With prices of goods and services up across the board, it is no surprise that inflation is also affecting road and bridge building projects.
Road agencies across the country are facing higher prices for materials. Labor costs have also risen with a demand for skilled workers, challenging employers across all sectors and affecting the cost of home building like other construction.
This week’s Talking Michigan Transportation podcast is the 100th episode. The guest is Brad Wieferich, director of the Michigan Department of Transportation (MDOT) Bureau of Development, who talks about how the hundreds of projects in the works or planned across the state will continue this year despite the pressures of inflation.
Wieferich also explains that there’s no evidence that the Rebuilding Michigan bonding plan is the reason for the inflation, which is not unique to Michigan as outlined in data published by the American Road and Transportation Builders Association.
The higher prices are the result of a “perfect storm” as the pandemic, war in Ukraine and decades of disinvestment (meaning the longer we delay maintaining and building infrastructure, the more it costs) have taken a toll.
While emphasizing that this year’s MDOT projects remain on track, Wieferich explained that if prices continue to rise, planners may have to make adjustments to future projects in the five-year program.
Jeff Cranson: Hello, and welcome to the Talking Michigan Transportation podcast. I'm Jeff Cranson.
Cranson: Today I'm going to be talking with Brad Wieferich, who is the director of the Bureau of Development at MDOT. And he's going to sort of set the record straight and give us the facts on what's going on with inflation in the construction industry. Shouldn't surprise anybody given what inflation is doing to costs of goods and services everywhere, that it's also affecting the road construction industry and what they're doing. He's described what's going on as kind of a perfect storm between the pandemic and lots of other factors. So, Brad, thanks for taking time to do this, and give me your—what we always say the aunt Shirley explanation for what’s going on.
Brad Wieferich: Absolutely, and thanks for having me back, Jeff. This issue that we’re dealing with right now is not unique to Michigan; there's a national construction inflation issue that the industry is dealing with. We were made aware of some information that was put out by the American Road and Transportation Builders Association, ARTBA, where they have a bit of a dashboard that just kind of shows nationally where things are. And quite honestly, the numbers that they're seeing nationally are even higher than what we were seeing in our bids. We've had similar discussions with our peer states in the Midwest. So, yeah, this is a national issue and something that, we're kind of all in this together, and we are talking to our peer states, and we're all trying to deal with the same issues.
Cranson: So yeah, we're all dealing with the same issues, but why don't you break it down from a process standpoint. Michigan is a low-bid state, not every state does things that way. Some have kind of a mix of quality, and costs, and other factors, but we're legislatively required to do strictly a little bit on these construction contracts. So, how does it work? You've worked at many levels in the business including in private industry. So, when you start to conceive or scope a project and decide to put it out for bids, how do you determine what those engineers’ estimates are?
Wieferich: Yeah, sure, something I’ve done quite a bit through my career. So, MDOT, I hope most people know that we develop a five-year program. So, every year we're kind of adding that fifth year out. We use an asset management strategy primarily to direct how we can most efficiently utilize our funds to maximize the condition of our system. Now, when we do that, we base our estimates largely on our average historical prices. So, when we put out a contract, there's line items that the contractor bids on and eventually gets paid for, let's say, a ton of asphalt, a square yard of concrete, a cubic yard of earthwork. And we keep track of that; we have huge databases, and we're able to, through some algorithms, come up with pretty good estimates based on the type of work, the quantity of work, the location of the work, that really get us in the ballpark. We use that sort of estimating for projects even four or five years out, but we also apply an inflationary index. And historically, we've used right around four percent per year. That's actually served us quite well, and it was interesting—a couple years ago, we did a research project with Western Michigan University where they did a more scientific dive into this and found that the value was about four percent per year, so it really validated what we were doing. But, when you look at nationally what's going on, and where the consumer price index is going, we're up seven or eight percent right now. Like you said earlier, it really shouldn't be a surprise that we're seeing differences. So, whereas we've laid out our program, we've done what has worked very well for us historically, we are going to, year by year, have to make adjustments based on what's in the market. And I also think you mentioned the perfect storm of things that we're dealing with right now. The covid pandemic created a lot of logistical issues that are lasting: material procurement issues, labor shortages, all kinds of materials. And now we have a war in Ukraine that's had an effect on our fuel prices, so there's all kinds of things going on. Go down to Home Depot and then try to buy some lumber or a sheet of OSB right now, and I think you'll see that, again, this isn't something that's just unique to Michigan. So, as we go through our projects, we finalize our engineers estimates about the time that we advertise the project for bids. We take in our bids, and we have a bid review process where we kind of scrub through anything that's coming in over the bids. We're going to review the estimate, we're going to look at the individual bid pay items, look for anomalies, and then, at the end of the day when we've justified and accepted the bids, we’ll continue to monitor the entire dollar amount as a whole just to understand what the impacts are going to be going forward. We aren’t looking to change anything this year as far as the projects that are going out.
