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Construction Association Notes that Uneven Growth of Construction, Lack of Long-Term Infrastructure Funding Leave Firms Vulnerable to Price Spikes

The cost of construction materials took a breather in April, while contractors showed slightly greater ability to roll past price increases into their bids, according to an analysis of producer price index figures released today by the Associated General Contractors of America. Association officials noted that despite the temporary reprieve from materials price hikes, market conditions for construction remain difficult.

“Contractors caught a bit of a break on major input costs in April, enabling some firms to make up for recent price spikes,” said Ken Simonson, the association’s chief economist. “However, workloads remain uneven by segment and geographical region, leaving many firms very vulnerable to unexpected price hikes for key materials.”

Simonson noted that there was a rise of 0.1 percent in April and 2.5 percent over 12 months in the producer price index for inputs to construction—a weighted average of the cost of materials used in all types of projects, plus items consumed by contractors such as diesel fuel. That was the smallest year-over-year increase since early 2009, he observed.

There have been slightly larger increases in the indexes for new nonresidential buildings, which are a measure of what contractors estimate they would charge to put up a new building, Simonson added. He pointed to increases of 0.5 percent for the month and 4.3 percent over 12 months for new school construction; 0.5 percent and 4.0 percent, respectively, for new warehouse construction; 0.6 percent and 3.2 percent for industrial buildings; and 0.1 percent and 3.2 percent for offices.

Prices moderated in April for a variety of materials, some of which had experienced large jumps earlier in the year, Simonson noted. For instance, the price index for diesel fuel dropped 0.9 percent for the month and 0.1 percent year-over-year. The price index for gypsum products such as wallboard, which leaped 14 percent in the first quarter of the year, fell 1.9 percent in April, although it remained 11.5 percent higher than in April 2011. The biggest monthly and year-over-year decreases among key materials occurred in the price index for copper and brass mill shapes, which tumbled 2.7 percent and 11.4 percent, respectively.

Association officials said that while improvement in the price indexes for finished buildings is a positive sign, it will do little to help construction firms working in the public sector, where the volume of projects has been declining. They added that because most firms have to guarantee their bids months before knowing what they will have to pay for materials, the industry remains particularly vulnerable to future price spikes.

“Until Washington finalizes a number of long-delayed infrastructure measures, public sector demand for construction is likely to continue to decline,” said Stephen E. Sandherr, the association’s chief executive officer. “With less work available, firms working on public projects will be particularly susceptible to price spikes.”

Click to view the Producer Price Index tables.