State Adjusts Formulas to Reflect Dramatic Increase in School Construction Costs

At this week’s meeting of the Capital Debt Affordability Committee, Dr. David Lever of the Interagency Committee on School Construction described the dramatic increases in school construction costs. He also described the State’s accompanying reaction to those increases, an adjustment of the maximum allowance of dollars per square feet that the State will consider eligible for its funding.

While the State does not make any contribution to property acquisition costs, architectural or engineering expenses, or the cost of interior furnishings, the State does pay a specified percentage towards other K-12 school construction costs. The percentage the State pays, also called the state share, varies based on the wealth of the jurisdiction.

In the state’s wealthiest jurisdictions according to its calculation, it pays at most 50% towards the eligible costs of school construction. The state wealth calculation considers student income levels, enrollment growth, and wealth factors including One Maryland status, local effort, and what is called the education foundation formula percentage. For more information, see the state share for each jurisdiction and COMAR 23.03.02.05.

There is also a cap of state funding, however, set at a certain dollar amount per square foot. This means that unless the state’s per square foot formula is adjusted, the state pays a smaller and smaller percentage of school construction costs as school construction costs rise. Last year the IAC applied a standard 4% increase, but by mid-year, based on construction bids, that cost was found to be about 16% too low.

The dramatic increase in school construction costs are attributable to a variety of causes, as described by David Lever at this week’s meeting. These costs include the direct costs of state mandated environmental and labor regulations. Increased regulation has also driven some contractors to leave the field of school construction, and improving economic conditions in the home building market have allowed them to do so, decreasing the competition in school construction that indirectly leads to greater school construction costs.

The Interagency Committee on School Construction (IAC) is raising the maximum allowance for eligible costs for building by 4% (above the additional 16% that should have been applied in FY 2016) and increasing the maximum allowance for site work costs from 12% to 19% for FY 2017. The IAC will also continue to monitor the market for any needed adjustments.

As described in the presentation for the Capital Debt Affordability Committee:

Construction Cost Escalation

Significant changes have occurred in the cost of construction in the last year, accelerating the modest escalation trend experienced since 2011:

In July 2003, the approved State construction cost was calculated at $138.75/sf for new construction; for July 2015 it was $233.00/sf, a 68% increase. However, this figure was found to be significantly below the actual cost of construction in mid-2015:

Vertical Construction Cost:

  • For three fiscal years, FY 2012 to FY 2014, the estimated 4% annual increase of construction cost used by the IAC and DGS [the State Department of General Services] tracked well with actual bid-day costs.
  • In developing the cost for the FY 2016 CIP [Capital Improvement Program] in July 2014, the IAC applied the same 4% increase: the FY 2015 cost of $224.00/sf was increased to $233.00/sf.
  • However, in the last eight months, four school construction bids showed that the 4% increase was about 16% too low; the figure should have been approximately $271/sf.

This figure corresponds to costs reported from construction sources in Maryland.

Sitework Cost

  • The IAC has used a sitework cost of 12% for many years; in recent years, LEAs [local school systems] have asserted that this figure was too low, largely because of the new stormwater management requirements that became effective in 2011.
  • The four bids indicated that the revised FY 2016 figure of $271/sf should have been increased by 19% (to $322.42/sf). This figure is on the low end of percentages experienced by a constructor who has built a large number of Maryland public schools.
  • The combined building-plus-site number of $322.42 for FY 2016 represents a full 23.6% increase over the figure used by the IAC for the FY 2015 CIP (it is 107% higher than the corresponding figure for 2003).

For the FY 2017 CIP, the IAC will:

  • Escalate the building-only figure by 4% above the figure that should have applied in FY 2016 ($271.00/sf) to $282.00/sf, and
  • Will use 19% for the sitework cost for new construction, for a total of $335.58/sf.

However, these assumptions are on the low side of industry indicators. Given the volatility of the construction market and our recent experience, we will continue to monitor these figures throughout the upcoming FY 2017 CIP process.

For more information, see the September 16 2015 CDAC Meeting Materials and our previous posts on Conduit Street, The Actual State Share of School Construction Costs.