Correctly predicting costs is one of the biggest challenges facing managers charged with preparing a capital budget for a newspaper construction or renovation project.

Compounding this challenge: market shortages in such commodities as steel and petroleum-based construction materials.

Still, it remains possible for newspapers to identify costs, assuming they do their homework. Here’s a list of some of the global and regional construction commodities whose prices were adversely affected over the past year, followed by recommendations aimed at helping you develop the most accurate cost predictions possible.

Steel

As the worldwide demand for steel increased, shortages in the U.S. market drove cost hikes. The shortage affected not only structural steel but also miscellaneous specialty products such as those used in the mechanical and electrical trades. Indeed, throughout most of last year, steel suppliers wouldn’t hold prices for longer than a week while awaiting a contract award. It’s extremely difficult to predict a project’s cost if the price of a universal material such as steel can’t be accurately forecast well in advance of the contract award.

Fortunately, for the most part, the steel shortage has subsided and costs have stabilized. Many equipment vendors who rely heavily on steel for their products are still reluctant, however, to commit to long-term pricing. And although steel prices have fallen from their 2004 peak, they remain significantly higher than they were in 2003.

Petroleum-based materials

The price of oil continues to break new records this summer, fueling the cost of petroleum-based construction materials.

Consider one product: polyisocyanurate (polyiso) insulation. The popular oil-based roof insulation material boasts a market share of 70 percent. But polyiso is becoming harder to acquire as raw materials are diverted to other markets amidst soaring demand.

In response, polyiso manufacturers have adjusted how they supply the market. One of the first decisions made by roofing membrane manufactures was to supply the insulation under their roof membranes first, and then to supply others only if product is still available. As a consequence, roofing membrane manufacturers that don’t make polyiso are at a significant disadvantage.  

Polyiso prices, meantime, have ratcheted up monthly. Long-term contracts guaranteeing stable pricing of raw materials have been canceled; therefore, polyiso manufacturers cannot protect pricing for more than a few weeks, and may not offer any pricing guarantees.

Shortages caused polyiso manufacturers to put their distributors on allocation. Each distributor gets a predetermined number of truckloads per month, and each then has to determine how it manages its supplies. As a result, the largest roofing contractors will get preferential treatment when scarce insulation is being distributed.

Regional pressures

Locally, cement, lumber and gypsum wallboard are the construction materials most under pressure in 2005, particularly in the southeastern and western United States.

Newspaper impact

Newspapers’ production facility programs are not immune to these cost impacts. In fact, steel and concrete material costs are such significant components of a typical project that newspaper production facilities might be impacted more than an average facility.

Steel and concrete costs are often higher on a percentage basis for a newspaper facility than for other facility types that may put more cost in building finishes or specialty systems. Newspaper office facilities, on the other hand, would be more likely to trend with the national average projections (see charts).

To combat the market uncertainty, it is important to consider the timeline of cost and scope development. The longer-term the projections, the less predictable they will be. The undefined nature of a long-term project scope adds to this unknown and to the need for appropriate cost factoring. Capital spending plans that extend for multiple years may account for price unpredictability by using estimated cost ranges until more detailed project plans and specifications are developed.

The following methodologies allow for well-planned implementation with predictable results:

*Ensure that cost projections reflect project development, and refine cost projections as the project is further developed. If a project is initially planned and projected properly the final cost should fall within the initial estimated cost range.

*Develop a “project procurement philosophy” early in the project. The packaging of bidding documents may be determined early in the engineering process, allowing for optimal project buying and scheduling. For example, in one project, to minimize a client’s cost and ensure on-time delivery, Austin Media Group made a commitment to purchase steel in December 2004 for delivery to be made this December.

*Develop a  “look ahead” methodology, using the project schedule to develop contingency approaches when necessary. Allow for variances in projects that are not yet well defined. 

*Select planners and constructors with a proven working knowledge in your industry to reduce the possibility of your project serving as an “object lesson.” Because the communication associated with material and cost issues is particularly complex, integrated teams with experience on multiple projects should be favored.

Logically, the greater the risk, the greater the reward (profit) expected. Newspapers wish to control their risks by balancing the design of their project with the budget that is set for a specific ROI.

Often, the preliminary design is developed reflecting a strategic initiative that will require construction cost forecasting 18 to 30 months in advance. The challenge is to be able to implement a strategy that mitigates risk and allows for effective management of the risk that remains.