Construction Faces Inflation for Projects, Prices, Labor, Says AGC

Non-residential construction will experience wide variance in demand, materials cost and labor availability in 2008, according to the Construction Inflation Alert released today by the Associated General Contractors of America (AGC). The groups chief economist, Ken Simonson, says some non-residential segments will continue to grow, including power and energy, but others such as lodging will slow or decline. Diesel, copper and steel are among materials likely to increase in cost.
 
The large increase in diesel-fuel prices compared to a year ago, along with the importance of diesel fuel to highway construction, makes it likely that highway costs will go up even more. Conversely, the slumping demand and rising supply of gypsum products may mean non-residential and multi-unit residential building costs go up a little less than 6 percent.
 
"These cross-cutting trends make it likely that the PPI for construction inputs will accelerate from the 4.5 percent rate of increase that prevailed in 2006 and 2007 to a 6 percent to 8 percent range by the end of 2008," commented Simonson.
           
Looking beyond 2008, AGC says two factors make a sustained 6 percent to 8 percent growth rate for construction input prices likely. First, many construction inputs, such as diesel fuel, steel and copper, are in demand worldwide. Second, construction will always be dependent on physical delivery of heavy, bulky, relatively low-value materials for which transportation and fuel costs are a major part of the delivered price.
 
Labor accounts for roughly half the cost of a construction project. In 2007, despite the high level of non-residential activity, contractors were generally able to find enough workers, thanks to a massive redeployment of specialty trade contractors from residential to lighter non-residential projects.
 
"In 2008, I expect labor shortages will worsen for a few crafts, pulling average wage rates higher; but in other segments such as residential specialty trades, the supply of some crafts will be plentiful," noted Simonson. "Wage increases in non-residential construction may rise to the 4.5 percent to 5.5 percent range in 2008, despite the slowdown in overall activity, and to 5 percent to 6 percent in 2009, when residential work begins to compete again for some specialties."
 
The AGC is the largest and oldest construction trade association in the United States, representing 33,000 firms nationwide. For more information, visit www.agc.org. For a complete copy of the Construction Inflation Alert, visit www.agc.org/cia.