Contractors’ profit margins pinched by rising materials costs and lower bid prices

Crane and skyscrapers under construction in San Jose, South San Francisco bay area (Image: Sundry Photography via AdobeStock - stock.adobe.com)

Profitability is getting harder to achieve for contractors, who are dealing with persistently rising materials costs while charging less to build. 

The price of materials and services used in nonresidential construction increased 0.5% from March to April, while an index that measures contractors’ bid prices declined 0.3%, according to an analysis of government data by the Associated General Contractors of America.

“Prices remain volatile for many key construction materials, making it difficult for contractors to bid projects that may take years to complete,” said Ken Simonson, the association’s chief economist. “Even some materials that have dropped in price recently have still posted year-over-year increases exceeding 10%.”

The producer price index for inputs to nonresidential construction, which is a weighted average of the prices charged by goods producers and service providers such as distributors and transportation firms, rose 0.5% from March to April - the largest increase since January, Simonson noted.

Meanwhile, the index for new nonresidential construction - a measure of what contractors report they would charge to put up a specific set of buildings - slipped 0.3%.

As in previous months, price patterns for key construction inputs varied widely in April. Price changes for the month ranged from increases of 15.3% for liquid asphalt and 3.6% for steel mill products to a decrease of 5.9% for asphalt paving mixtures and blocks.

In addition, a diverse range of input prices continued to rise at double-digit cost increases compared to a year ago. Prices jumped 13.7% year-over-year for cement, 13.3% for electrical switchgear, 13.2% for concrete products, and 12.1% for gypsum building products.

Association officials said the Biden administration’s approach to new Buy America rules is contributing to higher materials prices by limiting what materials contractors can use and sowing confusion among state and local officials responsible for enforcing the new measure. 

“The Biden administration has opted to define the new Buy America rules in a way that leaves no flexibility but causes lots of confusion,” said Stephen E. Sandherr, the association’s chief executive officer. “As a result, public officials are being both overly restrictive and overly cautious in signing off on the materials contractors can use, which adds to the cost of many materials.”