Supply vs. Demand Driving Material Costs

Contractors, architects and their customers around the country have dealt with a large upswing in material prices during the past few years, but Sam Hollis has been managing cost increases for much longer.
Hollis, who founded Milestone Construction of Springdale in 2004, said the Northwest Arkansas building boom has driven up prices for construction materials steadily for the 14 years he’s been in the industry.
“There’s definitely a supply and demand factor in Northwest Arkansas,” Hollis said.
That tried-and-true economic principle could fill a textbook with the examples of price hikes in the last three years, and especially in the months following Hurricanes Katrina and Rita in the fall of 2005.
Natural disasters, labor problems, factories problems, fuel prices and increasing steel exports to developing economies like China have put the squeeze on every facet of the construction business.
A strike at a New Zealand mine is one reason copper prices have nearly tripled in the last three years. According to U.S. Department of Labor statistics updated in November 2006, copper ores are at 273 percent of their levels from three years ago and 64 percent more expensive than last year.
PVC, a byproduct of natural gas, is 31 percent more expensive than three years ago but 24 percent lower than last year as recovery continues from the Gulf hurricanes.
A PVC factory in Texas stopped production in October 2005 after an explosion killed 11 people, which along with high oil costs has raised the price of plastics for everything from plumbing to wire conduit to vinyl siding.
High oil prices have also led to a spike in diesel fuel prices, which affects everything from production to delivery to construction. Diesel prices dropped 22 percent in the three months prior to the report, but are still at 105.6 percent of the cost from three years ago.
Gypsum, used in drywall, is 54.5 percent higher than three years ago.
Steel, which isn’t traveling as quickly to China as in the past few years because of increasing subsidies by China for its domestic steel industry, is also up.
Steel products are up from 28 percent to 83 percent in the last three years.
Hollis, who only does commercial construction, said his company tries to stay adept at managing rising costs. While there has been a slight decline nationally in prices thanks to some oversupply caused by the housing slowdown, Hollis expects prices to continue to rise.
Reed Construction Data projects construction costs to rise 6 percent to 8 percent in 2007 compared to 2 percent to 2.5 percent inflation for the overall economy.
The key, Hollis said, is having the contractor involved in the building process early and often.
“A lot comes down to good communication with our suppliers. You can’t predict natural disasters. We do the best we can, but it’s trying to hit a moving target.”
On a hard bid project — where each contractor bids based on the same specifications with the low bid winning — being able to predict cost overruns is vital.
Value engineering can reduce building cost with less expensive alternative materials.
There can also be simple fixes for architects by designing scaled-back buildings. Carpet or tile instead of marble flooring or less pricey light fixtures can all make a difference.
“Hopefully that eliminates some of that ‘sticker shock’ after the fact,” Hollis said.