With demands, delays, and industry inflation on the rise, Ken Simonson, chief economist for the Associated General Contractors of America (AGC), has issued a sixth construction inflation alert since March 2021 — and differing from the rest, Simonson’s latest report cited a new main culprit in recent construction inflation: Diesel fuel.
“Fuel surcharges are common now, and there’s typically a separate line for delivery charges that are adjusted according to the change in price,” Simonson noted, adding that every increase in the price of diesel per gallon may directly lead to rising delivery fees for materials.
Diesel prices have jumped astronomically since the beginning of the COVID-19 pandemic— Simonson’s recent Construction Inflation Alert reports a 237% increase in price between April 2020 and February 2022. However, things have only gotten worse in the past months. As the report highlights, the Russian attacks on Ukraine have caused another sharp increase in supply chain interruptions — and price changes, especially that of fuel. Diesel has seen an increase of 33% over the five weeks prior to March 14, 2022, leading to an all-time high price of $5.25 per gallon.
“This period is unique in how broad-based price increases are,” said Simonson. “Previously, we’ve seen just a limited number of items soaring in price. This time, it’s much more extensive in the number and magnitude, long lead times, unexpected shortages and things not showing up in the quantities or times expected.”
Diesel isn’t the only factor at play, of course. Steel mill products, lumber, copper and brass, plastic, and drywall have all seen prices jump by significant amounts during the same period.
Contractors are, unfortunately, already directly feeling the impact.
“Suppliers are constantly repricing, and they’ll only hold their prices for 24 hours,” said Barry Wurzel, president and founder of Austin, Texas contractor Wurzel Builders. “Owners haven’t embraced the change of pace yet, so it puts a strain on the relationship with general contractors.”
Though contractors are already feeling the pain, these new issues with materials pricing may make a larger impact on other vulnerable parts of the industry.
“The area that’s probably most at risk at the moment is residential,” Simonson said. “We’ve seen extremely rapid increases in 30-year-fixed mortgage rates as well as house prices themselves. That suggests this huge increase in demand for single-family homes in particular is going to diminish at some point, and maybe very abruptly.”
That’s a big problem for construction as a whole — residential projects have been one of the most profitable parts of the industry during the pandemic, with spending on residential construction projects rising by nearly 60% in 2021.
Just like everyone else, experts are hoping for the end of these difficulties, but they’re finding it hard to see where that end may come from.
“I wish my crystal ball were clear enough to predict when this would be over, but if I’ve learned anything from this period, it’s that there always seems to be something on the horizon that keeps us from getting back to so-called normal,” Simonson said.