Understanding the Supply Chain
Construction costs have escalated significantly over the past five years with the square footage cost of non-residential buildings increasing by a rate greater than the 19.4% increase of the Consumer Price Index. The framing system of a building continues to typically account for 10% to 12% of the building cost. During this time the cost differential between structural steel and concrete framing systems has remained relatively constant with a 5% savings gained by selecting structural steel. For example, when measured using national R.S. Means data, the selection of a structural steel framing system for a 20,000 square foot 8-story office building would save the owner an average of $200,000 compared to a typical concrete system. This comparison of framing systems includes directly related items such as floor systems and fire protection.
The consistency of these results over the past several years may surprise some building project owners who continue to read press reports of increasing steel prices. Steel prices have increased, but the increase in steel prices impacts all projects on a nearly equal basis independent of the framing system selected. A recent study concluded that for every $100 increase in the average cost of ALL types of steel, the typical non-residential building project would increase in cost by 3.5%. The study further distinguished between structural steel framed projects and concrete framed projects with the impact of changing steel prices on structural steel framed projects being 3.8% and 3.3% on concrete framed projects. Based on the findings of this study the overall contribution of changing steel prices from late 2003 until early 2008 would be approximately 18%. The study did not consider the impact of the changing cost of other materials, such as increasing concrete or lumber prices, on the differential. However, just as the price of steel has increased, cost increases in other materials are a reality and the result is that today steel framing continues to offer approximately a 5% cost savings over other building materials.
What this study demonstrates is that the vast majority of the cost impact of steel in a structure is NOT a function of the structural steel frame! Actually, in today’s marketplace material costs represent 30 to 35 percent of the cost of fabricated and erected structural steel. At the current mill price, a $100 change in material price would result in a 3.5% increase in the cost of the structural steel package. The structural steel package is typically between 10% and 12% of the overall cost of a typical project. This means that a $100 change in the mill price of structural steel will result in an increase in the range of 0.4% in the overall cost of the project.
Rather steel price increases have impacted a wide range of building components such as piping systems, ductwork, metal studs, decking, facades, elevators, escalators, nails, wiring, electrical components, window frames, sprinkler systems and, most certainly, reinforcing steel used in concrete construction. In fact, in the typical building located in a low seismic zone the weight of the reinforcing steel in the concrete is roughly 50% of the weight of the equivalent structural steel frame. In high seismic zones the weight of the reinforcing steel may actually approach the equivalent weight of the structural steel.
Structural steel is readily available in today’s construction marketplace through a network of Steel Service Centers and producers. The domestic structural industry continues to expand both production and fabrication capacity. The cost of fabricated structural steel for building projects has increased over the past several years as a function of increasing costs of mill products. But unlike the gyrations seen among commodity based construction materials the trend for fabricated products has been relatively smooth and predictable. The Bureau of Labor Statistics (BLS) data indicates that the steel fabrication industry has absorbed the variability in producer pricing (see figure 1) even as prices have increased.
The project owner or general contractor can exercise significant control over how these market place variations impact their projects by clearly identifying whether the risk of material price variations is held by the project owner, the fabricator or the material supplier.
The project owner can opt to hold the risk for material price variations by employing an escalation clause in the contract for the fabricated structural steel package. By assuming this risk, the project owner will gain the benefit of a lower base price for the steel package and the potential savings of a decrease in material costs.
The project owner can require that the fabricator hold the risk of increases in material prices. The result will be that the fabricator will price the cost of that assumed risk into the base price of the steel package. In addition, any decrease in material cost will accrue to the fabricator as compensation for the risk that is being assumed. The project owner can lower the risk being assumed by the fabricator by authorizing acquisition of material as soon as a bid is accepted and compensating the fabricator for material storage.
A third method of managing material costs is for either the project owner or fabricator to pass the risk back to the material supplier. Material suppliers, either mills or service centers, currently have programs in place to address price variability. At the mill level these program vary by producer from a program providing price locks for a specific period of time up to 15 months for a per ton fee to a four month freezing of prices. At the mill level these programs require the specification of the actual shapes to be ordered and may involve a minimum project size. Service centers work closely with their fabricator customers and will address project timing and pricing based on project and business factors. In each case, the key for the passing the risk back to the material supplier is to discuss the process early with the structural steel fabricator.
The single most important factor for managing not only the cost of the structural steel package, but the overall value that can be obtain from utilizing structural steel is the early involvement of the structural steel fabricator. The structural steel fabricator is the construction professional most acquainted with the value implications of design decisions, material availability, costing paradigms and process optimization. Projects where the fabricator is engaged early recognize that structural steel is not a commodity and benefit directly from the fabricator’s expertise.
Today’s design and construction marketplace demands the wise selection of the project framing system and the proper management of the process of acquiring that system. Fabricated structural steel systems provide both the material and the industry expertise to bring the greatest possible value to any building project.