Cranson: Talk about that a little bit because I think there was some confusion in some of the reporting that’s out there, some of the media outlets that suggested that this is such a dire thing that it means that some projects are gonna get cut. And, like you said, that’s just not the case in 2022.
Wieferich: No, no it's not. And I think, as anyone would expect, we have a budget, we have our estimates, and we’re going to monitor that. And we're going to look for ways that we can adjust so that we can get the entire program out. That's the beauty of a five-year program. It allows us to kind of smooth out some of the changes that we see. So, obviously, when we’re planning on four percent per year, and we hit a year like this where there’s seven percent, eight percent—we don’t know if that’s a blip, we don’t know if this is going to be really long-term. But by having a five-year program, we’re able to kind of absorb and balance that. So, we really shouldn’t see much of an impact this year. I also know, I’ve heard folks talking about the Rebuilding Michigan program, the bond program that we’re putting out, and it’s increased our program considerably. And the questions are, hey, has that had much of an effect? And quite honestly, we don’t have any evidence that that’s been an issue. Again, going back to my perfect storm term, because there’s so many things going on in the market right now, it’s impossible to say that there was any one thing that caused it. But again, we really don’t have any evidence that Rebuilding Michigan has been a big driver in any of that.
Cranson: Well yeah, and I think the best answer to that is that it’s going on across the country. And like you said, just what you're hearing in your neighboring states. You mentioned fuel prices; I think some of us have a vague sense that fuel is a factor in HMA or asphalt pavement, but the rising cost of fuel has much bigger impact on these project costs. It’s not just about whether it’s asphalt or not. Can you talk about how fuel affects things?
Wieferich: Absolutely, look at all the equipment that's out on a project site and think of all the trucking that goes into bringing materials in, bringing materials out, you know, the rollers, the cranes; it's heavily dependent on fuel in order to have the vehicles and the equipment that's needed to build the projects. So that's kind of something right now that the contractors, when they're bidding, they're gonna have to take that risk into account. So again, I don't think that should be a surprise to anyone who fills up their car. I have a pickup truck with a 36-gallon tank so, believe me, I know.
Cranson: You know how much it cost every time you fill it, for sure.
Wieferich: [laughing] Unfortunately, I do.
Cranson: Stay with us, we'll have more on the other side of this important message.
[Cars driving past]
Female Narrator: Oh, look at those beautiful wildflowers along the road. Aren't they pretty?
Male Narrator: Check out that classic car; you don't see many of those anymore.
Female Narrator: Wow, look at that cable median barrier.
Male Narrator: What, you mean that wire guardrail in the middle of the road?
Female Narrator: Exactly, aren't they gorgeous?
Male Narrator: Um…not exactly.
Female Narrator: They were put there to prevent crossover head on crashes, which are some of the most deadly type of freeway crashes. And they're really effective, reducing those types of incidents by 90 percent. That's a lot of lives that have been saved.
Male Narrator: Huh. I guess I never really looked at them like that. I prefer the wildflowers, but I'm seeing those median cable barriers in a whole new light.
[Cars driving past]
Cranson: One of the questions I’ve been asked—and the reason I think this is really difficult is everybody wants a crystal ball—and people have been asking, so what do you think is going to happen? And if it was 7 to 10 percent since last July, what's it going to be going forward. Well, obviously we just don't know, but you have historical patterns where you saw costs go up, and you had to adjust the five-year program accordingly. So talk about how that works.
Wieferich: Yeah, like I said before, that's the beauty of having a five-year program that's balanced out that way is that we can kind of plug and play over five years to lessen immediate impacts. We said this year, and I, again, I don't plan to see much of an impact on our program and what we're going to deliver this year. But we will have to look out, especially if this continues. I don't have a crystal ball, like you said, nobody does right now. But in any given year, regardless if we're going through this or not, we're doing the same types of things; we're looking at our bids, we're looking at our estimates, we're looking at what's been programmed, and making those adjustments. So this is, I shouldn’t say it’s the same as every year because obviously the impacts are bigger than they had been in the past, but our process that we use to adjust and move forward will be the same.
