Skyrocketing Material Prices Putting a Damper on Construction

Published On
May 19, 2021

It doesn’t seem to matter what type of construction is being discussed—nonresidential or residential. Skyrocketing material prices are putting a damper on new construction.

The Associated General Contractors of America (AGC), Arlington, Va., released a report discussing how the cost of construction goods and services accelerated further in April as more items logged double-digit increases over the past year.

Prices for materials used in construction jumped 19.7% from April 2020 to last month. Services and goods purchased by contractors increased 19.1%.

Hurting contractors even more is the fact that the producer price index for new nonresidential construction (a measure of what contractors say they would charge to erect five types of nonresidential buildings), rose 2.3% over the past 12 months. This is because competition for a decreasing number of new projects forced contractors to absorb most of the increases, according to the report.

And a third concern: nonresidential contractors struggled with material arrival delays and increasing intense competition that limited their ability to pass on higher costs. AGC urged the Biden Administration to roll back the tariffs and quotas on imported construction materials that are leading to higher costs and lower material availability.

“Today’s producer price index report—bad though it is—actually understates the severity of the problems contractors are experiencing,” said Ken Simonson, AGC’s chief economist. “Many items have posted even steeper price increases since the data for this report were collected in mid-April, while lead times for producing goods and delivery times to distributors and work sites have grown ever longer and less certain.”

The problem exceeds just nonresidential construction. According to a May 2021 report from the National Association of Home Builders (NAHB), Washington, D.C., with labor and lot availability a challenge in many markets, home buyers should expect rising prices throughout 2021 as the cost of materials, land and labor continue to rise.

While builder confidence held stable in May, there are growing concerns over the price and availability of most building materials, including lumber.

“Low interest rates are supporting housing affordability in a market where the cost of most materials is rising,” said Robert Dietz, NAHB’s chief economist and senior vice president for economics and housing policy. “In recent months, aggregate residential construction material costs were up 12% year over year, and our surveys suggest those costs are rising further. Some builders are slowing sales to manage their own supply chains, which means growing affordability challenges for a market in critical need of more inventory.”

Furthermore, explained Chuck Fowke, NAHB chairman, first-time and first-generation home buyers are particularly at risk for losing a purchase due to cost hikes associated with increasingly scarce material availability.

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