Why So Expensive?

Recent questions from a variety of sources within and outside the institution have prompted a discussion surrounding a fairly common topic for those of us who plan and build facilities for colleges and universities.  Specifically:  Why do our buildings cost so much? And what can we do to help reduce those costs?  Here are some of the responses we prepared.

WHAT DRIVES COSTS FOR PROJECTS AT PUBLIC COLLEGES AND UNIVERSITIES?

As we see it, there are two basic tiers of impact: (A) the requirements for our building projects that can increase their cost vis-à-vis the private sector; and (B) the more recent, market-driven issues that appear to be driving costs for all sectors even higher.  The former is often a local, regional or state-level impact, while the latter can involve national trends.

Cost Implications Inherent in All Public Higher Education Projects

Public university projects are complicated and subject to a host of requirements related to the operating demands of the campus and the laws/regulations of the state wherein they reside.

Regulatory

As state entities, public universities are subject to regulatory requirements that, in addition to the direct cost of compliance, can generate “opportunity costs” in a rising market.  Contractors or subcontractors, in some cases, elect to raise prices in response to added paperwork and more requirements or, as has been the case, elect not to bid a job at all and thereby increase the cost by reducing competition. Not every item applies to all projects, but the following examples (listed in order of their likely applicability) are useful:

• The university’s own policies and state statutes and regulations can introduce multiple levels of approval and extensive documentation that makes our projects less attractive, by lengthening bid periods and time between time of bid and contract awards, as well as change order processing.
• Some states have requirements to purchase materials and services from specified vendors or suppliers.  A requirement to “Buy American Steel,” for instance, will limit competition, though the benefits of such a provision in terms of quality and economic development may outweigh the initial cost premium.
• Union participation, minority business goals and prevailing wage requirements are sometimes part of a public university project, whereas they may not be required of a private developer building in the same town.  Again, contractors and subs take these into consideration when bidding work on campus.  Like the purchasing provisions mentioned earlier, however, often the good will generated by such practices outweighs the added cost, though the capital budget is affected either way.
• Bonds and Insurance may not be required in private sector.
• Environmental requirements (green building certification, storm water management, sediment control, reforestation, historic preservation, etc.) may be requirements on state projects, whereas the private sector may not be as restricted.  Again, however, there’s no argument here that these aren’t worthy and beneficial goals for the state.  They sometimes do, however, come with a need for a greater short-term capital investment.

Logistics

Campus environments are uniquely crowded, busy places, often 24 hours a day.  Timing of projects around class schedules and academic calendars to minimize disruption of campus operations is an issue.  Often, facilities being renovated must continue in operation (at least in a limited way). Parking, staging and access issues are exacerbated in an urban campus setting.  Contractors build these temporal and spatial restrictions into their bids as contingencies.

Scope

University projects are typically more comprehensive than comparable private sector projects. University projects may include the elements noted below.  And although some of these may be required of a private developer, they are generally not included in quoted cost-per-square-foot comparisons.

• Demolition and abatement costs
• Central Utility Plant upgrades
• Developer quoted $/sf often does not include all tenant fit-out costs
• New utility connections such as electric, telecommunications, steam, or chilled water beyond what would typically be in a private development
• Extensive site work outside the project limits, such as roads, sidewalks or new quads
• Phasing or enabling work; ancillary construction to permit the main work to proceed
• Public Safety issues, lighting, security systems, emergency communication, etc.
• Standards of construction, university buildings are built to be highly efficient and maintainable throughout a fifty year life, with the structures themselves built to stand up to 100 years or more; with the internal flexibility to reconfigure and replace components throughout that life.
• Higher levels of system reliability and redundancy for some University projects, particularly teaching and research lab facilities. 

Comparable Projects

Many university projects, especially research oriented projects, lack good examples of comparable private sector construction. In other words, valid comparisons of higher education projects with those in the private sector cannot be easily made, nor should they be the basis of policy decisions at the state level.

Institutions in other states experience the same types of unusual impacts on construction cost.  A recent presentation (link here) by the facilities office from the University of California, Santa Cruz stated that, “when comparing cost per square foot, cost per bed, or total project costs of apparently similar projects, it is important to know the scope of the projects in the comparison. The scope of a public UC project is likely to be different than a similar project in the private sector.”

Issues listed included: Occupancy by the owner, program complexity, a long-term investment in durability and operational efficiency, the obligation of the project to support campus infrastructure.  Ultimately, the presenters determined that “UC may expend greater initial cost to gain greater long-term value…. Public university projects represent long-term investments in the on-going development and re-development of campus buildings and infrastructure in support of the academic mission… Costs for equivalent scope (are) usually higher within the UC than for projects built by private developers.”

