Construction Inflation Becomes a Problem

Prices for construction materials and products have been creeping up steadily for more than a year. Higher demand pushed supply lines to the limit of current capacity, giving manufacturers the opportunity to raise prices and regain some long-lost profits. Wages likewise have been creeping higher, outstripping the wage gains of the overall workforce. Creeping became “leaping” during the past two months. The first signs of sticker shock are beginning to appear.

All of the gradual price increases have been given a boost by the tariffs levied by the Trump Administration. While it’s worth noting that virtually all of the documented increases happened before the tariffs went into effect, the threat of tariffs gave manufacturers the room to push price increases into the market. That has applied to products that won’t be affected by the tariffs too. Surcharges were beginning to hit the market for tariff-affected items in June, and the impact on producer prices was immediate.

Analyzing the Department of Labor Statistics’ data for May, AGC Chief Economist Kenneth Simonson noted that “the producer price index jumped by 20.0 percent for aluminum mill shapes, 17.4 percent for copper and brass mill shapes and 12.3 percent for steel mill products between June 2017 and June 2018. Other construction inputs that rose sharply in price from May 2017 to May 2018 include diesel fuel, 52.8 percent; lumber and plywood, 18.3 percent; asphalt felts and coatings, 7.5 percent; ready-mixed concrete, 5.5 percent; and paving mixtures and blocks, 5.0 percent.”

The producer price index for inputs to construction industries, goods—a measure of all materials used in construction projects including items consumed by contractors, such as diesel fuel—rose 9.6 percent over 12 months. The year-over-year increase was the steepest since October 2008, Simonson noted.

ppi for construction

This kind of hyperinflation couldn’t come at a worse time for construction in Pittsburgh. Most of the anticipated boom in construction lies ahead. With labor nearly tapped out this summer, specialty contractors are beginning to price projects more cautiously and the result is stressing budgets. The upward pressure comes from several factors. Specialty contractors’ costs are roughly 50 percent labor. With the construction workforce at full employment in Pittsburgh, future work will be done with less people than necessary. Premium time and pay will be used to meet schedules. Contractors will be less certain about the productivity of the labor force. Uncertainty adds risk – and cost. Contractors will also begin to be maxed out on backlog (many already are), meaning that the projects they bid will have higher profit margins on their work. This isn’t greed; it’s simply the response to a shift to a seller’s market.

The results of this unexpected and steep jump in prices for owners will be higher costs for less program and the deferral of some projects for a time. That will chill the boom somewhat. The worse impact will be for contractors – and owners – that are locked into agreements before prices spiked and before projects were bought. If costs rise beyond what the contractors bid, disputes will increase and firms will do what is necessary to survive the inflation. None of those kinds of measures will make for better projects.

The many large private projects that will be built in Pittsburgh over the next 12-18 months have already begun to feel the impact on budgets. That hasn’t been the case in the public market, where bidding remains competitive. God bless the school district that signed big contracts based on bids taken in the past 90 days. They may want to wait until the punch list is complete to celebrate the great bids they received.

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