Price Increases Squeezing Contractors' Margins
The Associated General Contractors of America recently discovered in an analysis of government data that increased prices of construction materials are outpacing the rate at which contractors are raising their bid prices.
“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.”
The association further reported that the steps currently being taken to address these issues are insufficient and is again urging public officials to redouble their efforts.
Price Index, Continued Inflation
According to AGC, 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.
In turn, Simonson reports that the increases stunted 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—climbing just 0.3% for the month and 12.4% from a year ago.
Looking at specific products, AGC found that steel mill products more than doubled, soaring 141.6% since November 2020, while aluminum nearly doubled as well, increasing by 41.1% over the 12-month period.
Copper and brass also showed an increase of 37.8%, plastic construction products increased 32.5% and the price for gypsum products rose 20.9%. Architectural coatings also revealed an increase of 12.4% and the index for lumber and plywood rose 12.2%.
The product price increases appear to be becoming a trend, as the Associated Builders and Contractors reported an increase in construction input prices by 1.5% in October. Nonresidential construction input prices also saw in uptick of 1.4% that same month.
At the time, the organization reported that the October increase was the largest monthly increase that the industry has seen since June. In comparing year-over-year numbers, construction input prices were 21.1% lower in October of last year, while nonresidential construction input prices were 22.3% lower over the same span.
When comparing year-over-year increases, that month ABC reported that steel mill product prices had increased 141.6% since October 2020, while iron and steel prices were up 101.5%. Softwood lumber prices, which surged during the pandemic, were down 19.5% from the same time last year.
AGC officials report that the steep rise in materials prices shows that more needs to be done to tackle supply chain issues and price inflation which are making it difficult for contractors to be successful and has gone as far as to request that public officials look at increasing port capacity, abandoning double tariffs on Canadian lumber and addressing the rising levels of inflation.
The doubled tariff was first announced by the U.S. Department or Commerce at the end of November and involves nearly doubling the import rate from 8.99% during the Trump Administration to 17.99%.
The decision, which was previously announced in May, was originally slated to increase the tariff rate to 18.32% in wake of stumpage fees and clean energy subsidies provided to companies by the Canadian government. These savings are then passed onto mills within the companies’ territories.
“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.”
A chart of the gap between input costs and contractor bid prices can be viewed here.
Construction Employment Update
Along the lines of industry recovery, those in construction are also still working to hire skilled workers to pre-pandemic levels. According to a report issued in September, firms had hired 22,000 new employees across the nation. However, despite the increase in workers, the industry was still falling short of its pre-pandemic levels, sitting at 201,000 employees below its February 2020 numbers at the time.
The August to September construction employment statistics were as follows:
In looking at the growth percentages year-over-year, the Construction sector has increased 2.6%, Nonresidential increased 1.3%, Residential increased 4.7% and Residential Building saw the biggest increase at 6.8%.
More recently, last month the AGC reported that only 18 states and the District of Columbia added construction jobs since just before the start of the pandemic in February 2020 despite a pickup in most states from October to November.
“Construction activity has picked up in recent months but still has not reached the employment levels of early last year in most of the country during what has become a very tight labor market,” said Simonson. “If contractors had found enough qualified workers, more states would have recovered fully by now from the pandemic-induced job losses,” he added, noting that job openings at the end of October exceeded the number of workers hired into the industry that month.
As labor shortages continue to undermine the industry’s ability to fully recover, the association reported that it was working with its chapters and member firms to recruit more, and more diverse, people into the industry. In additional efforts, although the association is in full support of COVID-19 vaccinations, the same month, it reportedly filed suit to block the Biden Administration’s mandate on federal contractors.
Filed in a federal court in Texas, the AGC argued that the relatively small federal contracting sector will be negatively affected by the mandate, given that there is an estimated half of construction workers who’ve declared themselves vaccine hesitant.
One contractor supporting the lawsuit went as far to say that the once the mandate takes effect, they’re under the impression that half of its workforce would rather leave their jobs than get vaccinated. In a statement, the AGC furthered the contractor’s point, saying that the mandate would leave federal construction projects “struggling to reach completion on time and within budget.”
According to the AGC, there have been 34 lawsuits filed across the country regarding the federal contractor vaccination mandate, all of which are supported by the Construction Advocacy Fund, in the U.S. Court of Appeals for the Sixth Circuit.