Contractors staying busy, but costs rising

Building contractor associations in the United States are reporting full order books for nonresidential contractors in the U.S., but also concern regarding the rising costs of building materials.

The Washington-based Associated Builders and Contractors (ABC) says its members experienced a “big increase” in average project backlog rates. Meanwhile, the Arlington, Virginia-based Associated General Contractors of America (AGC) has pointed to federal government producer price index figures on building materials as a potential sign of future troubles.

ABC says a member survey it conducted from Feb. 20 to March 6 has revealed what it calls a big increase in the organization’s Construction Backlog Indicator. The indicator increased to 9.2 months in February, a reading it says is 1.2 months higher than in February 2022.

The association says for the past four months the indicator has “hovered around highs not seen since the start of the pandemic.” The ABC’s Southern region continues to post the highest backlog of any region and, as of February, has had at least 11 months of backlog in four of the previous five months.

“Despite a gloomy economic forecast and extraordinarily elevated borrowing costs, contractor backlog and confidence continue to rise,” says ABC Chief Economist Anirban Basu. “This mirrors the broader economy, which has thus far proved resilient in the face of rising interest rates. While economic strength, particularly regarding labor demand, is surprising, interest rate increases typically take 12 to 18 months to affect the broader economy, and the first interest rate increase occurred in March 2022.”

That timeframe means the countdown clock could be ticking on other positive metrics tracked by ABC. ABC’s Construction Confidence Index reading for sales, profit margins and staffing levels increased in February. “All three readings remain above the threshold of 50, indicating expectations of growth over the next six months,” states the group.

“While backlog remains at a historically elevated level, borrowing costs will continue to rise during the next several months, and contractors continue to struggle in the face of skilled labor shortages,” said Basu. “If economic momentum fades this year, as a majority of forecasters continue to predict, then backlog and confidence may decline, especially for contractors working predominantly on privately financed projects.”

AGC also points to building material costs as a source of concern. It says the price of materials and services used in nonresidential construction increased by 0.4 percent from January to February, outpacing the 0.1 percent increase in contractors’ bid prices.

The association points to government-maintained price indexes for metals, paving materials, cement and flat glass as among the problematic materials. AGC also points to a policy culprit, as the group is urging the Biden Administration “to rethink planned ‘Buy America’ limits on the materials firms can use on a broad range of projects that will make many key materials even more expensive.”

“Today’s price report shows that construction costs are not necessarily settling back to ‘normal’,” says Ken Simonson, the association’s chief economist. “A resurgence of prices for glass, metals, cement, and paving materials suggests many projects may get more expensive in coming months.”

Remarks Stephen E. Sandherr, the association’s CEO, “Limiting the availability of materials used on the billions in federally funded construction projects planned for the coming years will needlessly inflate the cost of construction and contribute to broader inflationary pressure. Instead, they should allow for the same kind of flexibility on federally-funded state and local projects that exists when the federal government procures its own construction projects.”