Contractors are warned about potential price inflation

February 18, 2021

An Associated Builders and Contractors analysis of information provided by the Bureau of Labor Statistics shows construction material prices rose 2.5% from December 2020 to January, according to www.abc.org. On a year-over-year basis, the price of construction materials increased 4.8%.

Nonresidential construction material prices rose 2.1% from December 2020 to January and increased 4.2% compared with one year ago. Softwood lumber prices are up 73% year-over-year, and iron and steel prices are up 15.6%.

“Contractors beware: the inflation story is real,” said ABC Chief Economist Anirban Basu. “They say the cure for low prices is low prices. Early in the COVID-19 pandemic, several key commodity prices declined substantially, causing a diminished incentive for suppliers to invest in capacity augmentation. The result is that as demand increases, scarcity builds, and those low prices disappear. Eventually, suppliers respond by investing more aggressively in capacity given the pursuit of higher sales amid higher prices, which eventually results in the pendulum swinging back toward lower prices.”

However, Basu said it is different this time because COVID-19 vaccine distribution is accelerating, and global demand for steel, aluminum, oil and other productive inputs is expected to surge later this year. This could cause construction input prices to surge substantially.

“Contractors must be mindful of potential rapid input price inflation as they enter into new contractual obligations,” Basu said. “Given the softness in demand in a number of key nonresidential construction segments, the temptation may be to bear the risk of future price increases in exchange for increasing the likelihood of securing new work. That strategy may work out, but estimators, attorneys, executives and others should be aware that the accompanying risks of such approaches are elevated.”

Tags: Trends

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