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Highway Construction Costs The Potential Impact on SAFETEA-LU and MPOs

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Highway Construction Costs The Potential Impact on SAFETEA-LU and MPOs

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    1. Highway Construction Costs – The Potential Impact on SAFETEA-LU and MPOs William R. Buechner, Ph.D. Vice President, Economics and Research, ARTBA AMPO Spring Conference March 14, 2006

    2. How Does SAFETEA-LU Guaranteed Funding Compare to TEA-21?

    3. What Will SAFETEA-LU Mean for MPOs? A solid foundation for growth of highway investment, but … Highway construction costs are rising rapidly, which… Will play havoc with the TIP unless you are very careful about estimating future project construction costs

    4. Best Measure of Highway Construction Costs-- BLS PPI for Highways & Streets Covers prices of materials and services used directly or indirectly in highway construction from more than 180 industries – weights based on input-output tables Timely – one-month delay Does not cover labor or overhead National only – no state or regional data

    5. Until 2004, Highway Material Costs Were Well-behaved, 12-Year Avg. Inc. of 1.8%

    6. In 2004, Major Price Increases Involved Steel and ….

    7. Diesel Fuel

    8. Impact Major increase in cost of construction using steel Affected bridge, guardrail fabricators Could have led to defaults, delays on major bridge projects, inc. Woodrow Wilson Bridge Some states aided fabricators

    9. In 2005 --- Cost increases spread to core highway construction materials Impact more wide-spread Construction costs rose even more sharply than in 2004

    10. PPI for Hot Rolled Steel Bars & Structures Level After 45% Rise in 2004

    11. Diesel Fuel Up 47.5% in 2005 Following 27% Increase in 2004

    12. PPI for Crushed Stone Increased 3.5% in 2004, Rose 6.8% in 2005

    13. PPI for Ready-Mix Concrete Increased 5.2% in 2004, Up 12.1% in 2005

    14. PPI for Asphalt Paving Mixtures Rose 1.6% in 2004, Rose 8.3% in 2005

    15. Highway Material Costs Rose 12.5 Percent in 2005

    16. Other Costs Rising Less than Materials –ARTBA Index up 5.4% in 2004, 7.7% in 2005

    17. What Is Causing the Cost Increase? – Strength of Construction

    18. Combined with Limited Supply Little if any new capacity in aggregates, cement, asphalt production Some possible relief from Mexican cement imports – but cement mfgs. raised prices in January Hurricanes disrupted petroleum supplies, rebuilding will add to demand

    19. Outlook Continued upward pressure on material costs Major risks – Iran cuts off oil exports China, India growth accelerates Cost-push cycle where owners accelerate projects to beat cost increases

    20. Impact of Rising Material Costs Bids higher than expected as contractors protect against unpredictable prices Erosion of state and local highway construction & maintenance budgets Some projects postponed or canceled Deterioration of conditions

    21. Possible Relief Housing market slows Fed continues to raise rates to point where U.S. economy slows Rest of world slows down Long-term – new capacity and supplies

    22. Highway Construction Costs in 2004 - 2005 Cut Real Growth to Under 1/2%

    23. Largest Increases in Guaranteed Funding , FY 2009 vs. 2003

    24. Smallest Increases in Guaranteed Funding , FY 2009 vs. 2003

    25. Outlook for Federal Highway Funding in FY 2007 – FY 2009 President’s budget requests RABA bonus of $842 million FY 2007 Will Congress honor? Will some be used for research? Katrina repairs? Most for donor states DOTs assuming future ob limits = 91% of CA, but overlooks earmarks in appropriations legislation

    26. SAFETEA-LU Earmarks Meant Big Bonuses to Some States

    27. …But Appropriators Also Add Earmarks

    28. Impact of SAFETEA-LU on Highway Construction SAFETEA-LU provides 4-year predictability to federal highway & transit construction funding but less funding growth than under TEA-21 Will let state and local DOTs get “back-burner” projects underway – possible short-term boost to highway/bridge construction Probably an uptick for design/study consultants State and local funding will become more critical

    29. Is There Any Good News? State and local highway construction budgets are improving after some tight years Economy stronger Tax revenues up Value of construction work on highways and bridges rose to record levels in 2005

    30. Value of Pavement Construction Has Been Flat Since 2001, Rose 14.2 Percent in 2005

    31. Bridge Construction Resumed Strong Growth in 2005, Rose 9.6 Percent

    32. Value of Airport Runway Construction Grew 18.4% in 2005, Topped $6 Billion

    33. Awards for Pavement Construction Have Been Level, but Rose 5.9% This Year

    34. Bridge Awards Were Down 13.1% in 2004, Rebound 11.3% in 2005

    35. States Budgets Improving, Many Increased Spending for Highways and Bridges in FY 05

    36. Conclusion Highway and bridge construction should remain a strong market in 2006 But if other construction markets also remain strong, Will continue to put upward pressure on costs of construction materials

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