Construction Association Notes that Despite Recent Declines, Yearlong Trend of Rising Materials Prices and Flat Bid Levels is Cutting into Contractor Earnings, Adding to Industry Challenges

The amount contractors pay for a range of key construction materials edged down 0.2 percent in December but climbed 5.3 percent from a year earlier, according to an analysis of producer price index figures released today by the Associated General Contractors of America. Meanwhile, the amount contractors charge to construct projects remained largely flat for the month and is up only between 3.3 and 4.7 percent for the year, cutting into contractor earnings and adding to the challenges the hard-hit industry is facing, association officials said.

“Any relief contractors might get from the recent declines in materials prices is being offset by their inability to increase prices for new construction projects,” said Ken Simonson, the association’s chief economist. “With overall demand relatively weak and public sector investments in construction declining rapidly, construction remains a buyer’s market.”

Simonson noted that prices for many key construction materials declined between November and December. The price index for diesel fuel dropped 7.8 percent in November, yet remains up 20.2 percent compared to December 2010. The index for copper and brass mill shapes continue to decline from record high levels early this year, sinking 0.4 percent in December and down 9.3 percent for the year. Likewise, steel mill products dropped in price for the month, by 0.6 percent, but rose 11.3 percent from a year earlier. Meanwhile, the index for asphalt paving mixtures and blocks increased 0.4 percent in December and 8.4 percent for the year.

Despite inching up slightly in recent months, the price indexes for finished nonresidential buildings, which measure what contractors estimate they would charge to put up new structures, have lagged compared to the year-over-year increases in materials costs, Simonson observed. The index for new industrial buildings actually declined 0.1 percent in December and is up only 3.3 percent for the year. The index for new office construction inched up 0.2 percent for the month and 3.9 percent for the year. The price for new warehouse construction was unchanged in December and rose 3.8 percent compared to December 2010. And the price for new school construction was up 0.1 percent for the month and 4.7 percent for the year.

Association officials said the fact contractors continue to be squeezed between materials costs and what they can charge is making difficult market conditions worse. They said Congress and federal officials could provide needed help by enacting a series of measures to boost private sector demand and counter recent declines in public sector construction activity.

“The fundamentals are the same for construction as for any other industry, uncertainty breeds caution and stifles demand,” said Stephen E. Sandherr, the association’s chief executive officer. “The best way to boost demand for construction is for Washington to set permanent tax rates and enact long-term infrastructure and investment measures, including for aging highway, transit, aviation and water systems.”

View the latest producer price index tables for construction.