Construction a mixed bag

Construction a mixed bag

Soaring diesel prices have made things difficult for many industries, but construction has been one of the hardest hit, as it is very reliant on diesel prices

Soaring diesel prices have made things difficult for many industries, but construction has been one of the hardest hit, as it is very reliant on diesel prices. However, the overall outlook for 2008 is looking slightly better—at least for some segments.

Nonresidential construction will vary widely in demand, the cost of materials and availability of labor, according to a report released by the Associated General Contractors of America (AGC). The Construction Inflation Alert said the large increase in diesel fuel prices in the past year makes it likely that highway construction costs will continue to rise.

"In 2008, some nonresidential segments will continue to grow, including power and energy, but others such as lodging will slow or decline," said AGC chief economist Ken Simonson. "Diesel, copper and steel are among materials costs likely to accelerate, while others remain benign."

"These cross-cutting trends make it likely that the PPI [producer price index--the average change over time in the selling prices received by domestic producers for their output] for construction inputs will accelerate from the 4.5% rate of increase that prevailed in 2006 and 2007 to a 6 to 8% range by the end of 2008," added Simonson.

According to the report, two factors seem to indicate that a 6 to 8% growth rate will extend past 2008—construction inputs such as diesel fuel, steel and copper continue to be in demand worldwide, and construction is dependent on physical delivery of heavy but low-value materials to which transportation and fuel costs are a major portion of the delivery price.

Simonson told FleetOwner that fleets that perform construction and those that haul construction materials may be hit harder by the fuel increases than freight in general.

“Fuel is a huge cost for construction, because they do so many deliveries of heavy equipment,” Simonson said. “It’s not like a shipment of something such as electronics, where the delivery is in the product itself.

“Fuel is a bigger portion of a customers budget than it is other industries,” he added. “And once you guarantee a price for a project, you could be stuck with that price for two or three years.”

According to Simonson, contractors are still able to find enough workers due to the redeployment of specialty trade contractors from residential work to other projects.

"In 2008, I expect labor shortages will worsen for a few crafts, pulling average wage rates higher, but in other segments such as residential specialty trades, the supply of some crafts will be plentiful," noted Simonson. "Wage increases in nonresidential construction may rise to the 4.5 to 5.5% range in 2008, despite the slowdown in overall activity, and to 5 to 6% in 2009, when residential work begins to compete again for some specialties."
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