New Federal Data Shows Contractors Getting Squeezed Between Rising Materials Costs and Stagnant Prices for Finished Construction
Latest Producer Price Index Figures Signal Need for Speedy Investments in Infrastructure Construction While Prices are Still Relatively Low, Construction Economist Notes
Construction contractors are being squeezed by rising materials costs and disappearing profit margins, based on analysis of the latest producer price index (PPI) conducted by the Associated General Contractors of America today. The new figures show finished prices of nonresidential buildings dropped last year even though a number of construction materials prices have begun to increase in price, noted Ken Simonson, the association's chief economist.
"Contractors have not been able to pass on these cost increases, which is bad news for contractors but good news for anyone looking to build right away," Simonson stated. "Pressure is building on contractors to raise costs, however, so anyone waiting to build will pay more."
Simonson pointed to increased prices for a range of construction materials in the December PPI report. For example, copper and brass mill shapes are up 6.0 percent; prepared asphalt and tar roofing and siding products are up 5.2 percent; aluminum mill shapes up 2.1 percent; lumber and plywood up 2.0 percent; plastic construction products up 0.4 percent; and concrete products are up 0.3 percent
Simonson noted, however, that the price increases are not universal and some key material PPIs have recently dropped. For example, diesel fuel dropped 5.0 percent in December while steel mill products dropped 1.3 percent.
The PPIs for new nonresidential buildings, which includes overhead and profit as well as materials costs, were flat in December and fell between 2.4 percent and 4.3 percent for the year, depending on the type of building, Simonson noted. Meanwhile, the PPI for inputs to nonresidential building construction, a weighted average of the materials and diesel fuel used in construction, rose 0.2 percent and 0.4 percent, respectively.
"Contractors are swallowing the materials costs in order to stay busy," Simonson noted. He said that if present conditions continued for much longer a number of firms were likely to close up shop, which would cut competition and potentially drive up the cost of construction services.
A new 2010 construction hiring and business forecast the association released today found nearly 9 in 10 contractors do not expect the market to improve in 2010. As a result, overall economic and employment growth are likely to lag. The association called on Congress and federal agencies to take advantage of relatively low construction prices by moving forward with new infrastructure investments.
"Waiting to make these vital investments will only force taxpayers to spend more for the kind of infrastructure projects our country needs to remain globally competitive," said Stephen E. Sandherr, the association's chief executive officer. He noted that county and local governments, including DC-area Montgomery County, Maryland, have already realized the need for timely infrastructure investments and increased their capital budgets. "Congress can boost our economy, add jobs and get an edge on our competitors by quickly taking advantage of near record low construction costs," Sandherr added.