Through the Roof

When Tom Panek won a bid in 2003 to do sheetrock work for a high-rise building in Richfield, the owner of subcontractor Minuti-Ogle Company, Inc., in Oakdale hardly had time to celebrate before receiving some unwelcome news. Between the time he signed the contract and when he went to buy sheetrock for the job, its cost had climbed so quickly that it added another $30,000 to his expenses.

Dave Karsky, vice president of Parsons Electric, an electrical contractor in Minneapolis, has watched the price of copper soar more than 200 percent over the past year. The increase added $300,000 in material costs to his budget for electrical work on a new hospital—in just six months. “When you see copper prices rising 10 to 15 percent every week, it makes bidding on work very difficult,” Karsky says.

Such are the challenges for a construction industry that’s faced skyrocketing increases in raw material costs since 2004. Rising price tags for steel, concrete, drywall, PVC piping, copper wire, and other products are shrinking contractors’ profit margins and forcing them to adopt new purchasing strategies to limit risks from price spikes. Mushrooming construction budgets also have real estate developers and area businesses scaling back existing projects, using lower-cost materials, or even retrofitting existing buildings rather than building new ones to rein in costs.

“Material costs rose about 10 percent in 2005, the highest inflation we’ve seen in four or five years,” says David Molda, senior vice president of operations at Adolfson & Peterson Construction, a building contractor in Minneapolis.

Coupled with the price inflation from preceding years, recent material-cost hikes have emerged as a major concern for much of the construction industry. “For many years, supply costs weren’t a big issue for us from a risk standpoint, but over the past few years, the risk  [to the bottom line from] material costs has become higher than on labor costs,” says Dave Nielsen, vice president of business development for Parsons Electric.