Fall 2006 issue of Horizons

INDUSTRY CONTRACTORS Construction Materials Cost Trends And Forecasts

Mark Jansen, CPA

Frank Hogg, CPA

Increased materi- al costs were a major concern during 2005 and they continue to plague contrac- tors during 2006.

Construction materials are expected to continue rising at an 8-10 percent rate as compared to consumer and price indices of 3-5 percent. The Institute for Supply Management issues a monthly survey of purchasing managers. The sur- veys during 2006 have consistently reported construction overall as “rising in price,” as well as several inputs important to the construction industry: asphalt, building materials, con- crete, copper, diesel fuel and freight. More recent surveys, however, have listed steel as spiking in price and show that steel, stainless steel products and copper are in short supply.

Several key material components have increased sharply during the 12 months ended Dec. 31, 2005, and have shown no signs of slowing down based on the 12 months ended May 31, 2006:

Although cement prices have continued to increase in 2006, the industry is not experiencing supply shortages as in 2004 and 2005. In gener- al, construction demand continues to be strong and the prime driver for expectations of contin- ued material price increases. However, the out- look by segment varies, as does the impact on certain materials. Residential construction grew during the first four months of 2006 as compared to 2005. This seg- ment is expected to slow. Mild weather during January and February is believed to have accel- erated spending, which is expected to lead to a

2005

2006

Asphalt

17.8% 48.4% 46.3% 40.3%

Diesel fuel

Concrete products 9.8% 11.3% Plastic construction products 22.6% 18.0% Gypsum products 18.2% 26.4% Copper ores 34.1% 75.9%

Many of these products, such as copper, diesel and gypsum, had already experienced double-digit annual price increases before 2005. Steel mill products leveled off with a decrease of 3.6 percent in 2005 and an increase of 3.8 percent in 2006 after experiencing a 48.8 percent increase in 2004. Overall, materials and components for construction were up 6.1 per- cent and 7.8 percent for 2005 and 2006 respectively, as com- pared to the consumer price indices of 3.4 percent and 4.2 percent for the same periods.

sharper slowdown. As such, gypsum products (used for dry- wall), which showed sharper increases in 2006, are expect- ed to level off. Similarly, highway construction increased in 2006 over 2005, due in part to the mild winter months, which allowed an accel- eration of spending.

35 • summer 2006 issue

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