Construction contractors continue to be squeezed between rising materials costs and falling output prices, according to a new analysis of materials costs conducted by Arlington, Va.-based Associated General Contractors of America (AGC). The association notes that even as the producer price index leapt in April for key construction components, the amount contractors charge for construction services remains depressed.

"Paying more to earn less is not a sustainable business model," says Ken Simonson, chief economist for AGC. "Contractors are not going to be able to sustain the low prices they have been charging for much longer." Simonson notes that prices increased significantly for a range of construction components. Compared to March, the April data shows that diesel fuel was up 6.5% (not seasonally adjusted), steel mill products were up 5.2%, lumber and plywood were up 4.7%, copper and brass mill shapes were up 4.3%, aluminum mill shapes were up 3.6%, and gypsum products were up 2.4%. Over the past year, increases in materials costs by structure type have ranged from 3.9% for single-unit residential construction to 8.3% for inputs to highway and street construction.

Meanwhile, the producer price index for finished non-residential buildings — reflecting what contractors would bid to construct a new building — was little changed for the month and down significantly from a year earlier, according to Simonson. Prices for new office buildings fell 0.1% from March and 4.3% from April 2009. The index for new industrial buildings was unchanged from a month ago but down 4.0% from the year before. The index for new warehouses was up 0.2% for the month but down 4.6% over 12 months, and the index for new schools was up 0.7% in one month but down 1.5% over 12 months.

"These trends suggest that anyone considering a construction project should break ground promptly, before materials costs are reflected in higher bids and while there are still abundant contractors to do the work," Simonson adds.

To view the Producer Price Index figures, visit the AGC Web site.