Whether you’re planning a construction project or have already started one this year, you might be wondering how the economy might affect your project and your bottom line. Two major factors that impact the construction industry are the cost of materials/inputs and the cost and availability of labor. We’ve analyzed recent trends in both to give you an idea of where the market is headed and what that means to you.
Cost of Materials & Inputs
2013 once again saw the cost of materials and inputs into the construction industry increase at a slightly higher rate than other finished goods. According to the U.S. Bureau of Labor Statistics, the Producer Price Index (PPI) for inputs to construction industries increased 1.1% from December 2012 through 2013, compared to just 0.7% for other finished goods. While the increase is certainly modest compared to what we saw in 2010 and 2011—over 5% each year–it nonetheless reflects a disproportionate climb in the price of construction materials over other commodities. Additionally, this relatively small overall increase fails to illustrate the more significant price jumps of certain major material components used in many of our construction projects, including those shown in the figure below:
click image to enlarge
|Lumber and plywood||10.9%||-1.1%||5.1%||13.0%|
|Fabricated metal bar joists and rebar||-4.3%||2.2%||1.7%||0.7%|
While it’s important for us to watch these material prices, we also have to keep an eye on many other components that impact construction costs, including those shown in the figure below:
click image to enlarge
|Plastic resins and materials||10.1%||9.3%||2.4%||4.3%|
|Construction sand/gravel/crushed stone||1.2%||1.6%||2.4%||2.3%|
By watching these costs, we can better forecast potential increases and decreases that might affect your project and then plan accordingly by applying appropriate cost escalation factors.
Our preconstruction managers throughout Arkansas, Oklahoma, Missouri, and Kansas are reporting very modest to no materials price increases in their areas. In Tulsa, for example, any increases are currently being offset by strong competition in the market place. Managers in all locations report fewer than normal price increase notices, which we typically receive in large numbers each January. This indicates to us that materials prices, in general, are fairly stable.
Cost & Availability of Labor
Though labor prices seem stable for now, increases that could have a major impact on the industry are on the horizon. We are seeing a nationwide decline in available craftsmen as workers retire or leave for other industries. This decline in labor supply is likely to continue into the future, intensifying what we refer to as the war for talent, in which we in the construction industry must compete not only with other construction firms, but with other industries like the growing oil and gas industry for skilled craftsmen. This war for talent could very well lead to increased labor costs for construction. In fact, AGC Chief Economist Ken Simonson predicts in his January 2014 Construction Spending, Labor & Materials Outlook that while materials price increases will hover between 1–3%, labor costs are likely to increase at a higher rate of 2.5–5%, with widespread labor shortages possible between now and 2017.
How it Affects You
We expect overall construction prices in our region to remain relatively flat for the near future; however, we could start seeing increases in materials in the latter half of 2014 and into 2015. These increases should be relatively minor, and with a competitive marketplace and stagnant economy holding them down, the overall impact on individual construction projects should be minimal. We will continue to monitor the market and look forward to keeping you informed on current conditions.