Cranson: So these rising costs in inflation, it really affects us in short and long-term ways. And it causes us to pay twice; it's like the difference between renting and buying. These roads, these programs that we really need to rebuild, we need to go down to the base and rebuild them completely, and we can't. So we'll have to do a little more surface work and maintenance just to maintain it longer. So, it feels like you’re throwing good money after bad when you do that, right?
Wieferich: Yeah, and unfortunately, with the lack of available funding, those are the decisions that we’ve been having to make for the last several years. Applying good asset management principles, you want to try to catch roadways when they’re still in decent condition and do a fix on it so that you can put off those long-term fixes. You know, let’s keep it going with duct tape and whatnot to keep it as serviceable as we can. But you can only do that for so long. And, at some point, the bill comes due when we need to do a reconstruction fix. And when you're doing that, when you're pulling the pavement out, obviously that's the time when you're going to take care of all of the other ancillary stuff with your utilities and storm sewers and culverts. So, when we get in a position where we just can't rehab these anymore, we're having to do some bigger fixes which are very costly. Now Rebuilding Michigan, the bond program, was targeted right for that type of work because we knew it needed to be done. Pushing it off any further only delays and further compounds the cost that it would take to correct.
Cranson: Yeah, exactly, and that's my concern about this going forward, that there's so much work that just needs to be done. And as much as is being done, and the governor's Rebuilding Michigan plan is making a huge dent in some major freeways in the biggest metro areas where the most traffic is. Certainly, metro Detroit with I-275, and the I-96 flex route project in western Oakland County that's just starting. M-59, second phase of that work in Macomb County, a very busy road. I-196 in Ottawa County, just west of Grand Rapids, that's a big one. 496 in Lansing, that one certainly you're paying close attention to, it affects your life. I-69 basically from Calhoun county all the way to Port Huron is being fixed in various components along the way. So, we got all these projects going, and people are saying, “Are we doing enough to fix the roads?”. It's like, my God, I think in your many years at MDOT you haven't seen this kind of capacity for the program, right?
Wieferich: No, no we haven't. Yeah, and I drive through almost every one of those jobs that you mentioned it seems like. Yeah, we get frustrated with work zones, but we have a lot of catch-up work to do. And let's be real; the condition state that we're in right now took many years for us to get here. It's not going to be one bond program, and we need long-term sustainable funding in order to get us out of this. And again, it's not going to take 3 years, 4 years. It took us 15 or 20 years to get here, it's going to take us 10-15 years if we had the long-term sustainable funding to get out of it.
Cranson: Yeah, I think that's well said, and that's something that everybody has to keep in mind. I mean, we're all human, we're all impatient. We want our roads fixed, but we don't want to be inconvenienced when they are. And you've been on both sides of that, too. Obviously, you drive a lot of miles, so you know, and I'd like to remind people of that—that the people who build the roads, whether they're the MDOT people overseeing the projects or the people that are actually out there doing the building, they all drive these roads, too.
Wieferich: Yep, we're in the same boat. I drive by the gas station, and it's kind of sad that I get excited when I see it's $3.78 right now. But again, yeah, it's the same for me as it is for anybody else. And then as I travel around the state, which is starting to happen more, thankfully, now I get to sit through some work zones as well. So again, yeah, not to be impatient by any stretch. I hope people are thankful that the work is getting done, but it's certainly understood that it's going to have an effect on mobility and commutes. But we're looking at the long-term benefit.
Cranson: Well, and since you mentioned being in work zones, we're wrapping up national work zone awareness week and had a nice event in commerce township at CA hall on Monday with the governor and the director and folks from MSP and other departments. Some good reminders and some good ideas going on with all this work, you know, strained to the capacity already. There's going to be a lot of work zones, and we can't do enough to try to protect those workers and make people aware of it. So, thanks, Brad, for taking time to do this, I appreciate it.
Wieferich: Absolutely, Jeff, appreciate doing it.
Cranson: Yeah and I should mention that this is the 100th podcast since we started this a couple of years ago. Randy Debler, who does the sound editing and production, asked me to shout out that fact. So, I want to thank him, certainly, Randy, Corey Petee, who also helps with the production on occasion, Courtney Bates, Jesse Ball, Sara Koenigsknecht, all play a role in putting the photos together and posting it online with the show notes. So, all of them have helped make this what it has been for 100 episodes, and we'll look forward to doing the 101st next week.
Cranson: Thank you again for listening to this week's edition of the Talking Michigan Transportation podcast. I would like to thank Randy Debler and Corey Petee for engineering this week's podcast. To subscribe, to show notes, and more, go to Apple podcast and search for Talking Michigan Transportation.