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Construction Firms Face Higher Materials Costs, Flat Building Prices

Construction firms are facing increasing pressure in December as nearly every material used by contractors rose in price, while bid prices for new buildings remained flat, according to an analysis of December producer price index figures released today by the Associated General Contractors of America. Association officials warned that the price squeeze on contractors is likely to intensify in 2011 as global demand for construction materials grows and domestic demand for construction services remains weak.

“Bad though these numbers are, there is worse to come,” said Ken Simonson, the association’s chief economist, noting that since the data was compiled, suppliers have announced further price increases for copper, steel and diesel fuel. “With contractors unable to pass along the increases in the price of finished buildings, many firms could be pushed out of business.”

Prices for materials used in construction jumped 0.9 percent in December and 5.4 percent in all of 2010, while price indexes for finished buildings remained flat over both time periods, Simonson said. Construction costs also outstripped the producer price index for finished goods, which rose 0.6 percent in December and 4.0 percent in 2010.

Prices soared at double-digit rates over the year for four key construction materials. Diesel fuel prices climbed 2.3 percent in December and 28 percent in 2010; steel mill product prices rose 0.5 percent and 12.5 percent respectively; copper and brass mill shape prices were up 1.3 percent and 12 percent; and prices for aluminum mill shapes rose 12 percent over the year, despite a 0.2 percent dip in December.

Even as materials prices rise, weak demand for construction, combined with intense competition for work, is forcing contractors to hold the line on bid prices, Simonson said. The producer price index for new office construction actually dropped 0.8 percent in the month and year. The index for new industrial buildings was flat in December and up 0.4 percent in 2010 as a whole; new warehouses, up 0.1 percent and 0.4 percent; and new schools, flat and up 1.3 percent.

Other items that contributed to the December climb included lumber and plywood, 1.5 percent and 5.7 percent for the month and year respectively; architectural coatings, primarily paint, 1.5 percent and 0; brick and structural clay tile, 1.0 percent and 0.6 percent; and gypsum products, 0.8 percent and 3.4 percent. Prices in December and the year were little changed for asphalt paving mixtures and blocks, 0.2 percent and 4.6 percent; concrete products, 0.2 percent and -0.2 percent; and insulation materials, -0.5 percent and 4.4 percent.

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