Report: Contractors Concerned About Prices
According to an analysis by the Associated General Contractors of America of government data, construction material prices jumped nearly 20% in 2021, despite moderating in December.
“Costs may not rise as steeply in 2022 as they did last year but they are likely to remain volatile, with unpredictable prices and delivery dates for key materials,” said Ken Simonson, the association’s chief economist. “That volatility can be as hard to cope with as steadily rising prices and lead times.”
In a survey issued by the association, 86% of contractors rated material costs at their top concern for 2022, more than any other concern. Availability of materials and supply chain disruptions were the second most frequent concern, listed by 77% of the more than 1,000 respondents.
As part of its report, the AGC released a chart of the gap between input costs and bid prices.
In another report, issued by the Associated Builders and Contractors on the U.S. Bureau of Labor Statistics’ Producer Price Index, officials found that nonresidential input prices for December alone rose 0.6%. In looking at prices year-over-year, the association reported that overall construction input prices are up 22.3% from a year ago, and nonresidential construction input prices have increased 23.2% over that same span.
“The definition of transitory continues to expand along the dimension of time,” said ABC Chief Economist Anirban Basu. “A year ago, Federal Reserve officials and many others thought that elevated inflationary pressures would have abated by now. They have not. Instead, materials prices remain elevated and generally continue to march higher.
“Much attention has been devoted to global supply chain disruptions,” said Basu. “Thanks to the omicron variant, those disruptions will persist through the first quarter of 2022. That translates into additional upward pressure on construction materials prices, something that estimators must consider as they submit bids for future work. Among the other implications of materials price increases is the redesign of projects to substitute for expensive inputs, such as steel. Not only does this put pressure on architects and engineers to identify alternative designs and materials, but it also means that contractors may end up working with inputs with which they are less familiar.
A breakdown of product price increases, month to month, includes:
With the data in mind, the AGC adds that 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—increased by 0.5% last month and 19.6% in 2021 as a whole. Those gains topped 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 12.5% from a year earlier.
Over the past year, the following materials’ product price indexes increased:
“ABC continues to forecast that, at some point later this year, materials prices will begin to normalize,” said Basu. “The expectation remains that global supply chain disruptions will steadily fade as 2023 approaches as will the demand shock associated with economic reopening.
“The Federal Reserve has pivoted to a regime emphasizing inflation containment, which will also help to suppress inflationary pressures at some point in 2022. For these and other reasons, confidence among ABC members has continued to inch upward, according to ABC’s Construction Confidence Index.”
Construction Input Prices Increasing, Margins Squeezed
In November, ABC reported that that construction input prices witnessed an increase of 1.5% in October. In nonresidential construction, input prices also saw an uptick of 1.4%. The uptick was reportedly the largest monthly increase that the industry saw 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.
Looking at specific materials, steel mill product prices have increased 141.6% since October 2020, while iron and steel prices are up 101.5%. Softwood lumber prices, which surged during the pandemic, are now down 19.5% from the same time last year.
After observing the data, the AGC reported that the increased input costs were beginning to have a trickle effect, in that the prices of construction projects were also on the rise.
“After being battered by unprecedented price increases for many materials, contractors are finally passing along more of their costs,” said Ken Simonson, the association’s Chief Economist, at the time. “Meanwhile, supply-chain bottlenecks and labor shortages continue to impede contractors’ ability to finish projects.”
In an analysis of the producer price index for new nonresidential construction, the AGC found that there was a 7.1% increase from September to October and a 12.6% increase over the past 12 months. Compared to the index of input prices, these numbers climbed even higher, reporting a 21.1% increase compared to October 2020.
At the beginning of the month, the AGC discovered in an analysis of government data that increased prices of construction materials were 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 Simonson. “These costs are compounding the difficulties contractors are experiencing from long lead times for production, gridlocked supply chains, and record numbers of job openings.”
According to AGC, the producer price index for inputs to new nonresidential construction jumped 0.9% in November and 22.1% over 12 months. In turn, Simonson reported that the increases stunted the rise in the index for new nonresidential construction, climbing just 0.3% for the month and 12.4% from a year ago.
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 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, at the time. “Having strong demand for construction is important, being able to make a small amount of money on that work is vital.”