AGC: Upcoming Materials Price Increases Could Put Contractors at Risk

Some material price drops have already reversed making contractors who previously submitted bids vulnerable to losses

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Construction contractors face a continuing cost squeeze, even though a key price index for construction materials dipped in October and showed only a moderate increase over the past year, according to an analysis of federal figures released today by the Associated General Contractors of America. Association officials warned that recent and announced price increases may threaten the survival of some contractors.

“Although several materials retreated in price last month, prices in the past year have still outpaced the tiny increases in contractors’ bids,” said Ken Simonson, chief economist for the construction trade association. “In addition, some of the price drops have already reversed, or will soon, leaving contractors who have already submitted bids vulnerable to losses.”

The producer price index for inputs to construction - covering materials that go into every type of project, plus items consumed by contractors such as diesel fuel - decreased 0.4 percent in October, following increases of 0.9 percent in both September and August. The index climbed 2 percent in the 12 months ending in October. Meanwhile, the indexes that reflect what contractors would charge for their work were largely unchanged and mostly rose less than materials costs over 12 months:

  • 1 percent for industrial buildings
  • 1.4 percent for new office construction
  • 1.5 percent for schools
  • 2.6 percent for new warehouses

Simonson said prices for essential construction materials were mixed in October.

  • Diesel fuel rose 2.3 percent in October and 12.6 percent over 12 months
  • Copper and brass mill shapes climbed 2.8 percent in October and 4.7 percent year-over-year
  • Steel mill products dropped 1.9 percent for the month and 8.5 percent for the year
  • Lumber and plywood shrank 1.8 percent in October but was 6.2 percent higher than a year ago
  • Gypsum products and insulation materials both fell 0.7 percent for the month but rose relative to October 2011 by 14.1 percent and 5.5 percent respectively

“Many of these price changes appear to be short-term,” Simonson commented. “While retail diesel prices have dropped 15 cents per gallon in the past three weeks and copper futures have declined, steel, gypsum and even concrete suppliers have announced hefty price hikes for December or January. As a result, contractors who have already bid to install these materials at fixed prices may be headed for losses and even bankruptcy.”

Association officials said declining public investments in infrastructure and businesses’ reluctance to commit to investments in the face of the “fiscal cliff” are forcing contractors to keep bids low. “With so few projects to bid on, contractors are offering their services with little or no margin to cover materials costs,” said Stephen E. Sandherr, the association’s chief executive officer, noting that recent Census Bureau data showed a 4.2 percent drop in public construction spending and a slackening in the growth of private nonresidential construction between September 2011 and September 2012.

Nonresidential Construction Spending Down 0.4% in September

“Congress and the administration have to find a way to avoid the catastrophic increases in taxes and cuts in infrastructure spending that threaten many construction firms and risk putting their employees out of work.”

View the October PPI table.