Nearly every type of building component used in the construction process has decreased in cost in recent years according to the U.S. Department of Labor’s Producer Price Indexes (PPI), despite increased construction spending and growing demand for all types of materials:
- The price of aluminum mill shapes and steel mill products decreased by double digits in 2015.
- Between 2010 and 2015, the cost of copper and brass mill shapes have declined substantially, while flat glass costs remained steady.
- Between March 2014 and March 2015, the price of lumber and plywood fell 4.4 percent.
- Optic cable has been flat since 2013 and had fallen in price more than 10 percent since 2004.
- Also experiencing flattened prices in the last few years are adhesives and sealants, vinyl flooring and granite.
Add to this the recent 39 percent slide in the PPI for diesel fuel and one would assume the overall cost of building commercial property has plunged as well. But it hasn’t.
This disconnect can be summarized in one word: labor. The combination of a double-digit increase in construction spending in the last year and an unemployment rate that has fallen to 5 percent has put pressure on the industry’s labor costs, negating any materials savings project managers are having.
The number of unemployed construction workers is at a 14-year low, according to federal employment data released by the Associated General Contractors of America. The low unemployment rate has placed upward price pressure on the skilled labor pool causing subcontractors and vendors to be more selective with whom they hire for their projects.
Another rising cost related to labor has been caused by new regulations and tighter enforcement. Because of the tight labor market, temporary workers are comprising an increasing share of the workforce on constructions sites. Therefore, OSHA is beefing up enforcement of rules that require companies to treat temps the same as full-time employees. These stepped up enforcement efforts have resulted in many construction firms receiving record numbers of OSHA citations and higher fines.
It’s not just regulators scrutinizing the inexperienced workers on construction sites. Insurance professionals are also concerned with the potential for increased accidents and the possibility of project defects, both of which negatively impacts premium rates.
In addition to labor costs, construction crews are also battling longer lead times to procure materials because capacity at production facilities is not keeping up with demand. These delays also add to overall project cost.
It should also be noted that although the cost of some materials has recently flattened, this follows an extended period of significant increases in what firms paid. The five PPIs for nonresidential buildings rose at annual rates of 7 percent or more between 2006 and 2009. The average price of gypsum, which has been in high demand due to remodeling and apartment building, increased by double digits each year from 2012 to 2014.
U.S. construction growth is expected to outpace GDP growth over the next decade. This anticipated demand will not only continue to affect labor costs — predicted to increase between 3 to 4.5 percent over the next two years — it could also result in an uptick in material prices.