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Material price rises push US contractors nearer the edge

15 Oct 12 US construction material costs jumped for second month in a row in September but contractors held the line on prices, adding to risk of insolvency.

Price spikes for several key construction materials in September threaten to push contractors out of business, according to an analysis of federal figures released by the Associated General Contractors of America. The recent surge comes despite mild year-on-year changes in materials prices overall.

“The latest surge in materials costs may push subcontractors and some general contractors into insolvency, following years of razor-thin margins and shrunken levels of activity,” said Ken Simonson, chief economist for the construction trade association. “Most contractors have no ability to pass on unexpected cost increases.”

The producer price index for inputs to construction—covering materials that go into every type of project, plus items consumed by contractors such as diesel fuel—increased 0.9% in both September and August, while the indexes that reflect what contractors would charge for their work were largely unchanged, the economist noted. The price increases for materials follow several months of declining prices, so that the year-over-year change in the index for materials was a “deceptively mild 1.7%,” he added.

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Simonson cited rising prices for a variety of essential construction materials as responsible for the recent spike. The price index for diesel fuel jumped 5.7% in September, following a leap of 8.7% in August. Prices for copper and brass mill shapes climbed 3.6% in September. The indexes for aluminum mill shapes and lumber and plywood each rose 1.1% in the latest month, while the price of steel mill products increased 1%.

In contrast, the price indexes for finished non-residential buildings, which measure what contractors estimate they would charge to put up new structures, as well as the indexes for subcontractors’ work, were mixed for the month, Simonson noted. The index for new industrial buildings decreased 0.2% from August to September, while the index for new school construction slipped 0.1% for the month. The indexes for new office and warehouse construction were unchanged, as were indexes reflecting prices charged by concrete, electrical and plumbing contractors for new, repair and maintenance work on nonresidential buildings. The index for roofing contractors was the only non-residential building index to show an increase for the month: 0.3%.

Association officials said inadequate public investment in infrastructure is a major reason contractors are unable to recover costs. “With so few projects to bid on, contractors are offering their services with little or no margin to cover materials costs,” said Stephen Sandherr, the association’s chief executive officer, noting that recent Census Bureau data showed a 3.5% drop in public construction spending from August 2011 to August 2012. “Despite the tepid recover, the construction industry continues to suffer from tight margins and weak demand. That is why federal, state and local agencies must keep funding intact for construction, or they will have even worse problems with unemployment and shuttered businesses.”

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