Prices for services growing as development stretches contractors' resources to the limit
Editor's note: This story has been updated to better reflect the geography of Texas' oil industry.
While Round Rock's rapid and ongoing expansion has provided the city with new residents, new jobs and a thriving tax base, city leaders have begun to grapple with an unavoidable side effect of growth: expanding construction costs.
At its April 24 meeting, Round Rock City Council rejected bids for a major package of road improvements to the city's downtown business area. The job, which the city is still planning in a modified form, would have revamped large sections of Bagdad Avenue as well as Blair, Main and Mays streets.
Engineers estimated the total project cost to be $13.7 million. But in early April when contractors submitted bids—which are essentially guaranteed price quotes for construction jobs auctioned off by the city—it became clear that Round Rock and the construction companies were too far apart on cost.
The city received two bids: one for $15.3 million and one for $16.7 million, 11.6 percent and 21.8 percent, respectively, above the city's estimates.
"We're in one of these unique places where we're just in a tough cost cycle," said Gary Hudder, transportation director for the city of Round Rock.
Supply and demand
The problem of inflated construction costs is not unique to Round Rock or Central Texas. However, the city and region are experiencing it on a higher-than-average level, however, given the area's pace of growth, said Phil Thoden, president and CEO of the Austin chapter of Associated General Contractors of America, an industry trade group.
Demand for the services of general contractors and construction firms has gotten so high, in fact, that local contractors are finding it hard to keep up. As a growing pool of public and private sector clients vie for the limited time, resources and manpower of builders, prices rise.
"The construction economy is strong here in Central Texas," Thoden said. "The bad news is that one of the consequences of a strong construction economy is shortages in supply in materials and labor. That's a general rule of thumb of supply and demand."
When times are good, developers are confident that empty houses can be sold. Cities feel more comfortable issuing debt to pay for road and utility upgrades as citizens and local businesses have more money to spend to support large projects. In lean times, however, the opposite is true. Round Rock's current market is very strong, which means demand is high.
"It goes in cycles. Back before the recession hit in the 2008–09 time period, [construction] prices were off the charts. As soon as the recession hit, prices came tumbling down," Round Rock Mayor Alan McGraw said. "It's typical supply and demand. If there's more demand for your product, then you start raising your prices. It's basically economics 101."
The economic downturn that started in 2008 was hard on general contractors. Many laid off workers and some went out of business, Hudder said. Now with the construction market improving and demand growing as the Texas economy soars, there are fewer companies to take a rising number of jobs.
"Now the market has exploded, and it's just a matter of getting caught up again. They don't have the equipment or manpower," Hudder said. "They may even be nervous about over-extending too early in a cycle like this."
The companies that can handle large volumes of work, meanwhile, are booked so tightly that their time has become more valuable, said Chuck Glace, president of Round Rock–based Chasco Constructors, one of the companies whose bid was rejected by Round Rock City Council in April. In addition, the lack of competition for contracts has also meant fewer incentives for builders to drive costs down.
"All the contractors are busy. Two years ago when we bid a job, there were 10 or 12 bidders, so your margins were pretty thin in order to be competitive and try to procure work," Glace said. "Today, we bid a job and there are two bidders."
Labor shortages
Also driving up the cost and price of construction is a labor shortage in the Texas market, Glace said. Construction companies are taking on staff to make up for the cutbacks of the recession and they are doing so at a time of unprecedented demand. Chasco has added 100 employees to its roster since mid-2012. Prior to that time the firm had roughly 250 employees, Glace said.
In addition, the Texas construction industry now has to compete with the oil and gas market for workers. The development of the Eagle Ford shale in southwestern Texas has led to a growth in the number of welding and trucking jobs in that region, Glace said.
Central Texas contractors must court their employees away from the oil business, which means paying employees more and working harder to retain staff. The result is another cost that is passed along to cities and the taxpayers that support them.
The construction industry as a whole is also facing the problem of an aging workforce that is rapidly retiring. And with more young people passing up vocational schools in favor of four-year colleges, the worker shortage is likely to become more acute with time, Thoden said.
Looking to the future
Glace said construction costs are likely to remain high for at least several years in Round Rock and neighboring cities. Houses are still being built quickly, which means infrastructure improvements and retail construction are likely close behind.
As for the Round Rock project, work has been split in two phases to bring costs down by attracting a greater number of smaller companies to bid, Hudder said. The city does not have cost estimates for the phases yet, but planners know how the work will be divided. Hudder said the city's goal is to bid phase one by Aug. 1. Phase two has no schedule yet.
On the whole, however, it seems there is little cities can do to manage construction costs besides keep bidding projects, reject bids that come in too high and ride out this portion of the cycle, McGraw said.
"I'm a real estate attorney. ... I'm dealing with this thing on a regular basis," McGraw said. "It has nothing to do with Round Rock. It's the market we're in."
