Construction firms faced increasing pressure in December as nearly every material used by contractors rose in price, while bid prices for new buildings remained flat, according to an analysis of December producer price index figures released recently by the Associated General Contractors of America (AGC). Association officials warned that the price squeeze on contractors is likely to intensify in 2011 as global demand for construction materials grows and domestic demand for construction services remains weak.

“Bad though these numbers are, there is worse to come,” says Ken Simonson, the association’s chief economist, noting that since the data was compiled, suppliers have announced further price increases for copper, steel, and diesel fuel. “With contractors unable to pass along the increases in the price of finished buildings, many firms could be pushed out of business,” the economist warns.

Prices for materials used in construction jumped 0.9% in December and 5.4% in all of 2010, while price indexes for finished buildings remained flat over both time periods, the economist notes. He adds that construction costs also outstripped the producer price index for finished goods, which rose 0.6% in December and 4.0% in 2010.

Simonson notes that prices soared at double-digit rates over the year for four key construction materials. Diesel fuel prices climbed 2.3% in December and 28% in 2010; steel mill product prices rose 0.5% and 12.5% respectively; copper and brass mill shape prices were up 1.3% and 12%; and prices for aluminum mill shapes rose 12% over the year, despite a 0.2% dip in December.

Even as materials prices rise, weak demand for construction, combined with intense competition for work, is forcing contractors to hold the line on bid prices, Simonson observes. The producer price index for new office construction actually dropped 0.8% in the month and year. The index for new industrial buildings was flat in December and up 0.4% in 2010 as a whole; new warehouses, up 0.1% and 0.4%; and new schools, flat and up 1.3%.

Other items that contributed to the December climb included lumber and plywood, 1.5% and 5.7% for the month and year respectively; architectural coatings, primarily paint, 1.5% and 0; brick and structural clay tile, 1.0% and 0.6%; and gypsum products, 0.8% and 3.4%. Prices in December and the year were little changed for asphalt paving mixtures and blocks, 0.2% and 4.6%; concrete products, 0.2% and -0.2%; and insulation materials, -0.5% and 4.4%.

View the latest producer price index tables for construction.

Source: The Associated General Contractors of America