Building costs expected to rise again this year

The Construction Inflation Alert released this month by the Associated General Contractors of America reports that labor and material costs that have remained relatively steady during the past 12 months are set to climb during 2008.
AGC Chief Economist Ken Simonson compiled the report, much of which is based on the extrapolation of trends from U.S. Census Bureau and Bureau of Labor Statistics data.
“The bottom line: Owners, budget setters and contractors should expect larger materials and labor cost increases in 2008 than they have experienced in the past 12 months,” Simonson said in the report.
But will those increases affect Rhode Island, as well?
Greg Mancini, executive director of BuildRI, a coalition of unions and contractors, said that in the past, national trends have made their mark on the state, and he expects that to continue. There was a sharp increase in construction costs between 2004 and mid-2006, then a slowdown, he said.
“My sense is, from what I’m reading, that it’s going to go up, not a little but a quite a bit,” Mancini added.
Along with predictions, Simonson’s report offered insight into how construction trends changed year over year in August. Total national construction spending for residential and nonresidential building is expected to fall only about 1.68 percent year over year, from $1.19 trillion during 2006 to a projected $1.17 trillion this year, an estimate based on seasonally adjusted August statistics.
The markets into which those construction costs are being filtered have changed dramatically, though, based on the same August statistics.
The percentage headed into single-family home construction has fallen to 26 percent of total building costs from 35 percent of costs. That coincides with increases for both nonresidential and public construction spending, which are set to increase year over year by 5 percent and 4 percent, respectively.
The cost of labor for construction, too, is growing quicker than the rate of the industry – it’s had 1.5-percent growth so far during 2007, whereas the industry has seen 1.3-percent growth. Specialty labor, though, increased 4.7 percent during the same period. It’s likely, Simonson predicted, that increases in all labor will continue.
“It is likely that average hourly earnings in construction will rise at an annual rate of 5.5 percent during the next several months,” Simonson wrote. “If residential construction revives in the second half of 2008, specialty trade workers will be at even more of a premium, especially if there is a crackdown on immigration.”
But union contractors such as BuildRI members shouldn’t have trouble with rising labor costs, said Mancini.
But Rhode Island materials costs are tied directly to national and global trends based on supply chains and demand. So if the rest of the country sees an increase, as Simonson predicts, Rhode Islanders will also, Mancini said.
Charles Shaw estimates construction cost for Cumberland’s Hart Engineering Corp., a mechanical contractor working with mostly pipe and pump work. He said copper and stainless steel markets – both dependent on international market value – have not been steady and will likely continue that way.
“A lot of times if we give a client a quote, we have to really restrict the number of days that the quote is good for, because it really does fluctuate so much,” he said. “And, in some cases, we’d be soliciting prices from our vendors and they’d say, ‘These quotes will only be good for three days or five days.’ ”
One thing is certain, Shaw said: Material costs aren’t likely to drop.
“I can’t see where it’s ever going to go back down as fast as it goes up,” he said. “It’s like gasoline; it’s not going to go away.” •