Construction Costs Moving in Both Directions

According to the latest report from Associated General Contractors of America (AGC), contractors are raising their construction prices as a result of tight labor market conditions and increases in the costs of many materials and services they use to build their projects.

After a year that was marked by a number of material price spikes, construction costs declined in December 2018, but remained elevated compared to a year earlier.

The overall construction cost declines in December, however, are deceptive on the surface. In actuality, according to AGC, costs for most materials and services either increased or remained steady. The reason for the overall slight decrease in total costs is due to the fact that there was a steep decline in fuel prices.

In specific, the producer price index for inputs to construction industries (a weighted average of all goods and services used in construction) decreased 0.8 percent in December but ended the year 3.8 percent higher than the index in December 2017. The index for energy costs declined a significant 11.5 percent in December and 3.9 percent for all of 2018. However, the prices of other goods used in construction climbed 0.1 percent in December and 4.8 percent for the year, more than the 3.3 percent increase in the index for 2017. In addition, the price index for services purchased by contractors also rose 0.4 percent in December and 4.2 percent for all of 2018, following a 3.7 percent gain in 2017.

Prices for new buildings in particular moved higher in December.

"The price index for new building construction outpaced the input cost index at the end of the year, but many contractors were probably caught by unexpected cost increases in 2018," said Ken Simonson, AGC's chief economist.

According to the AGC, higher construction prices in 2019 will increase the cost of many public infrastructure projects and could also undermine the financial viability of new private-sector development projects.

"Public officials may be forced to scale back planned infrastructure projects to cope with higher costs, while many privately financed projects may no longer pencil out if construction costs continue to increase," said Stephen, E. Sandherr, AGC's CEO. "Resolving costly trade disputes and addressing labor shortages will help relieve much of the inflationary pressure on construction costs."

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