Managing school construction expenditures in a rapidly changing environment.
When Fayette County (Ky.) school officials began putting together estimates for upcoming renovation projects at two elementary schools, they based their projections on their district construction projects from 2007.
"The information we were getting on the construction market was that costs were continuing to inflate," says Bill Wallace, Fayette County's director of facilities design and construction.
But by February, when construction bids were opened for the renovations of Cassidy and Russell Cave elementary schools, the building market had become a different place. In this upside-down world, education institutions like Fayette County are saving millions of dollars because the bids for their construction projects are well below estimates.
"Certainly, we were pleased," says Wallace. "Cassidy was 21 percent below estimates, and Cave was 11 percent below estimates. We had more bidders than we've ever had before."
The economic recession that has dragged down the stock market, wiped out savings and put millions out of work has hurt schools and universities as well — resulting in some building projects being mothballed (see sidebar, p. 24), jobs lost and campuses targeted for closing. The grim financial climate has made it more difficult for many education institutions to acquire the funds needed for facility improvements. However, for those that have funding in place for capital improvements, the combination of declining prices for some materials and the intense competition among contractors for projects has taken the sting out of the sticker shock that often accompanies capital improvement projects. And administrators aren't about to apologize for their good timing.
Need job, will work cheap
Fayette County is able to move forward with construction because voters in 2007 approved a property tax increase. By the time bids were solicited, the district benefited from price drops for oil and other materials. At the same time, the residential construction market was stagnant, and more companies focused their attention on submitting proposals for school projects.
"There is so little construction work out there," says Wallace. "School projects are the largest portion of what is getting constructed. We've drawn back experienced contractors, and we've seen a lot of new folks, too."
Below-estimate bids are not limited to Fayette County schools. Other examples in recent months:
The bid accepted in December for Morgan Village Middle School in Camden, N.J., was about $21 million; the cost estimate was $27.1 million.
The winning bid in December for an elementary/middle school in the Egg Harbor City (N.J.) district was $15.2 million; the cost estimate was about $18 million.
In Medford, Ore., the bid for renovating Lone Pine Elementary School was $700,000 less than the $12 million estimate.
Officials in the Bismarck (N.D.) district had estimated that a new elementary school would cost $12 million, but when bids were opened in January, the low bid was $8.8 million.
The Indianola (Iowa) Community School Board approved a $1.9 million construction contract for a new athletic facility; project engineers had estimated the cost at $2.5 million.
The Richardson (Texas) district had estimated that a new elementary school roof would cost $1.2 million, but the winning bid came in at $895,000.
Before the recession altered the construction market, many schools and universities found it difficult to control expenses and prevent climbing costs from jeopardizing projects. But even now, when many education institutions are benefiting from the scarcity of construction work, administrators must be vigilant about managing costs and planning thoroughly to avoid budget-busting surprises.
One reason schools and universities often find it difficult to predict and control construction costs is that, as the current recession has shown, factors can fluctuate greatly from year to year, institution to institution, district to district, state to state. Administrators who are better informed about the differences and how they might affect construction budgets are in a better position to anticipate additional costs.
In a 2008 report to the American Institute of Architects California Council, "The Complex and Multi-Faceted Nature of School Construction Costs: Factors Affecting California," the Center for Cities and Schools at the University of California-Berkeley noted that public schools often struggle to contain the costs of construction projects because they must provide needed classroom space even if economic conditions are unfavorable. A developer can delay or cancel a private project and wait for better times, but a school system does not have that luxury.
"School construction is driven largely by enrollment growth and needs for upgrading existing schools," the report says. "School districts must build schools whether market conditions are favorable or unfavorable."
In addition, education institutions trying to decide where to build a facility often have limited options. In the urgency to provide additional classrooms in the neighborhoods where they are needed, schools may have to pay more for a site, or choose a site that requires extensive grading, has potentially costly environmental issues, or requires significant road and utility upgrades. Any one of those can throw a budget out of whack.
On top of that, the emotional attachment that local communities may form with the neighborhood schools can lead to design and construction decisions that are guided by factors other than finances and efficiency.
"Schools are very ‘personal’ elements of communities," the study says. "As a result, local viewpoints about them are driven by a host of concerns and beliefs …. The desires for local flexibility in siting and design often conflict with regulations and/or cost efficiencies."
The Berkeley study, which focuses on California, but also looked at several other states, concluded that the three main elements affecting construction costs are state regulatory structures; local school politics, practices and design; and regional market conditions.
"School planning, design, and construction are highly local activities, and a large amount of variation exists in this work," the report says.
For instance, a growing school system that constructs facilities regularly is likely to have a larger staff and more expertise dealing with contractors than a small district that might erect a new facility once in a generation.
