Feeble demand, increased construction materials prices, put contractors increasingly at risk

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Ken Simonson, chief economist of the Associated General  Contractors of America, says construction  materials climbed 8.1 percent in the past 12 months, while the amount  contractors charge for new nonresidential construction increased only to 3  percent. “Feeble demand for construction is forcing contractors to absorb the bulk of materials price hikes, instead of passing them along to owners,” Simonson reported at the 15th annual Construction Financial Management Conference last week. “This pattern has persisted for more than two years, and many contractors are increasingly at risk.”

Simonson noted that key materials showed divergent price trends in September but all posted double-digit year-over-year increases. Those materials include diesel fuel, copper and brass mill shapes, steel mill products, and aluminum mill shapes.

Simonson observed that the price index for new construction – what contractors charge for construction projects – rose 2.2 percent over 12 months for industrial buildings, 2.6 percent for offices, 2.8 percent for warehouses and 3.0 percent for schools. “In light of the much steeper materials cost increases, these gains are not enough to keep contractors solvent,” he warned.

In addition to the cost squeeze, Simonson said the industry was suffering from decreasing demand for public sector construction activity. While state and local construction budgets will continue to contract for the foreseeable future, he said Congress could help offset some of the decline by enacting new infrastructure investments. Enactment of the $50 billion American Jobs Act proposed by President Obama appears unlikely, he added.

On a positive note, the AGC economist predicted continued growth in nonresidential spending in the following market segments: power (incl. oil and gas structures, pipelines), manufacturing (including data centers), health care and warehouse/distribution.

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