Cost increase woes ‘a perfect storm’ for local infrastructure projects

Cost spikes happen periodically, according to Kettering assistant city manager Steve Bergstresser, but this is a big one.

“This was a little more surprising because I think with things going on around the world and the price increase shocks that we’ve seen and the inflation that we’ve seen over the last 12 months,” they are taking their toll, Bergstresser said.

Economic causes

Inflation for consumer products sits around 8%, per the Consumer Price Index, but the producer price index, which measures inflation at the supplier level, surged to 11.2% in March compared to last year, according to the U.S. Department of Labor.

The vast majority of American purchasing is at the business level, and inputs to production in general are rising faster than consumer goods, said Kevin Willardsen, professor of economics at Wright State University. Inflation is the biggest problem, but it’s not the only cause.

“If you increase the money supply, you can expect a rise in prices,” he said. “We created a lot of new money (in 2020). The coronavirus pandemic created supply shocks, and a reduction in supply also raises prices. You have these things combined together which are a perfect storm for stagflation.”

“Stagflation” is a portmanteau combining high inflation with stagnant or negative economic growth.

Federal coronavirus relief money also complicates things. The CARES Act and American Rescue Plan Act afforded local governments millions to spend on infrastructure projects, with directives to spend or allocate it by 2026. The subsequent surge in demand for construction services means contractors can pick and choose which projects to take on.

“Contractors are getting calls saying, ‘Hey come do this work, and send the bill afterwards,’ ” said John Morris, President of the Ohio Valley Associated Builders and Contractors.

Contractors are also less likely to pick public sector projects because of their fixed bidding structure, Morris said.

In a government contract, a contractor often has to assume 100% of the risk because it’s a fixed price, and so contractors often charge more to accommodate for factors of uncertainty, Morris said. In the private sector, entities share more risk.

“We need to modernize bidding,” Morris said. “As long as we don’t, governments are going to continue to overpay. If you can get contract bidding systems that allow for variability in pricing, whether in labor or materials, than you will get more competitive bidding.”

The number of construction workers in the industry has held steady for the past 20 years, but the number of contracting companies has declined, Morris said.

“If you increase the amount of demand for construction services, you don’t instantly create more contractors,” Morris said. “You don’t instantly create more skilled workers. It’s a supply and demand issue.”

Credit: JIM NOELKER

Credit: JIM NOELKER

One city’s example

In Bellbrook, two streetscape projects were originally estimated to cost $250,000 to $300,000. Now, engineers are estimating it will cost $230,000 to do just one of them, said Bellbrook City Manager Rob Schommer.

Bellbrook relies heavily on grants, but most of those require local matching funds.

“I fear we’re going to have to pass on grant opportunities because funds are being eaten up by standard day-to-day capital projects,” he said.

Bellbrook’s ARPA money has been largely dedicated to stormwater projects. Schommer said his office has been getting cold calls from companies pitching projects, describing them as “ARPA-qualified.”

“People see opportunities and attach them to ARPA money,” Schommer said. “It exists legitimately, but I’m sure there are some who try to take advantage of it.”

One solution may lie in cooperative bidding, and ensuring cities do business with reputable contractors.

“We know contractors have seen increased costs,” Schommer said. “We can also represent taxpayers diligently, do good research as we get bids in to make sure that’s the best bid we can get.”

City-by-city look

Beavercreek: Rising costs have delayed a major resurfacing project on North Fairfield Road between Commons and Crossing Boulevards near the mall. The city budgeted $1.3 million for the resurfacing project, but the lowest bid received was $2.3 million, leading the city to reject all of the bids and delay the project to 2023.

Kettering: Work on Forrer Boulevard and Stroop Road will cost about $2.81 million combined, a 29% increase from earlier estimates. Smithville Road resurfacing will cost about $150,000 more than the $575,000 the city budgeted, records show.

City capital improvement reserves should be sufficient to cover the increases, but Bergstresser said the uncertainty will affect how the city budgets for next year, with a potential 15 to 20% increase.

Troy: In January, Troy City Council authorized a North Madison Street stormwater project at just over $580,000. Eventually, the city received one bid of $975,000 and went back to the drawing board.

Huber Heights: The Huber school board is weighing alternatives after estimates for new career technology and “maker space” labs rose by $1.6 million, spokeswoman Cassie Dietrich said. Now the maker space labs may not be permanent spaces, or labs may go within existing classroom space, or one mobile learning lab might travel between schools.

Lebanon: The city awarded a bid for $12.1 million to Dugan & Meyers LLC for the new Glosser Road sewer station, after the engineer’s original estimate was $9.75 million. Lebanon officials said they’re moving forward because it is a critical infrastructure project for the city.

ODOT: Statewide infrastructure projects are also feeling the squeeze. Ohio Department of Transportation officials said asphalt prices have increased 27% since Jan 2021. “Inflation is something we have been and are still aggressively monitoring,” ODOT Press Secretary Matt Bruning said. “Materials for construction projects and fuel have certainly increased in price.”