Construction Outlook Predicts Continued Inflation and Steep Material Prices

Supply-chain disruptions and labor shortages have led to significant increases in inflation and prices in the construction industry. And more disruptions may be on the horizon due to the conflict between Russia and the Ukraine, said Amy Crews Cutts, Ph.D., CBE, NACM economist, during the NACM webinar, U.S. Construction Outlook: Workforce Worries, Project Prospects, Supply Snags.

"From June 2020 through August of last year, nonresidential construction employment really stalled," said Ken Simonson, chief economist for the Associated General Contractors of America. "In the last four months of the year and the first two months of this year, it has really been catching up. It has grown faster than total nonfarm and residential construction in the past six months." However, industry growth would be stronger if contractors could find more qualified workers, he added.

In January, the construction industry noted a record number of job openings—approximately 384,000, Simonson said. This represents a 27% increase in openings since January 2021. Furthermore, only 259,000 construction workers were hired January 2022—a 15% decrease from a year ago.

"Twenty-nine states have added workers beyond where they were in February of 2020, yet 21 states still lag," Simonson said. "Louisiana, Wyoming and New York have all experienced over a 10% decline in construction employment from February 2020 to December 2021."

An increase in construction worker wages is another factor affecting the industry. Wages for employees performing site work went up 6% from February 2021 to February 2022, the highest increase in 40 years, Simonson said.

"Contractors will have to pay even more to keep workers on," Simonson said. "They are having trouble finding candidates, so they have to pay more overtime to current workers."

A prominent topic of conversation is how inflation may affect the construction industry. Inflation becomes an issue when we are continuously spending more for the same items, Cutts said.

Supply-chain disruptions have led to producers being unable to get parts or to ship parts, she continued. One commodity that has affected multiple industries is oil. Crude oil is up 57%, and gasoline is up 25% from the beginning of this year. Commodities are up 40% since the beginning of 2020; processed goods are up 30%; and intermediate goods—or unfinished goods that go into the production of other items—are up 10%.

"We are up 1100% on the costs for shipping a container from China or Southeast Asia to the North American West Coast," Cutts said."Shipping to the East Coast from the same region is up 600%; and from Europe, we are up 400%."

In addition, unfavorable differences between input prices and bid prices exist. Input prices are the costs for materials that go into producing a project, while bid prices are what someone pays for the finished project itself. From September 2020 to January 2022, input prices rose from 1.8% above the expected amount to 20.3%, and bid prices went from 1.8% to 16.5%. This means that bid prices are not covering the cost of input materials.

This forces contractors to absorb price differences, Simonson said. Input prices increased because they are reliant on costs for individual materials and price changes that may occur to the market for these materials. From April 2020 to January 2022, the following products experienced massive increases in prices:

  • Steel mill products (136%)
  • Lumber and plywood (89%)
  • Copper and brass mill (70%)

The peak of material costs outweighing bid prices has more than doubled, Simonson said. "The entire construction industry is affected by this—especially subcontractors whose purchases may be more concentrated in high priced material items."

Overall, it will cost a lot more for firms to do business, Cutts added. Prices for materials may rise even further due to sanctions being placed on Russian businesses, which could reduce the availability of certain commodities. "For example, steel products have spiked because Russia produces a lot of nickel. The price increases are due to companies fearing what might happen next week, so they are scrambling to buy as many materials as they can."

The war could temporarily halt commercial projects, Simonson added. Expect more drastic changes in the March Producer Price Index report when post-war data come out.

-Bryan Mason, editorial associate

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Sunday, 26 June 2022

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