Highway Construction Cost Increases and Competition Issues

Background

With the continuing escalation of global fuel prices, many State DOTS are beginning to experience unprecedented construction cost increases. There are many potential reasons for higher bid prices.

In addition to higher energy costs, a number of diverse factors may be contributing to higher bid prices. Some of these factors include:

• Localized material shortages for specific construction products,
• Consolidation in the highway industry (number of prime contractors, ownership of quarries, etc.),
• Larger transportation construction programs with the same number of contractors,
• Increased construction market opportunities in other areas such as hurricane recovery reconstruction programs,
• Downsizing of workforce due to instability of transportation funding prior to August 2005,
• Spot shortages of skilled labor,
• Regulatory restrictions, such as environmental permits for plants and quarries,
• Increased technical requirements in contracts,
• Bankruptcies,
• Hurricane-related issues increasing non-highway construction demand

During 2005 and early 2006, some construction material prices rose much faster than consumer or producer prices indices. The availability of portland cement, copper, gypsum and PVC pipe became an issue in many parts of the US. Of particular concern to the highway industry, the availability of portland cement became a major worry during Hurricane reconstruction efforts in late 2005. However, on March 6, 2006, the U.S. Commerce Department, the U.S. Trade Representative and Mexico's Secretary of Economy signed the U.S.-Mexico Agreement on Cement. This agreement resolves a sixteen-year dispute over the U.S. antidumping duty order on imports of gray portland cement from Mexico. The agreement should help to ease cement shortages in the US. The US Department of Commerce web site provides information regarding the trade agreement (Press Release, Fact Sheet, and Agreement (.pdf, 03 mb)). Furthermore, the Associated General Contractor's Cement Shortage Fact Sheet (.doc, 53 kb) provides additional information on the Trade Agreement and the anticipated effects on the construction industry.

The unfortunate impact of these price increases may be the deferral or cancellation of projects in a contracting agency's long-term construction program. The consequences of such actions have potentially significant impacts on the State DOTs, the highway industry and the public in general. According to an article published in the February 13, 2006 edition of "azcentral.com", the Maricopa Association of Governments (MAG) budgeted $500 million for freeway work in fiscal year 2006. The projects bid as of that date came in approximately $91 million more than expected. Thus the MAG transportation policy committee was faced with a decision of funding a huge gap that was not anticipated or deferring much-needed projects for a year or more.

In an effort to share information on construction price increases and competition issues, The FHWA is providing a list of resources where additional information may be obtained on these subjects.

• Assessing the Problem
  • Presentations from the September 11, 2007 Highway Construction Cost Workshop
  • Recommendations from the September 11, 2007 Highway Construction Cost Workshop
  • AASHTO's 2007 Update for the Survey on Construction Cost Increases and Competition, (pdf, 0.3 mb) (Jim McDonnell, Deputy Program Director, AASHTO)
  • AASHTO's 2006 "Survey on Recent Construction Cost Increases and Competition in Construction Contracts"
  • Caltrans "California Construction Market Analysis - Causes of Bidding Trends and Industry Ability to Respond Increased Department Funding," (.pdf, 0.3 mb) October 24, 2005
  • Caltrans "California Construction Market Analysis - Material Market Influence on Contract Bid Price Trends for Period Ending December 2005," (.pdf, 1.3 mb) July 24, 2006
• What can be done?
  • Florida's presentation at the 2007 Highway Construction Cost Conferece: "Rising Construction Costs - The Florida Story", (,pdf, 1.0 mb) (Ananth Prasad, Chief Engineer for Florida DOT and Bob Burleson Florida Transportation Builders Association
  • Missouri DOT's presentation at the 2007 Highway Construction Cost Conference: "MoDOT's Approach to Program Management", (,pdf, 2.0 mb) (Kevin Keith, Chief Engineer).
  • Texas DOT's presentation at the 2007 Highway Construction Cost Conference: "Cost Control Texas", (pdf, 0.4 mb) (Thomas Bohuslav, Director, Construction Division, Texas DOT).
  • Texas DOT's "Cost Control Task Force Recommendations" (released November 21, 2006)  In mid-2006, the Texas DOT convened a joint State/Industry Task Force to review potential measures to control construction costs. The final report of the task force provide recommendations for reducing or controlling costs in the following areas: pavement maintenance, pavement design, alternates for pavement design, alternative materials, structures, structural aesthetics, roadside maintenance, landscaping, pavement markings, project scoping and competition.
  • A Summary of the Florida DOT February 17, 2006 One-Day Summit on Construction Prices On February 17, 2006, the Florida DOT convened a one-day summit in Orlando, Florida, which was attended by FDOT staff and representatives from the Florida Highway Industry. The purpose of the meeting was to discuss potential strategies for addressing cost increase issues while continuing to deliver a quality highway program.
  • Washington State DOT's Highway Construction Cost Website reports on the steps that WSDOT has implemented to mitigate the impact of rising project costs and facilitate bidder competition. In particular, see Recent Trends in Highway Construction Costs (.pdf) and Cross-Cutting Management Issues: Construction Costs Trends. (.pdf, 0.2 mb)
• Construction Economics and Price Information
  • The Highway Construction Costs website of the Washington State Department of Transportation (WSDOT) provides extensive information on construction cost trends of several States (Washington, California, Colorado, Oregon, South Dakota, and Utah). The site also contains information on the price trends of individual materials (fuel, concrete pavement, concrete structural, crushed surfacing, hot mix asphalt, road excavation, steel reinforcing bar, and structural steel), the status of competition for highway construction projects, and the steps that WSDOT has taken promote competition and mitigate the effects of cost escalation.
  • The About Construction Economics website of the Associated General Contractors of America (AGC) provides a number of reports that address historical, present, and future cost trends of highway and other types of construction. Its Construction Inflation Alert bulletin is of particular interest.
  • The American Road and Transportation Builders Association provides both monthly (February 2006) (.pdf, 150 kb) and annual transportation construction material price reports (.pdf, 150 kb). The ARTBA confirms that the price of materials used for highway and street construction have recently outpaced general inflation.
  • US Department of Labor Indices
    • US Department of Labor, Bureau of Labor Statistics, Produce Price Indices