"In many districts, personnel working on facilities planning have educational backgrounds and often do not have construction project management capacity," the report says.
The study's findings that market conditions can significantly affect construction budgets are supported by the spate of below-estimate bids in early 2009. Land prices, shortage of labor and materials, and fuel costs are reasons for climbing school construction costs, the study says. So when the market sees fuel costs that have dropped dramatically, materials costs that have declined, labor that is plentiful because of the lack of private construction, it stands to reason that schools and universities are benefiting.
As construction bids in early 2009 come in lower than expected, one fear that some education administrators may have is that contractors may try to increase their compensation down the road by asserting they have unexpected additional expenses.
"I am a bit concerned that we may get hit with more change orders," says Wallace.
Legitimate change orders occur frequently, Wallace says, when unforeseen obstacles are uncovered after construction has begun.
"If there are unknown conditions, like bad soil, or in a renovation, if you open a wall and find pipes that weren't on any of the existing drawings, you can't blame the contractor," says Wallace. "I don't know how you're ever going to escape change orders."
But that doesn't mean education institutions have to absorb cost overruns that are the responsibility of a contractor. Thorough planning and knowledge of project details will help safeguard schools and universities from unnecessary change orders.
"You have to be vigilant," says Wallace. "The best way you can protect yourself against that is to have really good drawings and specs."
Keeping costs down is a hot topic these days. Comment on this article below.
- Read the "Massachusetts models design sharing" sidebar for more information on Massachusetts' effort to encourage districts to spend less lavishly on new facilities and use existing designs as a prototype for new construction.
- Read the "Economy prompts Ivy League slowdown" sidebar for information on how the economic downturn has slowed these universities' ambitious expansion plans.
Kennedy, staff writer, can be reached at firstname.lastname@example.org.
Massachusetts models design sharing
Because of the recession, the Massachusetts School Building Authority (MSBA) says it will have less funding to help local districts construct facilities, but the agency still hopes that the lure of state dollars will persuade districts to rein in the galloping costs of school construction.
The MSBA's Model School Program is an effort to encourage districts to spend less lavishly on new facilities and use existing designs as a prototype for new construction.
School districts that agree to take part in the Model School Program will use an existing design as the basis for building a new facility. In Norwood, the new high school's design will be modeled on Whitman-Hanson Regional High, which was completed in 2004. The MSBA says the model schools approach will trim about $26 million from the Norwood High plan.
In Wellesley, plans for a new high school were altered after the district adopted some of the elements of the Model School Program. The new campus now calls for 280,000 square feet instead of 327,000 square feet, and construction costs are projected to be $110 million instead of $159 million.
The building authority acknowledges that the model schools approach will not work with all Massachusetts projects, but contends that wherever it is feasible, it will save taxpayers money. The agency spells out the ideal conditions for a school district to take part in the Model School Program: when the authority and district agree that a new school is needed; when both parties agree on enrollment; when a suitable building site is available; and when the proposed new school and the prototype school have similar education plans.
Economy prompts Ivy League slowdown
With the value of their endowments getting clobbered by the economic downturn, several Ivy League universities have decided to put the brakes on their ambitious expansion plans.
Yale President Richard Levin announced last month that construction projects already under way on the New Haven, Conn., campus will be completed, but "we will postpone construction on all other approved projects until conditions in credit markets improve or until gift funding is received. Unless gift funding is available, we will also delay design work on these projects. In total, we will be deferring capital expenditures of up to $2 billion over the next five years."
The postponed projects include two new residential colleges that would have enabled the university to expand undergraduate enrollment by 15 percent.
"An unprecedented drop in our endowment and pressure on every other source of income have forced a careful review of all of our capital planning projects," Harvard President Drew Faust writes in an update about the project.
Harvard expects its endowment, which had been valued at nearly $37 billion, to lose about 30 percent of its value by the end of the 2008-09 year.
Faust says the university will continue — at a slower pace — the first phase of work at the site. That involves finishing the foundation of the 589,000-square-foot Allston Science Complex, the first buildings in the planned expansion. In the meantime, Harvard officials will assess "whether there are feasible ways to lessen the complex's cost, through design changes or other means," Faust writes.
In the long term, Harvard envisions a development in Allston that, over 50 years, adds as much as 10 million square feet of space and creates 11,000 to 12,000 jobs.
"Harvard's 50-year vision for Allston is undiminished, regardless of these short-term challenges. Allston is vital to Harvard's long-term future," Faust writes. "Over time, we envision a campus of buildings, pathways, and green spaces with a variety of academic and research uses, from graduate schools to science laboratories to space for arts and culture activities."
Brown University in Providence, R.I., also is curtailing capital improvements because of the recession. The Corporation of Brown University, which governs the school, has urged officials to pursue renovation rather than new construction.