'The purchasing cycle is moving forward into design'

Sue Stewart, senior vice president of preconstruction for McCarthy Building Companies, manages preconstruction and estimating activities for the firm's Midwest division. A 27-year veteran at McCarthy, she has been an associate professor of engineering at Washington University in St. Louis and holds a BS in civil engineering from the University of Santa Clara, Calif.

BD+C: What's happening with materials prices?

Sue Stewart: Right now, steel is going down, copper's going down. Concrete is actually stabilized right now. Drywall and fuel are going down.

BD+C: What's the net effect on project cost?

SS: The forecast is that it's going to be even with inflation, perhaps 3-4% this year. That's just cost. There's also availability. For instance, one reason steel has gone down is because the mills are scheduling their rollings more carefully, doing certain shapes twice a year instead of 7-8 times a year. But if you need that material at a specific time, you might have to pay for stocked warehouse material at a premium.

BD+C: What else is affecting cost?

SS: The purchasing cycle is moving way forward in the job, into the design, so you're procuring from less design information. That [can] cause more construction changes, which can be very costly.

Another factor is the financial health of construction subcontractors. The market is so busy that it has caused [some] people to be greedy. A company that was doing $20 million a year has an opportunity to do $100 million, and their eyes get bigger than their stomach, and they get into trouble. I have a case where a mechanical contractor we were working with, the best we know, went bankrupt 60% through the job. How do you finish the job?

People are not figuring out the management issue. A $20 million company may have one good project manager, but when you go to $100 million, do you have five good project managers?

BD+C: We hear that some contractors are just refusing jobs.

SS: Absolutely. Those are the smart ones. There's a limited pool of resources. It's easier for us to be selective about projects, because the majority of our business is managing the work for big clients.

If the project is going to start construction in 2009, we'd be very interested. Otherwise, we have to look very carefully for resources before committing. I just got a call from a guy who wants to build a major project starting in 60 days. That was a real easy one to say no to.

BD+C: What about labor costs?

SS: This gets very localized. Where there is work, you may not have enough people, and where you have union contracts coming up, they're going to charge whatever they want. We may face that soon in places like Las Vegas, when union trades contracts come up. There will be tremendous pressure out there to give in.

BD+C: What are the busiest markets?

SS: Denver, Boston. Upstate New York, Colorado, the Midwest, Atlanta all are busy. Virginia is tremendously busy. West of the Rockies, Las Vegas, Phoenix, Southern California, and Northern California are all hot.

BD+C: What advice would you give owners and developers?

SS: Recognize that your project is going to cost more than you want it to, and spend the additional 1% or so to get a contractor that you have confidence in and who will be able to manage the risk, find the resources, and deliver the project for you.

And be open to nontraditional contracting practices. I am buying work [from subcontractors] now that is not going to be built until the spring of '08. That may feel uncomfortable to some clients, who prefer a competitive relationship over a teaming relationship, but that isn't always the way to go anymore.

BD+C: You advise owners to reevaluate their budgets. Why?

SS: Most budgets are old. If you put a budget together two years ago, you could be looking at a 20% deficit if you start out today. That's impossible [to work with]. If you assumed that '05 and '06 were going to be 4% years, and then they weren't, there are problems. Yes, our fees have gone up, because we have had to hire people and put them in overhead positions to try to manage issues that didn't exist five years ago. Five years ago, costs weren't as volatile.

BD+C: What constitutes a sound preconstruction strategy?

SS: My best advice is look at every job as a unique situation. It has to have the designers and contractor and owner moving things this way and that to figure out the best strategy. Well over 50% of projects are being delayed because of budget issues. If you commit staff for a $200 million job for the next eight months, what do you do with them if it's stalled?