Materials Cost Hikes, Flat Building Prices Pinch Contractors

Huge November jumps in prices for diesel fuel and copper -- key construction inputs -- pinched contractors even as weak demand for their services force them to hold down bid prices. An analysis of producer price index (PPI) figures by the Associated General Contractors of America shows prices for materials used in construction climbed 0.5 percent in November and 4.8 percent over the past 12 months, while price indexes for finished buildings remained flat over both time periods. The PPI for finished goods went up 0.4 percent for the month and 3.5 percent year-over-year.

"These price jumps, along with further increases since PPI data were collected in mid-November, could be the last straw for some hard-pressed contractors," said Ken Simonson, the association's chief economist. "With unemployment in construction running at 18.8 percent in November-double the all-industry average-any more business failures will only add to the industry's misery."

Simonson noted that prices shot up 5.6 percent in November and 16 percent over the past 12 months for copper and brass mill shapes, 4.8 percent and 18 percent respectively for diesel fuel, and 3.5 percent and 14 percent for aluminum mill shapes. "Since these data were collected in mid-November, prices have risen further for all of these materials, and steel makers have also announced hefty increases," Simonson stated.

"Contractors have been unable to recoup these costs in what they charge," Simonson added. "Indexes for new office, school, warehouse and industrial buildings were virtually unchanged both for the month and over 12 months. Prices charged by concrete, roofing, electrical and plumbing contractors showed very small movements in either direction."

Contractors are likely to be squeezed by rising materials prices and flat prices for completed projects for the foreseeable future, Simonson predicted. He forecasted that contractors would experience periods of simultaneous price spikes in multiple materials in 2011 as the U.S. and foreign economies pick up speed.

"Unfortunately, demand for construction will be erratic for months to come, worsening the price pinch that has already devastated too many firms and their workers," Simonson concluded.

View the latest producer price index tables for construction.

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