December 2004

Project Bids Climb for the Construction Industry with material Scarcity Cited as the Number One Reason

Phoenix, AZ— According to a new study by PinnacleOne, one of the nation’s leading construction consulting firms, an overwhelming majority (89%) of industry professionals have witnessed a significant price increase in project bidding during the past year. The average price increase was estimated to be 10 percent or greater by more than two thirds (69%) of respondents and at more than 15 percent by greater than one third (34%) of the participants. Cost of materials (68%) was identified as the clear driver of this alarming trend. The survey also identified a growing concern with the issue of false claims and a lack of understanding on energy and environmental issues among the construction executives.

These are just a few of the findings in the PinnacleOne Pulse of U.S. Construction - 2004 survey which examined the opinions of construction industry executives (owners, architects, engineers, contractors and developers) on issues related to project management, energy/environment and claim resolution.

Some of the major findings:

•When Steel Turns to Gold. During the past year, almost three quarters (74%) of industry executives had projects adversely affected by the steel shortage and the associated price increase, and a majority (57%) of these professionals believe this obstacle will become greater in the coming year.

•Need to Educate on Energy - Environmental Standards. Although more than three quarters (77%) of respondents have initiated energy efficient plans in new projects and 93 percent anticipate rising demand for energy solutions, a significant number (39%) of these professionals fail to use LEED (Leadership in Energy and Environmental Design) green building standards when designing projects. Moreover, almost half (44%) of the respondents were unaware of promotions and incentives offered by the Department of Energy or local utilities to assist in the procurement of energy efficient solutions.

•False Claims. More than three quarters (77%) of construction executives are concerned with the issue of false claims. Of the respondents that have been involved in the review and analysis of false claims, inflated pricing (45%) and subcontractor claims (25%) are the issues they identify as accounting for the greatest number of claims.

•Can We Talk About This? Respondents were far more likely to utilize mediation (34%) as a means to resolve disputes, compared to arbitration (14%) or litigation (12%). Dispute Review Boards (5%) were the least popular resolution vehicle. Of the 31 percent of respondents that have ever used a DRB to resolve a construction dispute, a majority (55%) described them as satisfactory and just under a third (31%) called them ineffective. Only a small minority (14%) described DRBs as very effective.

•Happy Partners? Of the majority (55%) of respondents who typically use partnering on projects, less than half (45%) feel the practice has resulted in a reduction of disputes/claims.

•Better Late Than Never. While respondents estimate that a majority (62%) of their construction projects are completed on time, a significant amount (29%) are completed late. Similarly, the construction professionals estimated that 61 percent of their projects come in on budget, with approximately one quarter (26%) over budget.

“As consultants to the construction industry, we created the PinnacleOne Pulse of U.S. Construction to serve as a barometer for measuring the opinions of leading industry executives on a variety of important issues,” said Chuck Dahill, President of PinnacleOne. “This inaugural survey has identified the forces driving the price increases in project bidding, compared the popularity of various forms of dispute resolution and identified a clear need to better educate the industry on what can be achieved through energy efficient technologies.”

Additional findings:

•Alternative Procurement Methods. When asked which alternative procurement method (other than traditional design, bid, build) they see gaining popularity over the next two years, almost one third (32%) of respondents chose construction management at risk and more than a quarter (28%) chose design build. Task order contracting (14%), design-build-operate-maintain (13%), public finance-lease back (7%) and construction management multi-prime (6%) were chosen by a smaller percentage of the construction executives.

•Change Order Growth. Almost three quarters (72%) of survey participants have witnessed growth in the number of change orders occurring on their projects over the past two years. However, a majority (53%) of the respondents estimate that growth to be less than 25 percent.

•Energy & Environment. “The survey clearly identified a lack of understanding among many of the construction professionals regarding the effectiveness of the latest energy efficient technologies,” said Darr Hashempour, vice president of Energy Solutions at PinnacleOne. “By dedicating between two percent to five percent of project budgets to meeting LEED standards, facilities can generate annual operational savings ranging from 30 percent to 50 percent and achieve a complete return on investment within three to five years.” Yet a quarter of the respondents mistakenly felt they would need to dedicate more than five percent of their project budget to meet LEED standards and 20 percent were unwilling to dedicate any amount of their project budget to meeting green building standards.

•Air Quality. When asked to identify the most frequent indoor air-quality concern impacting their construction projects, almost half (47%) cited poor/insufficient air exchange rates, 30 percent indicated it was mold/mold mitigation and 20 percent cited troubling humidification/dehumidification levels.

•Contracts. There was a clear split among the respondents when asked what type of contract forms they typically use on projects. Almost half (46%) use standard AIA/EJCDC forms and almost half (46%) indicated they use non-standard, custom written contracts.

The PinnacleOne Pulse of U.S. Construction Survey, conducted in October of this year, is based on the opinions of 136 senior executives (owners, architects, designers, engineers, contractors and developers) involved in construction projects around the U.S. A majority (58%) of the executives have placed more than $50 million in construction projects during the past two years and a quarter (25%) of them have placed more than $250 million during that time.

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