New Federal Data Shows Contractors are Getting Squeezed Between Rising Materials Costs and Stagnant Prices for Finished Construction
January 21, 2010

Based on analysis of the latest producer price index (PPI) conducted by the Associated General Contractors of America Construction, contractors are being squeezed by rising materials costs and disappearing profit margins. The new figures show finished prices of nonresidential buildings dropped last year even though a number of construction materials prices have begun to increase in price, notes Ken Simonson, the association's chief economist.

"Contractors have not been able to pass on these cost increases, which is bad news for contractors but good news for anyone looking to build right away," Simonson states. "Pressure is building on contractors to raise costs, however, so anyone waiting to build will pay more."

The PPIs for new nonresidential buildings, which include overhead and profit as well as materials costs, were flat in December and fell between 2.4 percent and 4.3 percent for the year, depending on the type of building, Simonson notes. Meanwhile, the PPI for inputs to nonresidential building construction, a weighted average of the materials and diesel fuel used in construction, rose 0.2 percent and 0.4 percent, respectively.

"Contractors are swallowing the materials costs in order to stay busy," Simonson says, adding that if present conditions continued for much longer a number of firms are likely to close up shop, which would cut competition and potentially drive up the cost of construction services.

A new 2010 construction hiring and business forecast released by AGC found nearly 9 in 10 contractors do not expect the market to improve in 2010. As a result, overall economic and employment growth are likely to lag. The association called on Congress and federal agencies to take advantage of relatively low construction prices by moving forward with new infrastructure investments.

"Waiting to make these vital investments will only force taxpayers to spend more for the kind of infrastructure projects our country needs to remain globally competitive," says Stephen E. Sandherr, the association's chief executive officer. He notes that county and local governments, including D.C.-area Montgomery County, Maryland, have already realized the need for timely infrastructure investments and increased their capital budgets. "Congress can boost our economy, add jobs and get an edge on our competitors by quickly taking advantage of near record low construction costs," Sandherr adds.

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