Construction contractors are being squeezed by rising materials costs and disappearing profit margins, based on analysis of the latest producer price index (PPI) conducted by the Associated General Contractors of America. The new figures show finished prices of nonresidential buildings dropped last year even though a number of construction materials prices have begun to increase in price, noted Ken Simonson, the association's chief economist.

"Contractors have not been able to pass on these cost increases, which is bad news for contractors but good news for anyone looking to build right away," Simonson stated. "Pressure is building on contractors to raise costs, however, so anyone waiting to build will pay more."

Simonson pointed to increased prices for a range of construction materials in the December PPI report. For example, copper and brass mill shapes are up 6.0 percent; prepared asphalt and tar roofing and siding products are up 5.2 percent; aluminum mill shapes up 2.1 percent; lumber and plywood up 2.0 percent; plastic construction products up 0.4 percent; and concrete products are up 0.3 percent

Simonson noted, however, that the price increases are not universal and some key material PPIs have recently dropped. For example, diesel fuel dropped 5.0 percent in December while steel mill products dropped 1.3 percent.

The PPIs for new nonresidential buildings, which includes overhead and profit as well as materials costs, were flat in December and fell between 2.4 percent and 4.3 percent for the year, depending on the type of building, Simonson noted. Meanwhile, the PPI for inputs to nonresidential building construction, a weighted average of the materials and diesel fuel used in construction, rose 0.2 percent and 0.4 percent, respectively.

"Contractors are swallowing the materials costs in order to stay busy," Simonson noted. He said that if present conditions continued for much longer a number of firms were likely to close up shop, which would cut competition and potentially drive up the cost of construction services."