Construction contractors face a continuing cost squeeze, even though a key price index for construction materials dipped in October and showed only a moderate increase over the past year, according to an analysis of federal figures released today by the Associated General Contractors of America. Association officials warned that recent and announced price increases may threaten the survival of some contractors.
“Although several materials retreated in price last month, prices in the past year have still outpaced the tiny increases in contractors’ bids,” said Ken Simonson, chief economist for the construction trade association. “In addition, some of the price drops have already reversed, or will soon, leaving contractors who have already submitted bids vulnerable to losses.”
The producer price index for inputs to construction — covering materials that go into every type of project, plus items consumed by contractors such as diesel fuel — decreased 0.4% in October, following increases of 0.9% in both September and August. The index climbed 2.0% in the 12 months ending in October. Meanwhile, the indexes that reflect what contractors would charge for their work were largely unchanged and mostly rose less than materials costs over 12 months — 1.0% for industrial buildings, 1.4% for new office construction, 1.5% for schools, and 2.6% for new warehouses.
Simonson said prices for essential construction materials were mixed in October. The price index for diesel fuel rose 2.3% in October and 12.6% over 12 months. Prices for copper and brass mill shapes climbed 2.8% in October and 4.7% year-over-year. In contrast, the index for steel mill products dropped 1.9% for the month and 8.5% for the year. The index for lumber and plywood shrank 1.8% in October but was 6.2% higher than a year ago. Indexes for gypsum products and insulation materials both fell 0.7% for the month but rose relative to October 2011 — by 14.1% and 5.5% respectively.
“Many of these price changes appear to be short-term,” Simonson commented. “While retail diesel prices have dropped 15 cents per gallon in the past three weeks and copper futures have declined, steel, gypsum and even concrete suppliers have announced hefty price hikes for December or January. As a result, contractors who have already bid to install these materials at fixed prices may be headed for losses, and even bankruptcy.”
Association officials said declining public investments in infrastructure and businesses’ reluctance to commit to investments in the face of the “fiscal cliff” are forcing contractors to keep bids low. “With so few projects to bid on, contractors are offering their services with little or no margin to cover materials costs,” said Stephen E. Sandherr, the association’s CEO, noting that recent Census Bureau data showed a 4.2% drop in public construction spending and a slackening in the growth of private nonresidential construction between September 2011 and September 2012. “Congress and the administration have to find a way to avoid the catastrophic increases in taxes and cuts in infrastructure spending that threaten many construction firms and risk putting their employees out of work.”
Click here to view the October PPI table.