their construction estimates and set aside contingency funds, but the run-up in costs this year is outstripping even cautious estimates.
Pent-up demand following the recession, low interest rates and a recovering economy have fueled a construction boom across Oregon. Capable contractors, skilled labor and many building materials are in short supply, driving up costs. Recent tariff fights, especially with steel, have further pushed up prices.
The effects are amplified in rural Oregon, according to construction project managers. Few regional contractors have the capacity for major construction jobs, and it costs a premium to draw contractors away from the Interstate 5 corridor where there is more than enough work.
Ideally, a district receives at least three bids for a project, so it can triangulate the most reasonable cost for high-quality work. Right now, districts often get no bids or districts get highly inflated bids from contractors unconcerned whether they get the job because they already have full work schedules, according to Joshua Dodson, vice president of project management company DAY CPM.
Scott Rogers, Wenaha Group senior project manager, said a recent bid for an education-related project in eastern Oregon came in about 25 percent over budget. Some construction bid areas — including plumbing, electrical, concrete, masonry and steel — were twice the cost per square foot as for a similar project a year ago, he said. Rogers said tariffs are wreaking havoc, particularly with steel-related costs. He said a contractor told him that the market is so volatile that an estimate older than 45 days is already obsolete. He said contractors are bidding overtime-equivalent rates for regular labor.
“Subcontractors are not hungry,” he said.
Rogers, who is the Athena-Weston School Board chair and an OSBA Board member, said a school built in Umatilla County in 2015 cost about $225 per square foot. By 2017 such a project had risen to about $255 per square foot. A similar project Rogers is working on now received bids of $318 per square foot.
Rogers said the recession postponed districts’ ability to build but not their need. With low interest rates and more state support, schools started building again. Eastern Oregon, with its smaller contractor base, has had to pay extra to lure more builders, according to Rogers.
Districts are deeply reluctant, though, to scale back projects.
“The community has long memories on what you tell them you are going to build for a certain cost,” said Rob Wagner, a Lake Oswego School Board member who is also a state senator. Voters approved a $187 million Lake Oswego School District bond in May 2017.
Wagner said the district has seen some cost overruns, particularly on materials, but the board was judicious in its planning so that the district can still fulfill its bond pledges.
Project managers are encouraging districts to set aside money beyond the usual contingency funds. Bigger safety margins reduce what a bond campaign can promise, but a conservative approach prevents painful decisions down the road.
“You don’t want any surprises,” Rogers said. “You don’t want any false expectations.”
An excavator tears down a wing of the James Templeton Elementary School in July. The Tigard-Tualatin School District will build a new school on the site. (Photo by Jake Arnold, OSBA)
The Tigard-Tualatin School District, which passed a $291 million bond in November 2016, is facing cost increases related to materials and labor, as well as competition in the K-12 marketplace as more districts pass bonds, according to Ernie Brown, the recently retired Tigard-Tualatin superintendent.
Work that was estimated a year ago to cost $260 per square foot is being bid at upward of $350 per square foot, Brown said.
Brown credits the district’s Bond Oversight Committee and its project management team with holding costs down through careful decisions. Brown said the district has identified some smaller projects that can be deferred while still delivering on the major projects associated with the bond.
Project managers such as Rogers and Dodson suggest districts identify top priorities and then add second-tier projects dependent on favorable markets. They said the key is to be clear with constituents about finances and project scopes.
Districts are considering different construction methods to save money, such as using lumber rather than steel frames or on-site masonry instead of pre-fabricated slabs. Districts can also trim costs with subtle changes, such as less fencing or cheaper flooring options.
“It’s always a balance between budget and scope,” said Jim Rose, Sherwood School District chief operations officer. Sherwood voters passed a $247.5 million bond in November 2016.
Rose said one way the district is dealing with soaring costs is by seeking bids for the basic job and then alternative bids for upgraded materials, finishes or design. The district then considers factors such as maintenance, material life and energy efficiency to find the best long-term value. Rose said district leaders try to balance between what they want and what their budgets allow.
The drawback is the district must do additional design work to give contractors a basis for bids.
The Bend-La Pine School District passed a $268 million bond in May 2017, and bids are coming in higher than projected on many projects.
“It’s painful,” said Mike Tiller, facilities director.
Tiller said Bend-La Pine is using in-house staff to manage some projects and maintenance staff to do some work. Using district staff saves money on contractors, but it increases staff workloads and takes focus off other projects.
Dodson, of DAY CPM, said construction costs have gone up at the steepest rate in his 20 years of experience. He said the boom in construction has outpaced the market’s ability to provide labor and materials.
DAY CPM works extensively with Oregon school districts. Dodson said districts need to be attractive clients, particularly if they are farther from Portland. Timely actions and easy working relationships are appealing to busy contractors.
“The labor market gets to pick and choose,” he said. “You have to be known as a client that makes good decisions.”
Dodson stresses the need for realistic front-end planning, managing expectations in the face of rising costs and delayed timelines.
Low interest rates fuel construction by making borrowing easier, but the historically low rates also have offered districts some relief. School bonds are selling at premiums, earning schools more than expected from bond sales. Districts can’t count on low rates, though. The Federal Reserve raised interest rates in June and expects to keep raising them.
The Beaverton School District passed a $680 million bond in 2014, based on estimates done in 2012. According to a May status report, the total estimated cost for bond-related projects has risen to $753 million. Fortunately for Beaverton, bond sale premiums let the district collect $802 million.
Maureen Wheeler, Beaverton public communications officer, said the construction boom in the Portland area has led to material and labor shortages that increase costs.
Beaverton has made some adjustments to rein in expenses. Paul Odenthal, Beaverton School District executive administrator for facilities, said some projects have flexibility. For instance, repairs on roofs and pavement can be delayed.
The district is also saving money by building slower. It had originally planned to replace a school in about 14 months, so only one school year would be disrupted. It extended the timeline to two school years to save on the extra labor necessary for quicker construction.
The fundamentals point to an ongoing construction boom, industry experts say.
“My biggest advice to other school districts is to give themselves enough time to get reasonable pricing,” Odenthal said.
- Jake Arnold, OSBA
jarnold@osba.org