Input Price Changes Vary from 7 Percent Jump for Gypsum to 2 Percent Dip for Diesel; Contractors Association Warns Sustained Uptick in Costs Could Squeeze Margins and Calls on Congress to Speed Infrastructure Funding

WASHINGTON, D.C. – February 19, 2014 – (RealEstateRama) — Prices for materials used in construction and for nonresidential building construction both increased more than overall prices for “final demand” in January, according to a new analysis of retooled federal data on producer prices released today by the Associated General Contractors of America. As a result, margins remain very tight for most construction firms even as private-sector demand for construction continues to grow.

“Although contractors on average were able to raise bid prices in line with materials cost increases, the results varied widely by commodity, building type and specialty trade,” said Ken Simonson, the association’s chief economist. “Several key construction materials, or ‘processed goods,’ experienced substantial price increases that in many cases exceeded what contractors could pass on last month. It will take a few more months to see if these costs increases are sustained—putting a squeeze on contractors’ margins—or a one-time blip.”

Simonson said the overall producer price index for inputs to construction rose 0.6 percent in January, propelled by a one-month jump of 7.4 percent in the index for gypsum products; followed by lumber and plywood, 2.4 percent; cement, 2.0 percent; insulation materials, 1.5 percent; and copper and steel products, 1.2 percent each. He noted that the impact of these price hikes would have been worse if not for declines in the price indexes for diesel fuel of 1.9 percent; flat glass, -0.6 percent; and architectural coatings such as paint, -0.3 percent.

A new set of “final demand” indexes breaks out how much private and public owners are paying for the differing mix of nonresidential buildings they buy, Simonson pointed out. In January, the index for “construction for private capital investment” climbed 0.6 percent while the index for “construction government” rose 0.8 percent. The combined index for final demand for construction rose 0.6 percent, more than the goods and services components of overall final demand, which increased 0.4 percent. For more information about the new PPI data, click here.

The price increases varied by building and subcontractor type, the economist said. The index for new school building construction rose the most, 1.0 percent; followed by office construction, 0.6 percent; industrial buildings, 0.5 percent; health care buildings, 0.4 percent; and warehouses, 0.3 percent. The index for new, repair and maintenance work on nonresidential buildings by plumbing contractors climbed 1.1 percent in January; the index for roofing contractors rose 0.7 percent; and the index for concrete contractors increased 0.4 percent. In contrast, the index for electrical contractors was unchanged.

Association officials said the fact margins remain tight signals that demand has yet to outstrip contractors’ capacity to perform work in most parts of the country. They added that many firms report competition remains fierce for many projects and that it will take more sustained growth in demand before firms are able to significantly increase what they charge.

“Despite growing construction employment and increasing private-sector demand for construction, market conditions remain quite tough for most firms,” said Stephen E. Sandherr, the association’s chief executive officer. “Getting Congress to act on vital infrastructure measures like federal transportation and water resources bills will help improve market conditions for many construction employers.”

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