Reader Harry H tells us that, at least in Vermont, shovel-ready projects aren’t as ready to go as the very nature of the term would suggest. The Wall Street Journal described some reasons for delay back in March:
It turns out, though, that shovel-readiness is in the eye of the beholder. Soon after his visit, Mr. Biden found out that his model stimulus project wouldn’t see a shovel for almost four more months, possibly longer, knowing how such timetables slip….
States are quickly assembling their construction wish lists. But it takes time to advertise for contractors, collect bids, check the numbers, pick a winner and get work underway. A typical paving project — easy roadwork — takes close to three months from the time the money is approved to the arrival of work boots on the ground, according to the American Association of State Highway & Transportation Officials. “It is not an instant process,” says a spokesman.
However, an additional complicating appears to be the vagaries of the bidding process. Harry H describes the local situation:
I was talking with a construction firm that was supposed to oversee a large ($9 million) civil project in VT.
The bids on the project came in and there were 2 that were below $7 million. The $9 million was the engineers estimate. Take 20% off that, and that is roughly the cost of the work for the contractor, or $7.2 million. So the bids came it below what the costs for the project were likely to be.
This situation is very bad. The municipality does not want to let the work out if the contractor is going to go broke during the project, even with bonding it is a royal mess to have a contractor go bust in the middle, and to get someone else to go in and finish it is even harder. At the same time, getting rid of low bidders on government projects is very difficult. Lots of lawyers and obscure bidding laws, but it is possible to not let the job to the lowest bidder. It depends on law mostly, but smaller municipalities will usually throw out the entire bidding process, and start over in a few months. This is a simplification of the process, obviously. Lots of law behind the scenes that I only have seen in practice.
I have hear this is happening a lot, all of the “shovel ready” projects are not going anywhere because of bidding problems. This particular project was in a small town in VT, dig up main st and replace all of the water, sewer and gas line, and then re-do the entire road and drainage, as well as sidewalks. Very good work for a stimulus, lots of labor, as compared to say a new road.
The construction season is relatively short in the Northeast. If it doesn’t get started soon, it will have to wait till next year.
I wonder if this is a sign of how desperate some contractors are, that they will put a bid that is bare minimum because they really need the work, and are too optimistic about what it will take to get it done (ie, they implicitly assume everything will go right, which never happens). This may just be a local fluke, but John L suggests it is broader based. I’d be curious if any readers have insights into this, or the more general question of whether these projects are moving forward as fast as hoped.
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Interested readers should check out the Fractals of Change blog written by Tom Evslin, Chief Recovery Officer of Vermont. Essentially managing the stimulus funds
Shovel-ready is in the eye of the bondholder: munis are Guvmint bucked-up, so once you buy your gelt is money-good.
Ben B. had a better idea: It _would_ be simpler to simply pitch wads of Ben Franklin’s from helicopters over dense urban areas. And it would likely result in more velocity of money circulation, too. I mean, those drug dealers have to launder fast to dispose of the evidence. Just like the iBankers, cycling TARP loot for T-bills: gone in sixty seconds.
I’m with Naomi Klein; I’ve got a mountain of outrage, but the theft is so gargantuan it’s still bigger than my ire. I can’t stay mad enough long enough to get on top of it.
Commercial construction on large projects shares its primary accounting tool Standard of Procedure (SOP) 81-1 with only one other industry: software development.
The primary item of note within this SOP is how to account for work that is not complete but for which you are being paid for.
Think of it this way (very simplified) $12 million dollar project will last 12 months. The contractor will complete 1/12th of the work each month. At the end of the first month he submits a bill for 1/12 of the work and is paid promptly. At this point in the project the contractors costs (with overhead and profit included) will match the owners payments. Thus the $12 million contract only requires a $1 million dollar outlay by the contractor. So if the contractor’s profit on the project is 5% ($600M) of $12 million, his return on investment is actually 60% (600M/1,000M one month outlay) which could also be found by multiplying profit by the reciprocal of the embedded leverage (.05*12 =.6).
So the 20% profit and margin found on the standard change order form does not really work at the macro level and this is probably where the 20% figure they used is coming from. Change orders are generally much shorter duration and have higher markups on material prices so they are more expensive.
