Inflation maintains a steady grip on headlines as the US consumer price index increased a further 1.2% in March 2022, and is up by 8.5% over the last 12 months. But it’s not just consumers that are feeling the pressure of higher prices: The Associated Builders and Contractors (ABC) recently reported that construction input prices increased by nearly 3% in March — more than double that of the normal consumer price index in the same period.
“Consumers are right to complain about inflation, which has been north of 8% during the past year,” said ABC Chief Economist Anirban Basu. “But America’s contractors have experienced materials price inflation nearly three times that during the same period. For now, there are few signs of relief.”
Contractors comment on inflation concerns
A recent post on Reddit suggests some contractors are taking action in order to prevent inflated materials costs from eating into their bottom line.
“I’m a self employed carpenter and I’m considering raising my labour rates 10-15%,” wrote the original poster. “It’s not really what I want to, but obviously everything is getting more expensive and why should I be under selling [sic] myself? Everyone is charging more, so why shouldn’t I just because I’m ‘small time’?”
The post has since gained traction in the online construction community, receiving 25 “upvotes” and 39 comments over the last week. Many users claiming to be contractors have weighed in, offering encouragement and agreeing that instituting price increases is necessary in order to keep up with inflation.
“Material costs for my field are up 20-30% so we had no choice what [sic] to raise our rates,” wrote one commenter.
Contractors may not even be actively raising their rates, but increases down the payment chain have a way of working their way back up.
“I haven’t changed my mark-up on my subs, but all my subs cost [sic] have gone up,” wrote another user. “A 20% markup on 100k of work is 20k and then the same mark up on 120k of work is 24k, so inherently I have raised my prices.”
The construction industry as a whole is experiencing cost increases at rates not seen since 1970. Many contractors have been able to pass on the additional expenses to consumers — the skyrocketing price of lumber has contributed heavily to the booming housing market, adding an average of nearly $19,000 to the cost of a new home — but it’s clear that volatile prices are a source of difficulty for many.
There has been more than one lawsuit recently resulting from fallouts over the volatile price of construction materials.
Just last month, a New York lumber supplier sued a long-standing contractor partner after the contractor allegedly broke multiple purchase agreements worth almost $7 million to buy lumber elsewhere after prices collapsed last year. And, in March, a North Carolina supplier sued a contractor in a very similar situation when the contractor allegedly rejected a lumber order after the price changed drastically.
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While it’s not clear exactly how long this period of volatility will continue, it’s important to consider what may be next.
“For contractors, this is not where the inflation narrative ends,” continued Basu. “With inflation running hot, the Federal Reserve will have to work even harder to slow the economy to trim price pressures and expectations.”
“Recession risks are accordingly rising, and while that is unlikely to affect the level of contractor activity in the near term, that could eventually set the stage for a period when demand for construction services declines,” said Basu.
Raising prices can contribute to a healthier business, and can provide a cushion from unexpected financial problems. For property owners and general contractors, be prepared to see higher bids coming through for projects, at least in the near future.
Many subcontractors are actively putting upwards pressure on their rates, and rightfully so. As one Reddit user wrote, “If you’re not having a decent fraction of bids rejected you’re not charging enough.”