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Rising Cost of Construction Materials Puts Contractors in a Bind

The dramatic slowdown in commercial real estate development in recent years due to the deep recession and its lingering effects has prevented a supply glut, but wiped out thousands of construction jobs in the process. At mid-year 2011, builders who have managed to stay in business are now finding their profits squeezed by rapidly rising costs.

“Materials costs for construction have greatly outstripped the Consumer Price Index and even the overall Producer Price Index in the first four months of 2011,” says Ken Simonson, chief economist for The Associated General Contractors of America.

“However, contractors are so hungry for work that they are continuing to promise to deliver jobs for almost no increase in price, in spite of their having to pay more for materials,” says Simonson. “That’s a pretty dangerous situation for contractors who have already cut their margins to a minimum, or maybe into negative territory.”

Producer Price Index results published June 14 showed that index components affecting construction were up 7.5% in May from a year earlier. That compares with a more modest rise of 3.6% in the Consumer Price Index for the same period.

“What’s driven these prices so high is the run-up in diesel fuel, copper and steel prices,” says Simonson. Diesel has experienced the greatest price gain, up 39% in the past year. Average copper prices climbed 17% in the same period, while steel was up 10.1% in May from a year earlier.

This month, copper is a precious commodity. On June 13, copper was selling for $4.03 per pound, up 35% from a year earlier.

Diesel prices have abated slightly since May. The average price at the pump for a gallon of diesel fuel was $3.95 on June 13, up 35% from $2.93 a year earlier, according to the U.S. Energy Information Administration.

Petroleum costs also are driving up the price of construction plastics, such as PVC pipes and roofing material, according to Simonson.

Overall, the price of construction materials is projected to be 5% to 6% higher in December 2011 than in December 2010, predicts Simonson. The concern is that a pattern of price spikes is emerging. The December 2010 price of construction materials was 5.3% from a year earlier.

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