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Aug. 21, 2006: Construction Materials Costs Heat Up Despite Producer Price Index Cooling

August 21, 2006
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WASHINGTON - "Construction materials costs heated up in July, even as other producers eased up on price increases," noted Ken Simonson, chief economist for the Associated General Contractors of America (AGC). Simonson was commenting on the August producer price index (PPI) report from the Bureau of Labor Statistics (BLS).

"In July, the PPI for finished goods slowed to a 0.1 percent increase, seasonally adjusted, down from 0.5 percent in June," Simonson observed. "But the PPI for materials and components for construction accelerated to a 0.7 percent rise from 0.3 percent in June. Since July 2005, the overall PPI has risen 4.2 percent, while the construction materials index climbed twice as fast, rising 8.3 percent.

"That gap actually understates the impact on nonresidential and multifamily construction," Simonson added. "Single-family building costs have been held down by falling prices for lumber and plywood, but these materials make up an insignificant part of the cost of other types of construction.

"Major materials price increases over the past 12 months include: copper and brass mill shapes, such as pipe, wiring, faucets, and flashing, up 88 percent; wallboard and other gypsum products, 23 percent; plastic construction products like polyvinyl chloride (PVC) pipe, fittings, and membranes, 20 percent; steel mill products, 18 percent; aluminum mill shapes, 15 percent; and concrete products, 11 percent," Simonson noted. "Furthermore, the PPI for diesel fuel - which affects the cost of running off-road equipment, construction vehicles, and fuel surcharges for delivering materials to job sites - soared 26 percent over 12 months. That means the delivered costs of many materials have gone up even more than their prices at the producer's point of sale, which is what the PPI measures.

"Owners should not assume inflation is going away," Simonson warned. "For many of these materials, cost increases have been accelerating, not subsiding. Others show big increases in prices of the raw materials used to make them.

"Public agencies and private owners alike should get realistic about budgeting for higher construction costs and not apply a general index, such as the finished goods PPI or the consumer price index, for construction," Simonson advised. "Construction depends on fixed quantities of materials, delivered to a specific physical location. Those facts make the industry vulnerable to supply-demand imbalances and high freight and fuel costs.

"BLS issued a new index for school construction that is meant to show the completed cost of a school, not just the producer price for the materials," Simonson concluded. "That index climbed 5.3 percent in its first seven months, suggesting school districts should figure on annual inflation of 9 percent or more for new construction."

Publication date: 08/21/2006

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