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Source : NASA
September 30, 2020
Author : Patty Rodridguez
Construction costs are down for the first time in a decade due to the coronavirus pandemic. It’s cheaper now for companies and individuals to hire home remodelers, paving contractors, and many other small construction related businesses.
Yet with material prices up, construction businesses appear to be getting squeezed at both ends.
Earlier this month, Turner Construction (the largest construction management company in the United States), described in its Building Cost Index report that for the second quarter of 2020 its “Cost Index—which measures costs in the non-residential building construction market in the United States… a 1.01% quarterly reduction from the First Quarter 2020.” It’s the first time construction costs have fallen in the past 10 years according to Turner’s criteria..
“Trade contractor competition has increased in many areas as they work to secure backlog due to uncertainty they have about future opportunities,” said the Turner vice president responsible for compiling the Cost Index, Attilio Rivetti. “We expect the third quarter will serve to more clearly define the fluctuation of escalation of cost in the construction industry.”
Highlighted by Construction Dive, the chief economist of the Associated Builders and Contractors’ (ABC) trade association shared Rivetti’s concern over increased competition, saying "the average construction firm leader is more concerned about demand for their services than any other consideration, including skilled worker shortages."
Nearly 40 percent of contractors expect their profit margins to shrink over the next 6 months, according to an ABC press release. “For many contractors, lack of demand for their services has emerged as the leading source of concern due to the COVID-19 pandemic, followed closely behind by a fear of inflation and a potential increase in materials prices,” the release quotes ABC Chief Economist Anirban Basu. “Contractors are also reporting greater competition for projects, which is consistent with suppressed profit margins.”
Meanwhile, rising prices are hitting contractor’s where it hurts, largely driven by fuel and lumber costs, according to a separate press release. The biggest increase was crude petroleum, which rose 71.9 percent.
“While the recent rise in energy prices receives much of the attention, the price of softwood lumber is up nearly 19 percent over the past 12 months and was up 11 percent in June itself,” Basu said. “With global supply chains buckling and trade tensions elevated, materials prices are more likely to ratchet higher, even in the context of a global economy that will shrink markedly this year."
Other estimates say prices are higher. As journalist Jenn Goodman points out, the National Association of Home Builders finds that lumber prices have gone up 50 percent since April 17. Largely driven by lumber mills closing or reducing output and demand being higher than expected.
Additionally, because many construction businesses hire undocumented migrants, the payroll and workforce information they may have used to apply for relief through the Small Business Administration’s Payment Protection Program may not actually reflect the company and the amount of relief it needs in order to keep its workers employed and the business running at full capacity. This could place further strain on construction businesses as well.
The situation is dynamic but, as the National Association of Home Builders observes, predictions about how the residential construction industry would fare during the pandemic have proven more pessimistic than the market is currently reflecting.