Transportation Secretary Brock Adams, reacting to dramatic increases in highway construction costs, has ordered a reexamination of all road-building contracts where the low bid exceeds the estimated cost by more than 7 percent, President Carter's guideline on wage increases.
Adam's order comes after a second straight quarter o extraordinary price escalation in multibillion-dollar federally aided highway construction projects ranging from interstate expressways to rural bridges.
Statistics for the third quarter of 1978, just compiled by the Federal Highway Administration (FHWA), showed that highway costs were 37.1 percent higher than in the same quarter of 1977. That is the largest annual percent was posted after the Arab oil embargo.
Adam's order, which includes several measures designed to encourage cost cutting, will be implemented after guidelines are sent this week to regional and state offices of the FHWA. The order will have the effect of foreing state contracting officers to redesign many contracts and perhaps reshuffle some priorities in the $7 billion federal aid program just getting under way for fiscal 1979.
"We're going to try and support this thing all we can," said H. J. Rhoads, deputy director of the American Association of State Highway and Transit Officials, which represents the interests of state highway departments in Washington."The chief impact of the program school be psychological - to try and get to the contractors."
Adams said in an interview "we're saying, in effect, cut it back to 7 percent or don't build it. We're going to get on top of this . . . We think this way we can keep the program going and still control costs."
Hundred of millions of dollars for highway programs were impounded during the Nixon administration to stem inflation, but impoundment was subsequently found to be illegal.
The FHWA reports construction costs on a quarterly basis and compares them with a base rate established in 1967. In the third quarter of 1978, costs were 14.7 percent above the previous juarter.
That would have been a record had it not been for the 17.6 percent increase in the previous quarter. Since 1967, highway construction prices have risen 296.1 percent. In other words, it costs three times as much to build a chuch of road now as it did then.
While costs have been going up, the demand for roadbuilders and materials has gone down. For example, in 1967 more than 5 million cubin yards of concrete were poured for highway construction, but in 1977 that dropped to slightly more than 2 million cubic yards.
John S. Hassell Jr., associate administrator for planning at the FHWA, said "it is clear" that the cause of inflation in the highway program was created by "expectation of increased costs" on the part of contractors, not by rising demand for their services.
Another major factor in cost increases, Hassell said, is the shift in emphasis from new construction to reconstruction and rehabilitation of roads.
"When we rebuild a road, usually we have to maintain existing traffic flow." Hassell said. "That means flagmen, barricades, odd hours and many other factors that drive up costs."
However, Hassell said, inflation in highway construction is occurring across the board, not just in reconstruction projects.
The FHWA figures show that excavation projects are increasing road-buildin costs the most. They were up 54.8 percent over the previous year and 28.8 percent over the previous quarter.
If the low bid on a new contract exceeds the engineering estimate by more than 7 percent, Hassell said, the contract will be rejected and reexamined for possible cost-cutting features.
One major device that will be urged on the states is to "phase" or "stage" a highway program into three or four separate, consecutive contracts rather than one big contract.
"If a contractor is looking three years down the road, he might build in a 30 percent inflation factor in his bid because he just doesn't know what's going to happen," said Rhoads. "By staging into three one-year contracts you can reduce his uncertainty to a shorter period, and perhaps get him to cut his inflation factor."
Economies of scale, are lost through such an approach, but "there is no way economies of scale are going to equal a 30 percent annual increase," Adams said.
Adams also said his program, among other things, would encourage states to seek bids containing many options on possibly cheaper construction techniques, would adopt liberal policies to encourage quick progress payments to contractors and would strongly encourage incentive clauses for contractors.
"A lot will depend on the unions, particularly in the North," said Rhoads. "If they are willing to accept 7 percent wage guidelines, the contractor might be able to hold his prices. If not . . ."
The AFL-CIO opposes voluntary wage-price guidelines and favors congressionally imposed, mandatory wage-and-price controls.