Another recent post by the Helbling Associates (link here) includes the headline: “U.S. Higher Education Construction Shows No Signs of Slowing Down.” The article includes the following:

     

Not only are there a multitude of projects going on, but the costs of some of the capital construction programs are astounding. And, there's no end in sight. Competition is strong in higher education, and institutions need to keep pace by building new facilities and modernizing/updating old ones for aesthetic and operational purposes and to continue attracting students.

According to ARC, a technology and document solutions company for facilities management, competition and changes in enrollment are challenging colleges and universities of all sizes. The firm says a survey commissioned by the Association of University Directors of Estates (the UK’s equivalent of our APPA/Facilities Officer organization) reported that 67% of respondents (students) viewed facilities as critical to making their college decision, while only 47% said reputation was important. What do they pay the most attention to? - Recreation centers, dining halls, career services, and other similar facilities…

A recent construction brief in College Planning & Management that outlined what keeps these professionals up at night resonated with us...

Top challenges of major capital construction programs on higher education campuses

·       Aging workforce - Numerous retirements within design, construction, and facilities teams expected over the next several years.

·       Allocating and building adaptable/flexible space.

·       Following rules and regulations for zoning and permitting.

·       Balancing reactionary vs. proactive approaches to diverse projects.

·       Preparing space and facilities for future technology advancements.

·       Weighing the benefits of public-private partnerships versus conventional funding, and initiating the concept when appropriate.

·       Minimizing inconvenience and distractions, and maintaining operations through construction and renovations, while also making process efficient. Determining optimal times for projects to be completed.

·       Mitigating potential negative impact of bureaucracy on delays and costs relating to vendor selection and procurement.

·       Addressing and adequately planning for deferred maintenance.

·       Finding construction materials that match those used in older buildings.

The bottom line is that higher education projects are unique among construction projects in general, yet they are similarly complex and higher cost no matter where they’re built.

Market-Driven Impacts on Cost

In general, there appears to be some increases in certain materials and equipment, but these tend to be cyclical.  An even larger issue affecting construction Nationwide appears to be labor costs.  Currently, this situation will not be resolved until the market slows down.  

Material costs are fluctuating. Recent project bidding on a Baltimore area project has resulted in a 20 – 30% increase in metal based materials (steel, reinforcing, metal studs, curtain wall, ductwork, piping, metal panels, and conduits).  With material costs accounting for approximately 40% of the budget, this has been a tremendous impact on project budgets. This can be attributed to tariffs, but is also seasonally affected by major storm damage across the U.S., fires in California, storm damage across the mid-west, the south and the U.S. Virgin Islands, all areas where restoration and re-building is still occurring. The need for materials such as drywall and lumber in these areas has led to high demand, low supply and higher costs nationwide.

On the labor front, subcontractors are able to decide what projects they want to be involved with and avoid those projects with inherent “risks” to their profit (e.g., difficult access, transportation, regulation). Where hard prices are sought, they often include a significant increase to account for these risks.  Here in Maryland, we’ve noted that regional differences within the state are enhanced in this market, with the state’s eastern shore posing a particularly difficult challenge.  An article in the Baltimore Sun (link here) last December, included the following:

Some construction projects in Maryland are costing tens of millions of dollars more than original estimates, in large measure because of a lack of skilled trades in the region…  “It was about 2014 when the labor shortages started appearing, first in the D.C. submarkets then in Baltimore a couple years later, then fairly prevalent throughout the state now,” said Maryland Center for Construction Education & Innovation President Bob Ayudkovic.  He said that the labor shortages in Maryland, and nationally, can be traced back to the Great Recession of 2008 to 2009….

Issues include a high demand for and low supply of skilled workers, which result in higher wages, adjustments to the scope of projects and rebidding trade packages. [Project] documentation also indicated that multiple large mechanical, electrical, and plumbing contractors are no longer in business….

Lt. Gov. Boyd Rutherford said during the board meeting that Maryland lacks skilled workers who are able to fill in-demand, high paying jobs.  “I would like to see more students in Maryland be exposed to apprenticeships and skills training opportunities so they are aware of all of their options for employment,” Rutherford said in a statement…

The cost of labor increases in part because people have to make the lumber and materials, which includes production cost, said Aydukovic.  The cost of professional services, such as architecture, engineering and financing, also has an additional cost.  Ayudkovic said that there is wage inflation among construction companies across the United States, “from the lumber yards, to the skilled craftspeople on site, to the professionals in the office that are contributing to the increasing costs of construction.”  He said that these jobs, which include the groundwork of being electricians and plumbers, and laborers of a certain sort, take a lot of brains and dedication.  

