Why is the Price of Construction Materials Increasing?
There is a perfect storm of interacting forces driving construction material prices upwards at an unprecedented rate. The easy explanation is reduced supply and increased demand, but that oversimplifies a complex environment.
SUPPLY:
On the supply side, there is a reduction of material that dates back to the start of the pandemic. When everyone got locked down in March 2020, the manufacturing plants also shut down. Suppliers were left with relatively large inventory and no demand.
Once the lockdowns started to lift, manufacturing plants were often sites for breakout cases and would shut down for several weeks at a time. As demand returned, most manufacturers were happy to be making profits again rather than investing in increasing capacity.
DEMAND:
Pre-COVID construction in 2019 was slightly less robust than in 2018 but still healthy. As people were stuck at home for an extended period after the initial COVID lockdown, many began to plan and start home renovation projects. Some projects were driven by need (i.e. working or attending school virtually); others by desire (long considered kitchen and bath renovations, outdoor living spaces like firepits, outdoor kitchens, pools, etc.).
Folks were not traveling, attending events, or eating out in restaurants, so there was excess money to be invested. Residential construction starts surged, while commercial and institutional construction projects resumed their previous pace.
SUPPLY CHAIN ISSUES:
White collar jobs can more easily shift to virtual modes. But construction, trucking, shipping and warehouse jobs are primarily conducted in person. Absenteeism due to COVID and many lower wage workers not returning to the workplace during the Federal stimulus program began to have a domino effect on the supply chain:
- International and domestic manufacturing was disrupted.
- Dockworkers couldn’t unload shipments fast enough, leaving ships stranded offshore.
- There was little demand to send full shipping containers back to international countries as their economies were also in lockdown.This created an asymmetrical bottle neck and shipping container shortages in some areas.
- A reduction in short and long haul truckers left ports full of containers that couldn’t get to distribution warehouses.
INFLATION:
When commodities like construction materials are in short supply, there is upward pressure on prices. We have all experienced the effects of inflation, especially in 2022. Construction materials costs are up 17.5% year-over-year from 2020 to 2021.
The US Census Bureau says that’s the largest year-over-year increase in material costs since 1970. The increase is affecting everything from lumber, to concrete, to metal and hundreds of materials in between.
FUEL COSTS:
As anyone who has filled up their gas tank recently knows, fuel prices have increased dramatically since the start of the war in Ukraine. Diesel fuel, which most construction vehicles and equipment use, has increased almost 51% in 5 months. The national average cost per gallon rose from $3.72 in mid-January to $5.61 in mid-May, 2022.
Increased fuel costs have a ripple effect on all commodities. It pushes prices up on every step from obtaining raw materials, through manufacturing, to delivery to the end site.
CURRENT BUILDING MATERIAL PRICING CONDITIONS:
According to the latest Producer Price Index (PPI) report released by the Bureau of Labor Statistics, the prices of goods used in residential construction ex-energy (not seasonally adjusted) climbed 1.4% in March 2022, following an upwardly revised increase of 2.2% in February and 4.1% in January. This adds up to an 8% jump in building materials prices since the start of 2022.
Here’s how PPI for individual materials have shifted during this timeframe:
- Softwood lumber increased 6% (seasonally adjusted) in March 2022 following a 2.6% increase in February and 25.6% jump in January. As a result, the index increased 36.7% over the first three months of 2022. Since reaching its most recent trough in September 2021, prices have almost doubled, rising 90.4%.
- Gypsum products increased 1.6% (seasonally adjusted) in March 2022. Gypsum products prices are 20.8% higher year-over-year.
- Ready-mix concrete came down 0.6% seasonally in March 2022 but remains elevated after climbing over the prior 13 months. It is 9% higher compared to the January 2021 reading.
- Steel products, in contrast, declined 4.9% (not seasonally adjusted) in March 2022 — the third consecutive monthly decrease after record-breaking increases over the prior 15 months. Although the first three months of 2022 have been good months for the cost of derivative steel products, the price index more than doubled since the start of the pandemic.
THE FUTURE OF CONSTRUCTION MATERIAL PRICES:
What does the crystal ball see for the future of construction material prices? If my crystal ball was clear (and dependable), I would be in a different business than architecture (and probably making a lot more money). With the red-hot housing market driving certain markets, there appears to be little let up in residential construction.
Some large-scale production home builders are putting projects (or phases of projects) on hold until the supply and price of construction materials stabilizes. There are signs of slow downs in the commercial construction market, but this again seems to be more pausing rather than cancelling projects.
I don’t see any significant drop in construction material costs in the near future. Perhaps in the 4th quarter we will see some leveling out of supply chain issues and pricing. Remember that ultimately prices will respond to supply and demand.
Most manufacturers are not increasing supply capacity unless they can find the workers to add another shift, which is a challenge in the current labor market. Slowly-reduced demand could have a positive effect. But sharply-reduced demand would most likely be the result of a national or international economic downturn.
PARTNER WITH A PROVEN ARCHITECTURE AGENCY
My advice: if you’re moving forward with a construction project now, hire experienced architecture professionals who understand the macro and micro economic forces that affect construction costs. Plan and schedule your project carefully and keep a contingency in your budget to cover unexpected costs or inflation of material or labor costs.
