Clearing the way for Ontario’s steel index

Rising material costs are posing a challenge for players across the construction sector. That includes those in the transportation infrastructure space where the escalating price of steel is making it increasingly difficult to plan ahead. In response, ORBA and other industry advocates are hoping the introduction of a steel index provides some relief.

BY MATTHEW BRADFORD

The proposed steel index imposes a 10 per cent price threshold on steel prices.

As it stands, Ontario does not currently have a mechanism to deal with the hyperinflation of key construction materials outside of fuel and performance graded asphalt cement (AC). Through the introduction of a similar mechanism for steel, industry advocates hope to change that in 2023.

“There is usually a gap of several weeks (or sometimes months in the case of municipal work) between bid submission, award, mobilization, and shovels in the ground. Within that timeframe, the price for key materials may have changed,” ORBA stated in its February 2023 pre-budget submission to MTO.

With regard to steel, ORBA’s submission says, “Key materials indices serve as transparent mechanisms to ensure fairness for all parties and take some of the risk out of the process. Our members are strongly of the view that a steel index would provide more certainty, help to reduce risk in contracts and ensure fairness for all parties.”

The proposed steel index takes its cues from the existing PGAC index. It imposes a 10 per cent price threshold on steel prices, meaning owners would reimburse contractors if the difference between the submitted bid price for the item and price at the time of purchase is higher than 10 per cent, and contractors would reimburse owners in the event the price decreased over that 10 per cent.

”The idea behind the steel index is that it insulates us against price increases over that 10 per cent. So if there is a major change that drives the price of steel up, this will serve as a remedy,” says Andrew Weltz, Vice President, Eastern Canada at BAUER Foundations Canada Inc. and incoming ORBA president. ››

Weltz has been among the team championing the creation of a steel index within Ontario. He explains that the plan calls for the index to be based on the Industrial Product Price Index (IPPI) which was found to best reflect what is being observed across the North American market. While there is recognition that steel is imported from all over the world, there is a consensus that the IPPI is the best route.

“Collectively, when we set out on this initiative with the MTO, we agreed that ‘If you’re looking for perfection, we’ll never get there.’ What we need to be aiming for is something that will soften the blow, and we believe this is the strongest approach,” says Weltz.

A rising concern

There is a strong appetite for the steel index. Fluctuating steel prices have been a source of frustration for many in the field. And while prices are beginning to recover, ongoing economic fluctuations and supply chain disruptions such as the RussoUkrainian War continue to fuel inflationary costs. All told, there remains demand for a tool that can provide some degree of protection for contractors in an industry where steel is an essential component of the job.

“Steel is a major component of a lot of what we do. It’s used to reinforce our concrete and is a key component for our bridge builders,” notes Weltz, explaining, “What we saw as a result of the pandemic and the war in Ukraine, however, is an increase in the price of steel by nearly two-and-a-half times. This increase is crippling the companies who were buying steel.”

Moreover, inflationary material prices can increase bid prices for public contracts which fuels further inflation. This leads to higher costs for project owners who, in turn, may have more difficulty making good on their public transportation infrastructure projects and associated economic benefits.

A question of timing

With the steel index nearing its arrival, the focus is now on deciding when it should be applied.

As Weltz explains, “We need to have it tied to the time at which the company is paying for the steel and when the price fluctuation actually occurs. The question is, when would that be? When the steel is installed in the bridge? When the steel is made?”

It’s a tricky question, he admits, noting, “When you have a job that’s several years long, you buy all the steel at the beginning but install the last piece of steel in the final year. That’s not necessarily the best time to try and capture steel prices because you purchased it years earlier. So, the last step is to get down into the minutia of this index and determine exactly when we crystallize that price.”

Narrowing in on the timing is key. And given all the factors, Weltz suggests that the ideal time to apply the index appears to be when the material is made: “That’s the easiest time because there are quality control documents that help verify when the steel was made. The MTO is always looking for transparency, and those are probably the most transparent documents to work with.”

Widespread adoption

The creation of a steel index is a significant step. The next, however, will be encouraging its adoption among project owners and their contractors. Promisingly, Weltz reports that feedback from Ontario’s municipalities has been generally positive, given the understanding that reducing project risk benefits both contractors and their clients.

“Look at it this way – if I, as a contractor, change my bidding price to reflect the possibility of steel going up, then the general contractor might do the same thing. And if we all guess on the high side, which we would do to avoid that risk, then the ministry will end up paying – and in a sense, overpaying –for risks that might not come to fruition,” says Weltz. “This steel index eliminates the possibility of them overpaying and gives them surety that they pay for what they receive.”

The advantages will extend to communities as well. By taking some of the risk out of transportation infrastructure projects, municipalities will make more effective use of their tax dollars while potentially going forward with more projects.

That is, of course, if contractors are on board with the steel index themselves. As it stands, using the index will be an optional mechanism for contractors. That’s why Weltz says it’s important that project bidders make their choice clear from the start to avoid participation by default. “The general thought is that if they don’t opt out, they will have opted into it as a result of doing nothing. So it’s important for contractors to understand the spec and know that if you’re not opting out, you have to make that official.” Similarly, it’s important to understand that contractors must make that decision for every item.

The steel index is ready to make its debut in Ontario. And while it will take some time for the benefits to take shape, ORBA and its partners are confident that the mechanism will introduce much-needed stability for project stakeholders during increasingly unpredictable times.