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Inflated construction input and commodities prices – Need to panic?

The US Bureau of Labor Statistics released Producer Price Index (PPI) data for March 2023, and according to Associated Builders and Contractors (ABC) analysis of that data, construction input price shows a 0.2% increase compared to February 2023. Although these prices are 0.9% lower than they were a year ago, they remain 39% higher than in February 2020.

The data also shows that Nonresidential, Industrial, Commercial, and Healthcare construction input prices rose by 0.4% in March 2023.

Construction input prices increase

Following the data release, ABC’s Chief Economist Anirban Basu said “Construction input costs are down on a year-over-year basis for the first time since August 2020. The good news is that the latest PPI data, which show broad-based declines in both goods and services prices, suggest that the expected 25 basis point interest rate hike at the Federal Reserve’s May meeting will be the last of the cycle.

Volatility in prices of construction commodities

The US Bureau of Labor Statistics also crunched data on construction commodities. The cost of building materials has been on the rise since early 2020. COVID-19 and consequent global lockdowns only made things worse. While there are signs of recovery, increasing infrastructure demand and some supply chain disruptions persist, and industry experts predict that prices will remain high for the foreseeable future.

In March 2023, the prices of construction commodities were volatile. A slight increase was seen in Adhesive and Sealants, Concrete Products, Steel Mill Products, Insulation Materials, and Fabricated Structural Metal Products, and decreases were observed in Copper Wire and Cables, Natural Gas, Gypsum Products, Lumber, and Wood Products, and Crude Petroleum, compared to February 2023.

Considering the prices before COVID-19, i.e., February 2020, they have generally trended upward, with significant increases seen in Iron and Steel, Natural Gas, Steel Mill Products, Unprocessed Energy Materials, and Crude Petroleum, all of which have risen by over 50%. Other commodities like Plumbing Fixtures and Fittings, Concrete Products, and Softwood Lumber, have seen more moderate increases, ranging from 10-45% of their February 2020 prices.

The below graph shows just how much prices have increased.

The construction commoditise prices have increased in March 2023

Increase in construction input and commodities prices: What does it mean?

This spike in construction input and commodity prices is a cause for concern for builders, developers, and consumers alike. From lumber and steel to insulation and concrete, the cost of materials needed for construction projects has increased dramatically, and it will only result in difficulty in constructing new homes, commercial spaces, and other infrastructure.

Rising building prices can also harm other aspects of the economy, such as consumer spending and inflation rates.

PPI graph March 2023

“The bad news is that this data indicates greatly diminished pricing power among wholesalers and others,” said Basu. “While some will cheer the notion that rate increases are set to end soon, the Federal Reserve may want to maintain higher interest rates for longer to ensure that inflation has been suppressed. This, along with other signs of slowing economic activity, suggests that the possibility of recession remains elevated, though the economic outlook is increasingly uncertain.”

It’s unlikely that the prices will come back to pre-COVID levels, or at least to normal levels compared to current prices, any time soon. This doesn’t mean construction will stop, right? The demand for new infrastructure isn’t slowing and there is now a dire need to add a sustainability touch to construction!

What are the possible solutions?

The increased costs will have a broad impact across the AEC sector, with smaller firms in particular needing to find solutions that balance cost management with maintaining high-quality work. Here are a few cost-effective solutions that we think might benefit them-

Cost-cutting measures

Construction companies can explore ways to reduce their expenses, such as finding more efficient processes, saving on overheads by collaborating with a CAD outsourcing service provider, or renegotiating contracts with suppliers.

Use BIM and AI for better pre-planning

BIM (Building Information Modeling) and AI in construction are great cost-efficient solutions if used properly. By studying BIM’s 3D models, you can make informed decisions about using the right material and AI can help in optimizing workflows and making build environments safer.

Growth of AI in Construction – Creating safer, optimized build environments

Design efficient buildings

Design better! Once again, leverage the power of BIM to find the most efficient design for your project. A building that requires minimum HVAC systems will not only save costs but also be sustainable. Need inspiration? Think of The Sun Queen, Mária Telkes, whose Dover Sun House from 1948 is a great example of sustainability in construction!

In conclusion, we would like to say that while things look bleak right now, there is always a solution. Yes, the costs are rising and there is the added pressure of achieving net zero, but there is always a solution. Look harder!

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