AGC Economist Warns of Materials Cost Hikes

Associated General Contractors Economist Ken Simonson last week warned of an inflation rate for construction materials of 6 to 8 percent, with periods of 10 percent increases possible. Construction segments such as highways, that are most dependent on volatile prices for petroleum products, are particularly vulnerable to such price increases, he said.

"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 to 4 percent increase in the consumer price index or broad producer price index for finished goods," Simonson said. "If these increases continue, I'm concerned that the inflation rate for construction materials could be double the rate of overall inflation. The extreme cost increases or volatility of some construction inputs are proving troublesome to contractors because they have been sudden, extreme and unexpected."

For example, Simonson added, the price of steel soared 50-to-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, Simonson said. 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 or a highway 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.

AGC, based in Alexandria, Va., represents more than 32,000 firms, including 7,000 of America's leading general contractors, and more than 11,000 specialty-contracting firms.

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