Which brings us to the other part of SOP 81-1. The contractor who has the largest incentive to bid low on these projects is the contractor that has already underbid previous work. Since there is generally a lag between their income stream and the need to pay their suppliers and subcontractors, there is always the “robbing Peter to pay Paul” problem.
http://www.phrases.org.uk/bulletin_board/7/messages/642.html
That is why many contractor go bust at the start of construction downturns rather than in the middle or end. They were operating at a loss during the boom and when their income stream slowed up they could not pay for their past projects, little less their current one.
So the two dynamics- embedded leverage, and “robbing Peter to pay Paul” -have a tendency to push pricing down even in the best of times.
The best option for the owner is to get to use their crystal ball to find out which contractor will continue to find new work after theirs starts so that their project can be paid for by them.
Vermont is one of the fertile grounds for the relocalization movement, which is struggling to point out the fundamental insanity of building yet more roads when we don’t and apparently economically can’t maintain the roads we already have, and when Peak Oil means the whole personal car/sprawl model for society is a zombie itself.
Just building more of this useless infrastructure on top of the rotting existing infrastructure, with all of this infrastructure doomed to obsolescence, is throwing money down a hole and wasting time just as surely as bailing out the zombie banks.
And if they really can’t find any use for this stimulus other than to trump up such worthless, destructive makework, why don’t they just go straight to Keynes’ paying people to dig holes and then fill them up?
But there are critical and productive uses to which the money could be put. To give the most important example, America needs millions of farmers to meet the challenge of the decline of fossil-fueled agriculture and just-in-time distribution. So if you’re looking for a new New Deal, there’s no better place to start than training and capitalizing these needed millions of small farmers.
IMO, its possible the engineer estimating the project is in denial that we are living in a deflationary period. The contractors need the work desperately… and their workers need the work desperately so they are taking minimum pay.
If the bids came in at 6 million, they’re dangerous, 6.8 million probably not.
Sometimes in times like these, antitrust laws notwithstanding, businesses do bid a job below cost. Why? Because there is a startup cost to losing their workers due to a lack of available work; while if they win a job and lose a small amount of money but keep their workers, they have a chance of being one of a fewer number of remaining contractors.
Anyhow, right where we are now, that’s the name of the game for some of the construction contractors.
I’ve read in the Kansas City Business Journal about similar under-bidding in Missouri. A $70 million project is going for $55-$60 million.
Another good sign of deflation at work.
Missouri officials did not seem too worried and seemed to think that they’d get more bang for their stimulus buck.
On average, about 5,500 barrels of liquid asphalt are needed per mile of paving.
Ugh, leave it to our elected officials to decide that a petro product should be the base of our stimulus.
As oil prices are pushed north due to an asinine stimulus it will only idle any recovery (if there even is one).
This stimulus is as smart as ethanol which uses more fuel than it makes.
Face it. Stupid people got us here, they ain’t going to get us out of here.
Beat this oil horse to death:
Road Work and ASPHALT
http://www.relocalize.net/node/10150
On average, about 5,500 barrels of liquid asphalt are needed per mile of paving…
Asphalt
http://www.construction-today.com/content/view/805/82/
Generally speaking, asphalt requires about 8,981 gallons per mile (GPM) for production and 1,737 GPM for hauling and placement.
2.6 MILLION miles or road in U.S.
http://www.fasterbettersafer.org/research_and_industry/Oldcastle%20T&I%20Hearing%20Testimony%20Final%20Oct08.pdf
page 3
Shovel ready ‘eh. My State is shoveling the money straight into the General Fund.
What the Feds give the States take away.
I remember two major highway projects here in Colorado where a contractor (or subcontractor in one case) went bust. The sub wasn’t abig deal; he just didn’t get paid. But the big guy was about 2/3 through; it took two years afterward before the project was finished (over a year extra).
Not much new about this, really. The low bid may have little relation to the ultimate construction cost. It’s a common strategy in public bidding to go in low, in hope of making up the difference on change orders (e.g., by demanding more money for every ambiguity in the contract documents).