AGC Economist Forecasts Materials and Labor Cost Increases

Oct 25, 2007 2:29 PM

Washington, D.C.-based Associated General Contractors of America (AGC) recently released its fifth Construction Inflation Alert, warning owners, budget setters, and contractors to expect larger materials and labor cost increases in 2008 than they have experienced in the past 12 months. "The worsening slide in homebuilding and turmoil in the credit markets threaten some types of nonresidential construction,” says Kenneth Simonson, AGC chief economist. “At the same time, some materials costs are beginning to turn up again, and labor costs have started to accelerate."

The cumulative increase in the producer price index (PPI) for construction inputs since December 2003 (28% through August 2007) remains more than double the 13% increase in the most common measure of overall inflation, the consumer price index (CPI) for all urban consumers. Labor costs, in contrast, have risen at similar rates for construction and for the private sector as a whole. The cumulative difference matters because the estimates for many projects now being bid, especially public facilities, were prepared in 2003-2005 under the assumption that construction costs would escalate at the same rate as the CPI. That divergence explains why some projects are being canceled, delayed, or redesigned. Labor costs are likely to accelerate further, as well, if residential building begins to draw back specialty trade contractors in late 2008. "Construction wages could go up 5% to 6% annually for several years beginning in late 2008," Simonson says.

For the first time, the Construction Inflation Alert shows the cumulative price change since December 2003 and trends in construction wages. The report also offers a sampling of comments on credit market turmoil and examines the trends in construction activity, materials and labor costs over the past several years. To download a copy of the Construction Inflation Alert, visit AGC’s Web site.