Editor's Commentary: A Costly Disaster

Hurricanes blow in higher construction costs.

Hurricane Katrina has been called the most costly natural disaster in U.S. history. Total cost estimates have been placed in the $125 billion range — a staggering figure that does not include tallies for subsequent damage caused by its sister storm, Rita.

Fortunately, many economists believe the back-to-back hurricanes will have minimal long-term effect on overall U.S. economic growth. In fact, some believe it will boost the GDP as we enter the reconstruction phase starting in early 2006.

For the construction industry, however, the effects will be felt a bit longer. At the Associated General Contractors of America's Midyear Legislative Conference, Ken Simonson, AGC chief economist, forecast at least a 10% increase in material prices next year vs. the 6% to 8% rise anticipated prior to the storms. Higher fuel cost was a major part of his assessment.

"Most of the increased costs in construction materials throughout the country will result from a reduction in oil and natural gas production, and not from higher demand for those materials for the reconstruction projects in the devastated areas," he states.

According to the American Road & Transportation Builders Association, as of September 12, diesel fuel was trending 82 cents higher than in 2004, and gas was at 92.7 cents higher. And while pump prices were expected to ease into the fourth quarter, worldwide petroleum demand in 2006 is expected to keep fuel costs trending at high levels for the foreseeable future.

Shortages of several types of construction materials will also be a factor, particularly cement. Much of the damage in New Orleans was caused by flooding, meaning basements and foundations will need to be replaced. "In addition, more non-residential buildings than normal were damaged by flood water and will need replacement," notes Ed Sullivan, chief economist for the Portland Cement Association.

Experts estimate rebuilding the city will require at least 4 million tons of cement over the next four to five years, placing more pressure on already scarce supplies.

Another factor likely to impact construction costs will be labor. Over the next couple of years, the Gulf Coast could become a labor "magnet", drawing skilled workers from throughout the country. This has the potential to push labor rates up nationwide as contractors struggle to hang onto their people.

Fortunately, the news isn't all bad. Rebuilding the Gulf will be a massive undertaking with high demand for qualified contractors. Those willing to send crews and equipment into the area are likely to find plenty of work for months to come.(Learn more about projects put out for bid by visiting www.forconstructionpros.com.)

High demand for cement in the wake of the storms is also putting pressure on the U.S. government to suspend anti-dumping duties and quotas on cement from Mexico and other countries. Such a move could bolster supplies and soften prices.

And images of clogged interstates in advance of Hurricane Rita are serving to underscore the importance of adequate road capacity around metropolitan areas. Hopefully, they will help to shield the recently enacted SAFETEA-LU against threatened budgetary cuts, as well as lay the foundation for higher funding in the years to come.