Steel Markets

Labor Shortage and Material Costs Squeeze Construction Margins

September 17, 2018

Construction costs are escalating due to labor costs and tariffs on critical materials. Although declining 0.8 percent from July to August, prices for construction goods such as diesel fuel, steel, aluminum, asphalt and gypsum products have risen 6.2 percent since the beginning of the year, said the Associated General Contractors of America in a recent analysis of Labor Department data.

The producer price index revealed an increase of 33.9 percent for diesel fuel, 18.6 percent for steel mill products, 14.0 percent for aluminum mill shapes, 9.2 percent for asphalt paving mixtures and blocks and 8.2 percent for gypsum products. Adding to the margin squeeze is higher rates for freight shipments. The price index for truck transportation of freight has climbed 7.2 percent this year.

“Price changes for construction materials in August were mixed, but contractors are likely to be hit with additional cost increases as new tariffs take hold, as well as significant labor cost escalation,” said AGC Chief Economist Ken Simonson. “Prices for goods and services used in construction rose over the past year at nearly double the rate that contractors have raised their bid prices to put up new buildings.”

An index that measures what contractors say they would charge to erect five types of nonresidential buildings rose just 3.4 percent over the year, indicating that contractors were absorbing more of the costs than they were passing on to owners, said AGC.

Difficulty finding qualified craft workers has led to higher project costs as firms increase pay and benefits to train and recruit workers. The labor shortage has resulted in longer completion times and the risk of financial penalties.

“Contractors are having to pay more for many construction materials and workers yet appear to have limited ability to pass those costs along to their clients,” said Stephen E. Sandherr, the association’s chief executive officer. “The president and Congress can help by lifting costly tariffs on key construction materials and boosting investments in career and technical education programs.”