Contractors squeezed by construction-material prices

Nonresidential building contractors are being caught in a price squeeze. The amounts these contractors pay for a range of key construction materials dropped slightly (-0.6%) in October but have climbed 6.9% year-to-year, according to an analysis of producer price index figures just released by the Associated General Contractors of America

Nonresidential building contractors are being caught in a price squeeze. The amounts these contractors pay for a range of key construction materials dropped slightly (-0.6%) in October but have climbed 6.9% year-to-year, according to an analysis of producer price index figures just released by the Associated General Contractors of America (AGC). But the prices contractors charge for new nonresidential building construction rose only 3.3 to 4.3% over the last 12 months, depending on building type.

“While the gap is beginning to narrow just a bit, prices for most construction materials have risen far more during the past year than the amount contractors can charge for completing construction projects,” said Ken Simonson, AGC chief economist. “Coupled with weak growth in demand for construction, the price gap is likely contributing to the stagnant employment levels the industry has been experiencing all year.”

Simonson said that prices for a number of key construction materials declined during the past month. Prices for diesel fuel dropped 2.2% in October, but are up 27.3% since October 2010 while prices for copper and brass mills shapes fell 8.3% during the past month but only 0.2% over 12 months. Meanwhile, prices for gypsum and steel mill products increased in October by 3.0 and 0.4% respectively. Gypsum prices are down 1.0% compared to last year, but steel mill product prices are up 13.6% over the past year.

“Costs for essential construction materials are likely to remain volatile, causing financial difficulties for some contractors, who must guarantee prices to owners months before purchasing materials,” Simonson cautioned. For example, he said that in the month since the latest price was collected, retail prices for diesel have jumped 26 cents per gallon.

Simonson said the price index for new construction – what contractors charge for construction projects – increased during the past month and is up compared to last year.

  • Price of new industrial buildings rose 1.5% during the past month and 3.4% for the year
  • New warehouse price was up 1.6% in October and 3.9% compared to October 2010.
  • Price for new school construction increased by 1.8% compared to the prior month and up 4.3% compared to last year
  • New office construction rose 1.0% in October and is 3.3%t higher than last year.

AGC officials noted that the pending repeal of the 3% tax withholding mandate – the House is expected to vote on a Senate-approved measure on Nov. 16 – will provide “some much-needed financial relief” to the construction industry.

“The fact contractors won’t be forced into providing billions in interest-free loans to the federal government beginning in 2013 will provide some much-needed relief for a hard-hit industry and its struggling workers,” said Stephen E. Sandherr, CEO of AGC.

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