Construction Faces Tumultuous Year

Nonresidential construction will experience wide varience in demand, materials cost and labor availability, according to the Construction Inflation Alert released by the Associated General Contractors of America (AGC).

“In 2008, some nonresidential segments will continue to grow, including power and energy, but others such as lodging will slow or decline,” says the AGC’s chief economist, Ken Simonson. “Diesel, copper and steel are among materials costs likely to accelerate, while others remain benign.”

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 nonresidential 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 to 8 percent range by the end of 2008,” Simonson says.

Looking beyond 2008, there are two factors that make it likely that a 6-8 percent growth rate for construction input prices will be sustained. 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 nearly half the cost of a construction project, according to information provided by the AGC. In 2007, even considering the high level of nonresidential activity, contractors were generally able to find enough workers, thanks to redeployment of specialty contractors from residential to lighter nonresidential 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,” Simonson says. “Wage increases in nonresidential construction may rise to the 4.5 to 5.5 percent range in 2008, despite the slowdown in overall activity, and to 5-6 percent in 2009, when residential work beings to compete again for some specialties.”

A complete copy of the AGC’s Construction Inflation Alert is available at www.agc.org/cia.