As economy booms, so do price tags for Palo Alto projects

Hot construction market means higher costs for new public safety building, bike bridge

The past year has been kind to Palo Alto's economy, with real estate costs soaring, hotel revenues booming, and the city's budget carrying a healthy surplus.

But the silver cloud comes with a dark lining: As the economy heats up, so does the construction climate — a trend that has brought rising costs, potential delays and fresh uncertainty for major infrastructure projects. And as Palo Alto embarks on an ambitious plan to fix up long-neglected streets and replace obsolete facilities, the old adage, "Time is money," has never rang more true.

From the proposed bike bridge spanning U.S. Highway 101 to the new police headquarters near California Avenue, the city's infrastructure wish list is long and costly.

In 2014, the council adopted an Infrastructure Funding Plan that identified the city's top priorities as well as funding sources for these projects, which collectively had an estimated price tag of $125.8 million. Much of the funding would come from the hotel-tax (known as transient-occupancy tax) revenues.

But now that the city is actually implementing that plan, those estimates are looking increasingly obsolete and budget officials believe an additional $68 million will be needed over the next decade to pay for the infrastructure projects.

The revised figure for the infrastructure costs was included in a recent report from the Administrative Services Department, which just released a 10-year economic forecast for the city. The report noted that the projects in the Infrastructure Funding Plan are now estimated to "cost substantially more due to updated designs, rising construction costs, and the State imposed requirements to pay prevailing wages."

"Some of these higher costs will be funded through higher than previously estimated Transient Occupancy Tax receipts dedicated to the Infrastructure Plan," the report reads.

The rising construction costs are coming at a time when the City Council is significantly accelerating its infrastructure program. On Dec. 14, the council voted to move ahead with design work for the new public-safety building on Sherman Avenue and for an upgraded fire station near Rinconada Park.

At the same meeting, the council also agreed to reset the design process for the proposed bike bridge. That change was prompted by recent revisions cost revisions submitted by Moffatt & Nichol, the firm that the council commissioned to work on the structure. After the estimated cost swelled from an initial estimate of $8 million to about $12 million, Public Works officials and the council agreed to cease negotiations with the firm and issue a new request for proposals for the overpass.

The trend isn't limited to these big-ticket items, or for that matter Palo Alto. According to the state Department of Transportation's Bridge Cost Index (which Moffatt & Nichol cited in explaining the escalating price tag), the "cost index" for bridge construction spiked from 313 in 2011 and 456 in 2014, suggesting an increase of about 50 percent in construction costs.

In a Dec. 9 update to the City Council, Assistant Public Works Director Brad Eggleston said that as staff began to actively work on the projects that the council had identified as a priority it became "apparent that additional funding is going to be needed for the projects."

For example, the latest cost estimate for the police headquarters and an adjacent garage on Sherman Avenue is between $72 million and $97 million, depending on which assumptions are used and which features are included in the projects. That, he said, is an increase of between $4 million and $29 million for funding the two projects.

"It's very important to remember that all the Infrastructure Plan cost estimates are at a minimum several years old," Eggleston told the council. "They don't account for cost escalation that has already occurred since then and they don't account for additional cost escalation that is likely to occur before the time that they are under construction."

City Manager James Keene told the council that, given the rising costs, one of the most important things for the council to do is "to be able to be as decisive as you possibly can on some of the choices as they're presented."

"We should treat time as a really precious resource and it should be factored in when we're thinking about other things we're trying to achieve," Keene said.

The good news for the city is that revenues, much like project costs, continue to exceed expectations. The city had expected to transfer about $5 million in hotel revenues into the capital program. Now, the plan is to add another $4.2 million to the transfer. The report from the Administrative Services Department notes that the higher-than-anticipated revenues for Transient Occupancy Taxes related to new hotels and the 2 percent voter approved tax increase will partially offset the higher construction cost. The existing funding plan relies on about $64 million from the hotel revenues, roughly half of the plan's entire cost.

Even with the growing revenues, the council agreed earlier this month that, given the rising costs of construction, the city should devote more attention to ensuring good project management.

Somewhat chastened by the city's recent struggle to rebuild the Mitchell Park Library and Community Center (a project that was completed last year after a lengthy and rancorous feud with the original contractor), several council members emphasized the need to carefully track each capital project to make sure the mistakes from the Mitchell Park fiasco don't get repeated.

Several council members, including Mayor Karen Holman, Greg Scharff and Cory Wolbach, said they would support investing more in oversight for the major capital projects in the city's pipeline.

