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Contractors Holding the Line as Material Prices Jump

By Eric Jay Toll for The Arizona Builder’s Exchange

“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,” warns Ken Simonson, chief economist for the Associated General Contractors. “Most contractors have no ability to pass on unexpected cost increases.”

A 14.6 percent spike in diesel fuel costs since June sparked concern as material costs jumped for the second straight month in the AGC study. New warehouse costs led the way with a 3.8 percent increase over September 2011. Warehouse construction has seen a recent boost in the Phoenix metro with projects such as a USAA and Seefried Industrial joint venture putting up spec warehouses in west Phoenix. ProLogis has another major warehouse for TJMaxx under construction in Phoenix.

Simonson is concerned that price hikes on key materials may push some contractors out of business. Although the AGC economist finds mild year-over-year changes in materials prices overall, the late summer price increase may impact builder’s abilities to make a project profitable. The Producer Price Index for construction rose nearly one percent in August over July, and then the same amount, 0.9 percent, in September over August. The 1.8 percent two-month jump is the equivalent of almost an 11 percent inflation rate.

During the same period, the prices charged by contractors remained unchanged, Simonson notes. Material increases are eating into already thin profit margins.

While fuel was the biggest impact on costs, copper and brass prices climbed 3.6 percent in September and lumber and plywood each rose 1.1 percent. Other material indices—plumbing, roofing and electrical—remained essentially unchanged for the month.

Inadequate public investment in infrastructure is a major reason contractors are unable to recover costs according to AGC officials. “With so few projects to bid on, contractors are offering their services with little or no margin to cover materials costs,” said Stephen E. Sandherr, the association’s chief executive officer, noting that recent Census Bureau data showed a 3.5 percent drop in public construction spending from August 2011 to August 2012. AGC calls for federal and state legislative action to free up dollars for necessary public infrastructure. Elected officials’ gridlock and draconian state budget cuts have slashed job-generating public construction dollars.

Original source: AGC