The Impact of Rising Material Costs on Commercial Construction

November 1st, 2022 Posted by Uncategorized No Comment yet

With inflation reaching a forty-year high in recent months, everyone is now acutely aware of rising costs.

The consumer price index, which measures changes in the cost of food, housing, gasoline, utilities, and other goods, increased by 8.2% in the 12 months from September 2021 through August 2022.

The latest data from the Bureau of Labor Statistics (BLS) shows energy prices increased by 19.8% and gasoline by 18.2% over the last year.

Non-Residential Construction Material Costs

Rising costs in an inflationary period are not just impacting consumers. Global property services giant, CBRE(formerly REI Limited and CB Richard Ellis) forecasts a 14.1 percent year-over-year increase in U.S. construction costs by the end of this year due to the combination of labor shortages, inflation, supply chain disruptions, ongoing pandemic reverberations, and the war in Ukraine.

Let’s take a brief snapshot look at the last twelve-month increases in material costs according to the Producer Price Index from the Associated Builders and Contractors:

*Fabricated Structural Metal Products up 17.7%

*Softwood Lumber up 14.8%

*Concrete Products up 14.3%

*Prepared Asphalt, Tar, Roofing & Siding Products up 15.2%

*Nonferrous wire and cable up 6.1%

*Crude Petroleum up 38.8%

*Natural Gas up 118%

*Iron and Steel down 5.7%

*Steel Mill Products down 4.6%

The Impact

Deliveries of construction materials and equipment were disrupted not only due to severe labor shortages in factories but also shipping facility limitations. While some products were being manufactured, often they were waiting to be shipped for months at a time.

With such low resources and high requirements, construction material cost dramatically increased. Construction companies are reporting 10% to 30% increases in material costs from the time the bid is accepted to the time material orders are placed.

While many contractors may be considering passing on the material cost increases to project owners, they will likely find them resistant to the elevated charges due to increased borrowing costs and mounting recession concerns.

But it isn’t just the price of materials that is impacted; the lack of construction products also creates long waits for them to arrive and become available. These delays significantly affect contractors’ ability to meet their deadlines and complete a project as planned.

The increased costs of construction materials can greatly impact the construction industry, whether material price volatility is caused by an increase in demand for specific construction materials or supply chain disruptions are the culprit.

Be Proactive

While companies should always be proactive it is even more important to do so in an ever-changing economy. To prepare for rising inflation, companies should:

  • Analyze their market position and identify what prices should increase to align with competitors’ pricing.
  • Scrutinize product and service offerings to ascertain the highest cost increases with the lowest revenue potential and margins.
  • Minimize supply chain risk by diversifying orders based on the import source.
  • Research and detect products that have long lead times and strategize best practices to prevent products from being unavailable.

CREED LA is a non-profit coalition of labor organizations concerned about sustainable development in Southern California that comply with state and local laws. For more information on how LA Creed is having a positive impact on your community visit https://creedla.com.

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