      The Producer Price Index of the U.S. Department of Labor's Bureau of Labor Statistics contains extensive price data of use of calculating highway construction cost trends. Go to the "Create Customized Tables (one screen)" section of the webpage and select "Commodity Data". Select the "Nonmetallic mineral products" group to display numerous categories pertaining to cement and asphaltic surfacing. Similarly, select the "Fuels and related products" group for fuel price data. Some contracting agencies use the PPI as an index in contract price adjustment clauses. State DOTs may be interested in the PPIs for WPU101- Iron and steel, WPU1017 - steel mill products, WPU0571 - gasoline, etc.

      An overall PPI for the Highway and Street Construction Industry can be obtained from the site immediately above by selecting the "Industry Data" option (rather than the "Commodity Data" option) under the "Create Customized Tables (one screen)" heading of the main PPI page. Once the "Producer Price Index Industry Data" page opens, scroll to the bottom of the first column ("Select an industry") and click on "BHWY-Highway and street construction." Then click on the "Get Data" button (Step 3) to generate a table of monthly and annual PPI values. The index includes the prices of materials and services used directly or indirectly in highway construction from more than 180 industries. The index does not include the cost of labor or administration and is only available at the national level.

    • The Employment Cost Index of the BLS can be used to track wage inflation of civilian workers. Particularly see the Construction index of the ECI Historical Listing (June 1989=100).
    • The Consumer Price Index for All Urban Consumers (CPI-U) of the BLS can be used to track the level of general inflation in the U.S. economy. Use the "Create Customized Tables (one screen)" "All Urban Consumers" feature to generate tables for "All items" or for selected goods and services (e.g., fuel and transportation costs).
• Highway Construction Cost Indices
  • The FHWA's Price Trends in Federal-Aid Highway Construction provides a composite cost index of construction items constructed from the unit prices for materials in actual highway project bids, compiled from reports of State awards for Federal-aid contracts of $500,000 or greater.
  • The Washington State DOT web site (.pdf) provides a graphic summary of highway construction cost indices from several California, Colorado, Oregon, South Dakota, Utah, Washington and the FHWA.
  • Caltran's Price Index for Selected Highway Construction Items provides an index for selected items in California DOT's program.
• State DOT Material Price Indices
  • Arizona DOT Bituminous Material Price Adjustment
  • New York State DOT Material Price Indices for Fuel, Asphalt Cement and Steel
  • Caltrans Price Index for Asphalt Cement
  • Ohio DOT Material Price Indices for Fuel, Asphalt Cement and Steel
  • Nevada DOT Contract Escalation Clauses for Fuel, Asphalt Cement and Steel
  • North Dakota DOT Fuel Price Indices
• Construction Price Adjustment Clauses
  • The AASHTO Subcommittee on Construction's Fall 2007 Survey summarized the use of contract price adjustment clauses being used by the states for asphalt cement, fuel, steel and portland cement.
  • See the specific State DOT links in the 2007 AASHTO Subcommittee on Construction, Contract Administration Section, Survey on the Use of Price Adjustment Clauses
  • Search the FHWA National Specification Web Site for Price Adjustment Standard Specifications

    Use the "search specifications" function to search this database of State standard specifications. A search for the term "fuel price adjustment" will provide results for Utah, New York, New Jersey, Montana, West Virginia and North Carolina. A search for the term "bituminous material price adjustment" provides results for Arizona and Alaska. A search for the term "asphalt price adjustment" provides results for New York , New Jersey, Alaska and Kentucky. A search for the term "steel price adjustment" provides a specification for Utah.

• Additional Information Regarding Competition, Improving Bidding Procedures, Reporting Fraud, Reporting Anti-Trust Issues, etc.
  • AASHTO - Suggested Guidelines for Strengthening Bidding and Contract Procedures, October 1991
  • US DOT/ US Department of Justice - Suggestion for Detection and Prevention of Construction Contract Bid Rigging, February 1983
  • FHWA Technical Advisory TA T 5080.3, Development and Use of Price Adjustment Contract Provisions, December 10, 1980
  • Guidelines on Preparing Engineer's Estimate, Bid Reviews and Evaluation
  • Detecting and Reporting Fraud to the US DOT Office of the Inspector General
  • Reporting Anti-Trust Concerns to the US Department of Justice