SAVE   |   EMAIL   |   PRINT   |   RSS  
Construction costs building steam
Contractors' group says prices for concrete and other materials have soared the past two years.
October 27, 2005: 2:03 PM EDT
By Les Christie, CNN/Money staff writer

NEW YORK (CNN/Money) - The awesome storms that pounded the Gulf Coast and Florida the past two hurricane seasons have resulted in a spike in construction costs around the country.

Ken Simonson, chief economist for The Associated General Contractors of America, issued an analysis this week that compared construction costs over a four-year period from 2001 to 2005.

Before the storms hit, the prices of construction materials had barely budged, with gains of just a few percentage points.

But by September of 2004, steel and copper construction products had soared as much as 62 percent higher than a year earlier. Gypsum products were up 21 percent, asphalt and lumber had climbed 12 percent, and insulation materials rose 11 percent.

Higher diesel fuel prices, up more than 50 percent, hit contractors hard. Not only did they have to pay more to run their own trucks, bulldozers, backhoes, and generators, they also had to pay more for fuel-thirsty materials such as concrete, which burns considerable energy while being mixed and transported in heavy loads to sites.

High fuel costs contributed to concrete prices that rose more than seven percent from September 2003 to September 2004 and more than 12 percent through September 2005.

Overall, construction material cost climbed about 11 percent in the 12 months ended this past September.

Contributing factors

Fuel has been the arch villain in this inflationary melodrama, and things could get worse as natural gas prices stay lofty.

Natural gas is used in production of many modern building supplies, either to fuel plants or as an ingredient, a so-called feedstock, in the materials themselves.

PVC plastic, for example, which is used in plumbing and other applications, "has almost doubled overnight, according to some contractors," said Simonson. Supply is extremely limited. "One of the biggest producers had a series of explosions last month in its Point Comfort Texas plant," said Simonson, further curtailing the PVC supply.

Other materials affected by the shortage of natural gas include insulation, paints, and coating. Simonson is looking for double digit price increases for these materials and expects natural gas production to be lowered right through the winter.

"There's no place to turn to for natural gas supplies," he said, "and no big reserves to draw on."

Another factor affecting building materials costs is the demand for them associated with record construction of new homes and other sites. Much of gypsum's double-digit increase is due to shortages as hotel and retail construction added to demand from new home building. As well, Katrina knocked out production at two plants in the South.

Cement is also a sore spot as New Orleans harbor facilities -- a major cement import center -- went off line following Katrina. "We've seen an ever worsening supply," says Simonson.

The good news

There are two bright spots in the report. Residential building costs moderated this year after suffering through a severe run up in lumber and plywood prices in 2004.

One reason for lumber and plywood price declines has been an early harvest of timber knocked down by the storms. That literal windfall increased the inventories of both commodities.

And labor cost increases have been surprisingly moderate. They've averaged about three percent over the past 12 months, according to Simonson. This despite the fact that employment is up about four percent in the industry.

Simonson doesn't understand why labor costs have not risen faster. "It's what Alan Greenspan might call a conundrum," he says.

The direction of oil prices has definitely been down lately. For more, click here.

For more on Katrina's impact, click here.  Top of page

New Construction
Alan Greenspan
Hurricane Katrina
Oil and Gas
Manage alerts | What is this?