Insurance and Sports Business

Higher stadium price looms: Hurricanes likely to blow up costs for construction projects

November 21, 2005

The Gulf Coast hurricanes may push construction costs sharply higher for several years, experts say, potentially adding millions of dollars in costs to the $625 million football stadium as well as other public projects in their early stages.

"Even a 1-percent cost increase on a project like [the stadium] is significant, and the effects from these hurricanes is likely to be higher than that," said Patrick Barkey, an economist and director of economic and policy studies at the Miller College of Business at Ball State University.

Demand for steel, concrete, drywall and even PVC piping has risen since Hurricane Katrina hit the Gulf Coast in August and Hurricane Rita struck in September, devastating communities in the paths of the storms.

"The scary thing is, the [Gulf region] rebuild effort really isn't even under way yet," said Larry Lippold, project manager for Toronto-based Stadium Consultants International, which worked on such projects as Madison Square Garden and the Portland Rose Garden. "On major stadium proj- ects, this could have a significant impact for a number of months, even years."

Construction industry officials say the hurricanes, along with increased demand for steel in China and India, could push up the cost of building stadiums and arenas as much as 12 percent. An increase of that magnitude would add $75 million to the Indianapolis Colts' stadium.

It's unclear how much leeway is built into the stadium budget to absorb unexpected costs. In a brief e-mail response to IBJ questions, John Klipsch, executive director of the Indiana Stadium and Convention Building Authority, said: "All large project budgets include and plan for normal construction-related unforeseen changes during the course of the project. These normal contingencies do not typically include or contemplate changes in the marketplace caused by disasters, natural or man-made."

Mark Rosentraub, a noted sports economist and former IUPUI dean, suspects there's no cause for alarm.

"We know from macroeconomics, nobody is going to escape the effects of this," he said. "But I guarantee you, there are contingencies built in. A 10-percent contingency isn't unusual."

Even so, if higher construction costs consume most of that cushion, stadium planners will have less flexibility to address change orders and other issues that typically arise during major projects, Lippold said.

The cost increases also could affect a range of other major construction projects in progress, including the Indianapolis International Airport midfield terminal, the Central Library expansion, the Conrad Hotel and Simon Property Group's headquarters. However, construction industry experts say those projects aren't likely to feel as direct an impact because they're further along in terms of construction, or at least in awarding contracts.

For example, while the $974 million airport terminal project isn't expected to be complete until 2008, major contracts were awarded over the summer and fall.

The $275 million Indiana Convention Center expansion, to be built on the site of the RCA Dome, is less likely to be affected because it won't begin construction until after the new stadium is complete in 2008.

Not all industry experts are predicting sharp construction cost increases. The American Institute of Architects released a report recently that said the industry should expect no more than a 4-percent increase in the cost of materials and labor in 2006.

"These things are difficult to predict," Barkey said. "But I would think it's got to be on construction managers' minds."

Contractors and project managers may be surprised by the range of materials costing more, everything from heating-and-airconditioning equipment to plumbing fixtures, said Andrew Shiel, CEO of Shiel Sexton Co. The firm is one of central Indiana's biggest construction contractors but isn't involved in the stadium project.

"This could cause some tough situations, and it won't just be materials. It will affect labor, too," Shiel said. "I think you'll see drywall workers, electricians, roofers, masons and other skilled laborers will be in higher demand."

Shiel said he's already heard of area construction companies sending workers to the Southeast to work in the hurricaneravaged areas.

"I know a guy who has 30 electricians down in the Gulf region and I know a number of roofers have gone down there," Shiel said. "We're considering sending people down there ourselves."

About 50 percent of the cost of a construction project like the stadium will be materials, and the other half will be labor, Shiel said.

Low interest rates already were fueling a hot construction market, Barkey said.

"The prices on construction materials is going crazy," Barkey said. "It looks like a huge shift to me, and it's putting pressure on demand."

Contractors and project managers around the country are trying to allay the fears of nervous clients, Lippold said. Many are researching the impact of two other devastating hurricanes, Andrew in 1992 and Hugo in 1989.

Those storms didn't have a long-lasting impact on demand or on project costs, Ken Johnson, vice president of Arizona-based Hunt Construction Group, told Street & Smith's Sports Business Journal. Hunt, which has its Midwest office in Indianapolis, is a builder of sports venues and serves as construction manager for the Colts stadium.

Despite the findings of its study on past hurricanes, Hunt officials have decided to start buying materials early for a $540 million stadium planned for the Washington Nationals and $600 million ball park planned for the New York Mets.

"We'll try to buy steel and concrete as early as possible with different procurement methods," Johnson told Street & Smith's.

Project planners can reduce their financial risk through guaranteed maximumprice agreements, or GMPs. But Shiel said securing GMPs can be difficult when there are fears of market price increases.

"At this point, people within the industry don't even know where the shortages will be," Shiel said. "Subcontractors and vendors are much less apt to pass on guarantees for an extended period."

Construction industry experts predict that once property owners in the Gulf region collect on their pending insurance claims, demand for both labor and materials will spike, and many contractors will be unwilling to negotiate GMPs.

Ramping up production of many construction materials is difficult, if not impossible, in some cases, Shiel said.

"A lot of these materials either have to be grown or pulled out of mines," he said. "And these things take significant time to produce. You can't just grow a tree instantly."
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