Contractors’ Bid Prices Finally Match Runup In Materials Prices, But Continuing Cost Increases Will Maintain Pressure On Profit Margins
Posted: June 16, 2022 | Tradewinds
Contractors’ bid prices for constructing new nonresidential buildings finally caught up with soaring costs for the materials and service they buy in May, according to an analysis by the Associated General Contractors of America of government data released today. Association officials cautioned that contractors will have a hard time keeping pace with additional price spikes for many key construction materials.
“After enduring more than a year of runaway increases in the cost of items needed to build projects, contractors have finally raised their bid prices by an equivalent amount,” said Ken Simonson, the association’s chief economist. “But the runup in materials costs appears likely to continue to pressure contractors’ profit margins.”
The producer price index for inputs to new nonresidential construction—the prices charged by goods producers and service providers such as distributors and transportation firms—rose 1.9 percent from April to May and 18.9 percent since May 2021, following 12 consecutive months of 20-percent or greater increases. An index for new nonresidential building construction—a measure of what contractors say they would charge to erect five types of nonresidential buildings—rose 0.4 percent for the month and 19.3 percent from a year earlier.
A wide variety of inputs accounted for the increase in the cost index, making further increases likely in the near term, the economist added. The price index for diesel fuel jumped 84.9 percent over 12 months. The index for liquid asphalt leaped 80.5 percent. The indexes for steel mill products and aluminum mill shapes climbed 32.9 percent and 31.2 percent, respectively. The index for architectural coatings such as paint soared 31.6 percent. There were increases of more than 20 percent in the indexes for plastic construction products, which rose 29.5 percent; truck transportation of freight, 25.8 percent; and gypsum building materials, 23.9 percent.
In addition, there were double-digit increases in several other price indexes that affect construction costs, Simonson noted. He cited as examples the index for roofing asphalt and tar products, which rose 18.9 percent over 12 months; insulation materials, 16.6 percent; paving mixtures and blocks, 16.1 percent; concrete products, 12.0 percent; and construction machinery and equipment, 11.5 percent.
Association officials said ongoing increases in materials costs will continue to threaten the profit margins of many contractors. They urged federal officials to remove remaining tariffs on key construction materials, rethink newly released Buy America policies and address constrained supply chains in order to lower costs.
“Higher construction prices run the risk of forcing public agencies and private developers to rethink planned projects,” said Stephen E. Sandherr, the association’s chief executive officer. “Federal officials need to remove remaining tariffs, support a competitive materials market, and take every possible step to support a supply chain struggling to restart after the pandemic.”
View producer price index data.