In an October 2019 report in the trade publication EC&M, the Associated General Contractors’ (AGC) Ken Simonson said:  "Even more states probably would have posted gains in construction employment if firms could find enough people to hire. They are finding most craft positions hard to fill, even though average pay in construction pays is higher than the all-industry average in nearly every state."

Longer term this situation will exacerbate.  According to NCCER’s report ‘Restoring the Dignity of Work’ of 2018, “The average age of a craft professional is 47. In 2019, the last of the Baby boomers turn 55. By 2024, many will begin retiring. Eight years from now, 29 percent of the current construction workforce will retire in 2026. Thirteen years from now, 41 percent of the current construction workforce will retire in 2031. Considering the time it takes for an individual to become fully trained as a construction craft professional (8 to 12 years depending on the occupation), we should have already started addressing this challenge.”

The AGC says: "Contractors across the nation are taking steps to alleviate labor shortages, including hiking pay, expanding training programs, and becoming more efficient. But they cautioned that many firms report labor shortages are affecting construction schedules and costs. They urged Congress to pass measures to boost career and technical education and provide a lawful way for more immigrants with construction skills to enter the country."

Just one example of this market impact on a recent project here in Maryland is the recent release of bid packages for the new major science teaching and research building on the eastern shore.  As the project moved through the bidding stage, two of the four intended mechanical bidders dropped out when the state announced they’d soon begin repairs on the Bay Bridge, the only link between the urban centers of Washington DC and Baltimore and Maryland’s eastern shore.  As subcontractors are more able to “pick and choose” their work, and as more suffer from a shortage of skilled labor, it is likely more projects will suffer.

The extremely busy construction market has resulted in a high demand for skilled workers but the supply of qualified workers is low, driving up wages as contractors compete for workers.  We are currently seeing the lowest unemployment in the construction market in over a decade.  The union benches are empty of employable trade workers.  The deficit of trade workers has given the ability of the unions to ask and have annual salary increases, and there is another 4% salary increase expected this year. 

As an example of the extreme shortage of skilled trade workers, at a project at one of our constituent institutions, a builder needs 60 carpenters to meet the schedule, but they are only able to find 30 carpenters that have the qualifications to work on a multi-story building.  Similarly, on another projects, weather delays that would be best mitigated by working two shifts are causing schedule extension due to insufficient manpower availability. 

A study published by the AGC in August 2019 (link here) by the AGC reported that “eighty percent of construction firms report they are having a hard time filling hourly craft positions that represent the bulk of the construction workforce… Association officials said the industry was taking a range of steps to address the situation but called on federal officials to takes steps to assist those industry efforts. ‘Workforce shortages remain one of the single most significant threats to the construction industry,’ said Stephen E. Sandherr, AGC’s chief executive officer. ‘However, construction labor shortages are a challenge that can be fixed, and this association will continue to do everything in its power to make sure that happens.’”

  

In Maryland, market conditions and the lack of skilled labor forces have resulted in higher bid numbers and/or low interest in bidding which in some cases have resulted in the need to re-bid packages to garner adequate competition  Other factors also contributed to this problem.  The construction industry in this region lost multiple large Mechanical, Electrical and Plumbing subcontractors that went out of business following the 2009 recession, and those companies have not been replaced.  Trade sub-contractors are not able or willing to expand their companies at this time, as there is no availability of labor to expand if they wanted to. 

The unpredictability of these factors has driven sub-contractors to carry additional contingency in their bid numbers.  Contractors working on non-university projects are having to negotiate with sub-contractors rather than getting a hard bid from them. 

Finally, a recent meeting of the Construction Managers Association of America (CMAA) here in the Washington DC region concluded simply that “market capacity is the biggest driver affecting project costs.”  Period.

WHAT SOLUTIONS CAN HELP REDUCE COSTS?

Many of the following best practices are already being implemented by the two project Service Centers at UMCP and UMB.  Both groups are dedicated to continuous improvement and are working together on shared solutions to common problems.

Selecting the Most Effective Project Delivery Method

Choosing the most effective way of delivering a project is one means of getting the best value from our limited budgets in this constrained market.  A 2015 report for the Joint Chairs of the Budget Committees of the Maryland General Assembly, we prepared jointly with two other state agencies, clearly demonstrates this value.  Our regent policy-preferred Construction Manager At Risk (CMAR) method is a big part of our success to-date; and a number of projects are also being managed as Design-Build, which further enhances the benefits to schedule and cost. 

Adopting Creative Construction Techniques

Technology is changing quickly. It's critical that we stay abreast of new trends and other changes that may help improve quality and reduce cost.  Modular construction, for example, is discussed in detail in this blog (link here).  Furthermore, we design the structural components of our buildings to last 100 years, knowing that the systems and internal structures will change over time.  We should discuss the value in this longevity and find ways to improve flexibility for the future.  We may also wish to reconsider the designers we use and seek to broaden the lists of firms (where possible) to capture the most creative ideas.  Finally, contracts should be regularly updated to capture best practices from all sources.

