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The most recent “Construction Inflation Alert” issued by the Associated General Contractors of America (AGC) warned that material and labor cost increases should be anticipated in setting budgets for 2008. AGC predicts the acceleration in costs and labor rates in 2008 will exceed those experienced this year.
According to Kenneth Simonson, chief economist for the AGC, material prices will again rise significantly in 2008. Simonson acknowledged that the surging costs slowed dramatically in 2007 because of reduced residential construction and, in most areas, available labor. But he warned that material costs have started rising and labor costs have started to accelerate.
The AGC reported that after years of minimal cost increase, the prices of many construction materials soared from 2004 to mid-2006. Although there has been some moderation in the increases of construction inputs over the last 18 months, Simonson reports that in the next several months the producer price index (PPI) for construction inputs is expected to accelerate to a three to five percent annual rate of increase. While material shortages and worldwide demand may be a significant driver of costs, the unpredictable price of diesel fuel may disrupt any planned accommodation of rising prices.
According to the AGC, the cumulative increase in the PPI for construction inputs between December of 2003 and August of 2007 has been more than 28 percent. This is more than double the cumulative rate of increase for the Consumer Price Index (CPI), used to measure cost inflation in urban areas. The difference is significant because many government agencies and private companies create capital spending budgets assuming that construction costs will track with the CPI. Since construction costs have increased so significantly compared to the CPI, many projects have been canceled, delayed, or redesigned.
AGC’s “Construction Inflation Alert” can be accessed on their website at: www.AGC.org/Oct2007CIA.
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