Construction materials rising at runaway rates

Rising materials prices are squeezing already slim profit margins for many contractors

Prices of numerous construction materials soared again in November, outpacing the rate at which contractors raised their bid prices.

That’s according to an analysis of government data by the Associated General Contractors of America (AGC), whose officials said the current steps being taken to address supply chain problems and rising prices have been insufficient and urged public officials to redouble their efforts.

“Prices for nearly every type of construction material are rising at runaway rates,” said Ken Simonson, the association’s chief economist. “These costs are compounding the difficulties contractors are experiencing from long lead times for production, gridlocked supply chains, and record numbers of job openings.”

Construction input prices are up 23.5% from a year ago, while nonresidential construction input prices rose 24.5% over that span.

All three energy subcategories increased significantly. Natural gas prices were up 150.6% compared to last year, while crude petroleum and unprocessed energy materials prices increased 115.2% and 113.6%, respectively. Prices also rose rapidly in the steel mill products (+141.6%) and iron and steel (105.1%) subcategories over the past year.

“Contractors are not the only people who should be concerned by today’s inflation figures,” said Anirban Basu, chief economist with Associated Builders and Contractors (ABC). “While contractors and the project owners they serve are most directly impacted by large, ongoing increases in materials prices, there are many other affected stakeholders. Among these are America’s taxpayers.”

He continued, “Many are delighted by the passage of a consequential infrastructure package in November, yet rising materials prices mean that Americans may receive less value for each dollar spent. Rising labor costs point in the same direction.”

AGC officials said the steep rise in materials prices shows that more needs to be done to tackle supply chain issues and price inflation that are making it difficult for contractors to be successful. They urged public officials to look at ways to temporarily increase capacity at backed up ports like Los Angeles/Long Beach, abandon plans to double tariffs on Canadian wood, and address rising levels of inflation.

“Rising materials prices are squeezing already slim profit margins for many contractors,” said Stephen E. Sandherr, the association’s chief executive officer. “Having strong demand for construction is important, being able to make a small amount of money on that work is vital.”

The producer price index for inputs to new nonresidential construction - the prices charged by goods producers and service providers such as distributors and transportation firms - jumped 0.9% in November and 22.1% over 12 months. Those increases dwarfed the rise in the index for new nonresidential construction - a measure of what contractors say they would charge to erect five types of nonresidential buildings, Simonson noted. That index climbed by 0.3% for the month and 12.4% from a year earlier.

A wide range of products used in construction, as well as trucking services, posted double-digit price increases over the past 12 months, Simonson observed. The price index for steel mill products more than doubled, soaring 141.6% since November 2020. The index for aluminum mill shapes jumped 41.1% over 12 months, while the index for copper and brass mill shapes rose 37.8%. The index for plastic construction products climbed by 32.5%. The index for gypsum products such as wallboard rose 20.9% and insulation costs increased 17.4%.

Trucking costs climbed 16.3%, as did the index for asphalt felts and coatings. The index for architectural coatings increased 12.4% and the index for lumber and plywood rose 12.2%. The index for diesel fuel, which contractors buy directly for their own vehicles and off-road equipment and also indirectly through surcharges on deliveries of materials and equipment, soared 81% over 12 months despite a 2.9% decline from October.

“There is no indication that materials prices will fall in the near future,” said Basu with ABC. “With the Omicron variant now circulating around the world and leading to a next wave of lockdowns and supply chain disruptions, demand for key commodities will continue to exceed supply. Among the implications is that estimators will be under enormous pressure to predict materials prices amid enormous volatility and uncertainty.”