"As we look at a bunch of major projects in the next few years, we need to ensure we are prepared for excellent project management from start to finish," Wolbach said.

He asked Keene to tell the council "exactly what you need" to make this happen.

"If that means more staff or more consultants, if this means more time on a retreat or preparation in a council committee – tell us what we need so that we're doing everything we can to make sure we have the best project management possible," Wolbach said.

His colleagues agreed, with Scharff calling a new project manager a "very worthwhile investment."

Despite the rising costs, Scharff lauded the city's progress on the infrastructure plan. The council, he said, is "soundly moving forward on every item" that it promised the voters in 2014, when it asked them to approve an increase in the hotel-tax rate. The increase, which raised the local rate from 12 percent to 14 percent, was intended to pay for the infrastructure projects.

The city, he said, has always "honored our commitment to the public."

"It seems to me we're moving forward on all of these (projects) to do that here," Scharff said.

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Like this comment
Posted by Neighbor
a resident of Old Palo Alto
on Dec 29, 2015 at 11:54 am

Today, the old adage rings true. Yesterday, the old adage rang true. For many years, the old adage has rung true.

Good lord! Is anyone reading this stuff before it gets into print?

Like this comment
Posted by Disappointed
a resident of Charleston Gardens
on Dec 29, 2015 at 12:49 pm

That was a very interesting design for the Adobe bridge. It's a shame that it's been lost for what amounts to office politics. The new bridge will be built much later and probably will not cost less.

4 people like this
Posted by resident
a resident of Downtown North
on Dec 29, 2015 at 4:33 pm

The "Palo Alto process" for makes construction projects take years longer than necessary. The city really needs to look at ways to speed up these projects, both to bring the benefits of the projects to the community sooner and to reduce the final price.

Like this comment
Posted by Builder
a resident of Crescent Park
on Dec 29, 2015 at 5:32 pm

The tallest structure ever built by human beings was built in 6 years, inside and out.

How long will it take PA to build this little bridge? Time will tell. It sure is a good example of America's infrastructure sclerosis.

Like this comment
Posted by senor blogger
a resident of Palo Verde
on Dec 30, 2015 at 8:25 am

High Speed Rail told it like is when it came to estimated costs, and got criticized and sued for it.

The City tried to "Low Ball" it to make it more attractive to Voters

Like this comment
Posted by ChrisC
a resident of Community Center
on Dec 30, 2015 at 10:40 am

It is not just the city seeing this. I'm in the middle of building a house. Every contractor is raising their rates dramatically over last year's quotes due to demand far outstripping labor supply.

Like this comment
Posted by Resident
a resident of Another Palo Alto neighborhood
on Dec 30, 2015 at 10:57 am

The real problem as I see it with Palo Alto projects is that they always have to be pretentious, the biggest, the best, and nothing ordinary will ever do.

Who cares about what a bridge over a freeway looks like when driving through Palo Alto? Who cares that a library looks better than the ones in the neighboring towns? Functional infrastructure should be just that, functional with some symmetry, but fades into the background.

If we want to spend money on doing something dynamic, how about making the Baylands Park a more pleasant place to spend time and lure our neighbors. It is a complete embarrassment.

Like this comment
Posted by ,JS
a resident of Another Palo Alto neighborhood
on Dec 30, 2015 at 1:41 pm

"As we look at a bunch of major projects in the next few years, we need to ensure we are prepared for excellent project management from start to finish," Wolbach said.

He asked Keene to tell the council "exactly what you need" to make this happen.

"If that means more staff or more consultants, if this means more time on a retreat or preparation in a council committee – tell us what we need so that we're doing everything we can to make sure we have the best project management possible," Wolbach said.

Wolbach is asking Keene to tell the Council how to avoid past project management disasters (I.e. Mitchell Park Library, El Camino Park, etc.)!! Keene was in charge of those disasters - seems like Council should be getting their advice elsewhere.

Like this comment
Posted by An Enginerr
a resident of Duveneck/St. Francis
on Dec 30, 2015 at 11:59 pm

Any government contractor can tell you there are two bidding options: 1) Price it so you can do it, in which case you'll never get it, because the competition knows one must 2) Price it so you can get it, and get realistic after the work is safely underway, when the change order process inexorably drives the cost well above what an honest (but sure to lose) original bid would have been.

It's the system. The lowest bidder wins. Honest bidders learn that or die.

Sorry, but further commenting on this topic has been closed.

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