Strategic Capital Budgeting Decisions

Improved utilization of existing facilities and even changing the nature of the type of projects we include in the capital queue (e.g., our continued focus on renewal and renovation in lieu of new construction) could impact the affordability of our capital program in the short term.  All are potential considerations now or in the future.

Cooperation and Communication Among Project Teams

The internal groups managing our projects have traditionally worked well together.  Improved coordination among these groups in terms of sharing information and best practices is, however, always a goal for all of them.  We find that cost per square foot data provided by our project teams are fairly consistent for new construction when the comparison includes the costs for both structure and equipment.  The renovation costs per square foot, however, are more difficult to compare because they often include required infrastructure improvements to the existing facility. All of our project teams have scheduled periodic collaboration meetings to exchange cost information, market conditions, procurement ideas, and lessons learned.   

The Chicken or the Egg?

A couple of years ago, following two horrendous flooding events in a row in a small, historic town here in Maryland, I drafted a piece focused on the need to address priorities in renewal.  Sometimes, the most obvious choice isn’t the right choice for first place on the funding list.  At that time, I noted that a “triage approach” is needed. 

In an interesting article comparing the use of a triage approach in disaster recovery to that of an IT systems manager, author Mike Talon notes that:

Modern military, relief, and medical organizations have practiced a workflow management technique known as triage for nearly a century now. The idea is that the appropriate amount of effort should be put forth for each situation, but before that can happen, the situation must be defined and classified to ensure it receives the proper treatment. Triage is the process of placing situations into those classifications, and the practice of triage can be quite valuable in planning out Disaster Recovery operations as well.

He lays out various stages of his approach. I would expand the final stages of Talon’s triage designation beyond simply addressing the current problem to include the period of rebuilding and planning.  His comment that Tier 5 requires “careful consideration of future events that are likely to occur at any moment,” is particularly important here. 

At one point in my career, I was worked with a major university as a project manager. Faced with a massive deferred maintenance backlog, I was tasked with helping our Board make informed decisions in terms of using our finite resources to make the highest priority repairs first, thereby preserving as much function as possible from the buildings we had. Typically, this meant first repairing the building “envelope” (such things as roofs, windows, walls, etc.) to reduce the impact of weather and water infiltration.  Only then, once a building was watertight and structurally sound, we would make repairs to systems and interiors without fear of further damage.

One project involved a historic theater facility that had deteriorated badly over the years.  As our budget was limited, we set about establishing a scope of work for an initial phase to repair a seriously leaking roof, securing windows and doors, and repointing the masonry walls to preserve the structural integrity of the facility.  A second phase would include interior reconfiguration and improvements that included accommodating the requirements of the newly established Americans with Disabilities Act. Finally, the interior would be refurbished and refinished with new seating, etc.

Shortly before work was to begin, a visitor to the theater threatened a lawsuit related to the new ADA law, citing the difficulty in accessing the more desired seating in the facility by the disabled.  The university took the complaint very seriously and worked through the complaint successfully.  In the interim, however, we were directed to cease work on the facility until the complaint could be resolved.  Ultimately, the work did commence, but not until after significant additional funding had been secured so the accessibility improvements could be made as part of the same contract.   

Ironically, the logical progression of construction still required the exterior envelope improvements be made first.  Unfortunately for the theater, however, the delay made the whole project more costly, as the leaky roof continued to damage the interior for an additional year.

Which reminds of of another excellent example that comes from a mold removal and remediation project we undertook over the last few months in the archives in the basement of our administration building.  The facility is notorious for its water infiltration problems and multiple corrective actions have been taken over the years.  None have worked, though a radical rebuilding of the exterior wall and adjacent plaza drainage system is in the works and planned for this summer. The constant barrage of storm-generated water through the foundation and into the archives room had rendered the space uninhabitable.

Thus, it was a significant effort, taken at great expense, to document and secure the contents of the room, survey them for mold contamination, remove and treat them, and then send in crews to remove all traces of the hazardous substance from walls and floors.  Following a few months of planning and execution, the space was finally clean and dry.

Then it rained.  And water dripped from newly replaced ceiling tiles and scraped concrete walls, and puddled on the floor.  Facility managers have maintained drying fans and dehumidifiers in the now vacant space, hoping that the upcoming project will correct the water infiltration problem once-and-for-all.   Until then, it’s an all-out effort to keep the mold problem at bay so we're not required to do this all over again.

The point here isn’t that accessibility or life safety improvements aren’t critically important, but that sometimes a slight reshuffling of priorities makes a lot more sense.