AGC Predicts Increase in Construction Materials Costs, Releases Inflation Alert

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Increases in construction costs slowed noticeably in the last half of 2006, but relief is likely to be short-lived and may have already ended, said Kenneth Simonson, chief economist for the Associated General Contractors of America (AGC), during the group’s annual convention in San Antonio, Texas. Simonson predicted materials costs could rise 6 percent to 8 percent by the end of the year, with wages rising 5 percent.

The AGC also released its fourth Construction Inflation Alert, in which Simonson explained construction is vulnerable to high price increases because the industry has little ability to avoid using materials that are in strong demand and for which supplies increase irregularly. He pointed to greater volatility in petroleum, concrete and metals products, which implies highway and other heavy construction are more likely to experience large price jumps than building construction segments. But, he warned, "Even building construction is at risk of much higher materials cost increases than the general rate of inflation."

Over the long-term, two factors distinguish construction costs from those facing consumers or most other industries, Simonson said. First, the consumer price index includes large amounts of services and goods for which materials are not a significant share of the costs, or for which substitution among materials is possible. Second, every material used in construction must be physically delivered.

"Contractors report that fuel surcharges are more common than in the past," noted Simonson.  "Because when transportation networks are stretched tight, fuel-cost increases are likely to be passed along to customers."

Simonson also believes the industry may be entering an era of accelerating wage and salary costs. From February 1997 to February 2007, the industry created one out of 10 new jobs in the economy, he said, which is double the industry's share of overall employment. Construction employment increased by nearly 2 million, or 33 percent. 

Demand for skilled workers, supervisors, estimators and managers is growing as the volume of nonresidential construction increases, he pointed out. However, low unemployment throughout the economy means there are fewer applicants to choose from while more skilled construction workers are reaching retirement age.

To download a copy of the AGC’s Construction Inflation Alert, visit www.agc.org/march2007cia.

The AGC is the largest and oldest national construction trade association in the United States. It represents more than 32,000 firms, including 7,000 general contractors and more than 11,000 specialty-contracting firms. For more information, visit www.agc.org.

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