Prices for Construction Materials Fall In August, Even As Annual Materials Cost Increases Outstrip Building Prices
September 15, 2011

The amount contractors pay for a range of key construction materials declined in August, but contractors continue to be squeezed as materials cost increases have outstripped the price of finished buildings over the past year, according to an analysis of producer price index figures by the Associated General Contractors of America (AGC).

"The disparity between contractors' materials costs and their selling prices threatens to push some firms and their hard-pressed workers out of business," says Ken Simonson, AGC chief economist.

Simonson notes that the monthly decrease in the materials index and its longer-term increase were the result of sharp price movements for a range of key construction materials. Those materials include diesel fuel, which was down 6.2 percent for the month and up 32.9 percent for the year; steel, which was down 1.0 percent for the month and up 14.3 percent for the year; and copper, which was down 3.3 percent for the month and up 21 percent for the year.

The construction economist added that prices were likely to remain volatile for the foreseeable future based on changes in broad-based global demand. "At best, contractors may get more short-term relief in the next few months, but they remain vulnerable to unpredictable price spikes, which can hit several materials at once and jeopardize firms' viability," he says.

Simonson notes that the index for new construction - what contractors charge for construction projects - was unchanged from the previous month for all building types except new industrial buildings, which declined by 0.2 percent. He added that annual increases in new construction prices, which ranged between 2.1 and 3.2 percent, paled in comparison to the annual increase in costs for many key building materials, forcing contractors to absorb the difference.

Association officials says contractors are having a hard time compensating for the steep annual increases in construction materials prices because demand for construction remains relatively weak. Simonson notes that private sector demand has increased only slightly during the past year while public sector demand, particularly at the federal level, has been declining rapidly as the stimulus and other federal programs wind down.

"Construction firms are paying more for materials and charging less for their work, even as they chase a diminishing number of projects," says Stephen E. Sandherr, AGC chief executive officer. "Without a significant change in market conditions soon, this industry is going to continue to struggle to add jobs for the foreseeable future."

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