"Private owners, public agencies that do budgeting and design, and contractors should all be aware that construction materials prices are likely to keep rising at a much faster rate than the 3-4 percent increase in the consumer price index (CPI) or broad producer price index (PPI) for finished goods," said Ken Simonson, AGC's chief economist. "If these increases continue, I'm concerned that the inflation rate for construction materials could be double the rate of overall inflation."

Simonson continued, "The extreme cost increases or volatility of some construction inputs are proving troublesome to contractors because they have been sudden, extreme, and unexpected." For instance, the price of steel soared 50-60 percent in the first half of 2004 after years of flat or falling prices. Steel prices declined slightly in late 2004 and most of 2005 but have risen again in 2006. Meanwhile, other metals costs, particularly copper, have jumped even more than steel mill products.

Two factors make construction vulnerable to above average cost increases. Contractors are generally locked into fixed quantities of materials, and construction costs are vulnerable to transportation costs and bottlenecks. Unlike consumer electronics makers, for example, contractors cannot generally make a building smaller or lighter. Contractors also require physical delivery of large quantities of goods to a specific location, in many cases from around the world and any number of influences can drive up delivered costs.

Publication date: 10/02/2006