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Construction Faces Tumultuous Year, Says AGC Economist

Nonresidential construction will experience wide variance in demand, materials cost and labor availability, according to the Construction Inflation Alert released recently by the Associated General Contractors of America (AGC). In the report, AGC Chief Economist Ken Simonson says that in 2008 some nonresidential segments, including power and energy, will continue to grow, but that others, such ...

April 14, 2008

Nonresidential construction will experience wide variance in demand, materials cost and labor availability, according to the Construction Inflation Alert released recently by the Associated General Contractors of America (AGC).

In the report, AGC Chief Economist Ken Simonson says that in 2008 some nonresidential segments, including power and energy, will continue to grow, but that others, such as lodging, will slow down.

"Diesel, copper and steel are among materials costs likely to accelerate, while others remain benign," said Simonson.

The large increase in the price of diesel fuel and its importance to highway construction will likely drive up highway costs even more. Conversely, the slumping demand and rising supply of gypsum products may mean nonresidential and multi-unit residential building costs go up a little less than 6 percent.

Simonson said it is likely the construction PPI will accelerate from the 4.5-percent rate of increase seen in 2006 and 2007 to the 6- to 8-percent range by the end of 2008.

Beyond 2008, two factors make it likely that construction costs will continue to rise by 6 percent to 8 percent per year: First, many construction commodities, such as diesel fuel, steel and copper, are in demand worldwide. Second, construction will always depend on delivery of heavy, bulky, relatively low-value materials for which transportation and fuel are a major part of the delivered price.

Labor accounts for roughly half the cost of a construction project. In 2007, despite the high level of nonresidential activity, contractors were generally able to find enough workers, thanks to a massive redeployment of specialty trade contractors from residential to lighter nonresidential projects.

"In 2008, I expect labor shortages will worsen for a few crafts, pulling average wage rates higher, but in other segments such as residential specialty trades, the supply of some crafts will be plentiful," noted Simonson.

Simonson expects wages in nonresidential construction to rise by 4.5 percent to 5.5 percent in 2008, and by 5 percent to 6 percent in 2009, when residential work begins to compete again for some specialties.

For the complete AGC Construction Inflation Alert, visit www.agc.org/cia.

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