Contractors' Cost Squeeze Intensifies as Prices for New Buildings Stagnate

Financial pressures on contractors grew worse in February as prices for key construction materials rose sharply even as prices construction firms charge for completed projects remained stagnant, according to an analysis of producer price index figures released today by the Associated General Contractors of America (AGC). Association officials said the price squeeze will make it harder for the construction industry to recover and urged federal officials to act on a series of recovery measures the group outlined yesterday.

"With construction spending hovering near a 10-year low, contractors are holding bids steady even while being hit with staggering price increases for key inputs," said Ken Simonson, the association's chief economist. "That combination threatens to add to an already appalling toll of laid-off workers and shuttered construction firms."

Prices for materials used in construction leaped 1.1 percent in February and 6.1 percent during the past 12 months, while price indexes for finished buildings stayed nearly level during the same timeframe, the economist noted. He added that construction costs also outran the producer price index for finished goods, which rose 5.6 percent since February 2010.

Simonson said price increases were particularly intense for four essential construction inputs. Diesel fuel prices climbed 7.1 percent in February and 40 percent for the year; prices for copper and brass mill shapes increased 4.5 percent and 20 percent, respectively; steel mill product prices rose 4.7 percent and 13 percent, respectively; and prices for insulation materials rose 3.5 percent in February and 6.0 percent for the year.

Weak demand for both public and privately financed construction, which is driving up the number of contractors bidding on projects, is forcing contractors to hold the line on bid prices, Simonson noted. The producer price indexes for new office, industrial and warehouse construction rose less than one percent over 12 months and the index for new schools was up just 1.4 percent.

Association officials said the new data underscores the need for federal officials to act on a series of measures the group outlined yesterday in its new recovery plan, "Building a Stronger Future." "Reviving demand for construction, particularly private sector construction activity, is essential to sustaining broader economic growth," said Stephen E. Sandherr, the association's chief executive officer.

View the latest producer price index tables for construction.

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