If buildings were constructed entirely of sheetrock, these would be fine times to be drawing up a bid for a commercial construction project. But since edifices happen to require ample quantities of steel and concrete, as well, contractors expect to weather another year of inflation and uncertainty in the materials they need for projects.
In a report issued in late March, the Associated General Contractors of America (AGC) predicted uneven growth looms this year for construction costs, and said labor shortages will worsen for some specialty trades that focus on commercial buildings.
Since December 2003, when steel prices first spiked, construction material costs are up 30 percent, more than double the increase to the consumer price index. ACG expects overall costs to rise an additional 6 percent to 8 percent annually over the next several years.
The inflation problem is compounded for building contractors who must provide firm bids many months or years in advance of breaking ground.
“Contractors ”¦ have been frustrated by public officials”™ lack of awareness that their costs have diverged so much,” said Ken Simonson, chief economist of Arlington, Va.-based ACG. “Some contractors have turned away from bidding on public projects (because) they knew the cost expectations were unrealistically low.”
The cost of diesel fuel, used not only for trucks but for concrete production for building foundations and parking garages, increased by half in 2007 and has tripled in the past four years, the biggest increase in any construction “input.” In the first two months of the year, diesel prices are up 40 percent over their level last year.
That could have a particularly big impact on road and highway contractors ”“ which rely on cement ”“ and ultimately on taxpayers.
The price of steel continued to escalate in 2008, having already risen up 30 to 50 percent for building trades in the past four years. AGC noted, however, that steel prices tend to vacillate between increases and retreats month to month as mills make adjustments, and expects prices to be up just 5 percent overall this year.
Despite a 4 percent drop in 2007, copper prices are up 140 percent since the start of 2004, having an impact not just on plumbing, but in wiring, roof flashing and gutters, as well.
With copper futures up 40 percent in February, AGC expects prices to creep up at least 10 percent this year.
If there is a silver lining, it is that the housing slump has brought down the price of gypsum used for wallboard and plaster, after two years of sharp increases. AGC says gypsum prices are down 20 percent the past two years, and expects the price to drop at least 10 percent more this year.
In late February, the Bureau of Economic Analysis noted that investment in nonresidential construction jumped 15 percent in the fourth quarter of 2007. Commercial construction growth has now exceeded overall economic growth a record nine quarters.
The divergent trends have thrown the construction labor market into a state of flux, with general contractors specializing in commercial construction reporting a large increase in the number of subcontractors bidding on projects. That could be due to residential subcontractors shifting their focus to the commercial sector as housing construction drops.
Because construction of hospitals, power plants and college facilities ”“ all sectors for which ACG forecasts heady growth this year ”“ require specialized skills, the commercial construction sector will be able to absorb only so many workers.
ACG predicts commercial construction wages will rise at least 4.5 percent this year, with wages rising in tandem with the complexity of a project.
