An unexpected surge in material prices took ENR’s cost indexes on a wild ride this year. Steel prices started rising early in the year and quickly reached record highs. This was followed by steep increases in lumber prices during the first half of the year. Even the long docile cement prices started to succumb to regional shortages during the summer, leading to the largest price hikes for cement in over a decade. By December, these higher prices had pushed the materials component of ENR’s indexes 20% higher than a year ago.

ENR’s Building Cost Index was affected the most by the spike in prices, ending the year 9.7% higher than 2003. The Construction Cost Index posted a 7.8% annual increase. ENR believes the impact from higher material prices on industry inflation has played out and by December of next year inflation will ease back to its former pace. ENR is forecasting a 3.6% increase for the BCI and a 3.5% increase in the CCI in 2005.

The most critical element in forecasting ENR’s indexes is labor costs, which account for 81% of the CCI and 66% of the BCI. In 2004, ENR found union wage and fringe benefits averaged annual gains of 4.5% for skilled workers and 4.9% for laborers in the 20 cities it tracks. This was slightly higher than the 4.1% national average increase reported by the Construction Labor Research Council, Washington, D.C. Multiyear collective-bargaining agreements reported by CLRC call for another 3.9% increase next year.

ENR’s forecast calls for the labor component of its indexes to hold close to the increases already negotiated for next year and predicts a 4.1% increase for its Skilled Labor Index and a 4.4% increase for the Common Labor Index.

The outlook for materials costs next year follows market forecasts that call for a mild decline in residential construction while office, commercial and industrial building work all continue to strengthen (ENR 11/15/04 p. 26).

McGraw-Hill Construction Dodge is forecasting a 3.3% decline in the dollar value of new single-family housing next year, which should help undercut lumber prices. In addition, the battle over tariffs for imported Canadian lumber appears close to being settled. A preliminary ruling by the U.S. Commerce Dept. indicates that the tariff on Canadian lumber imports could be cut in half. Some industry observers believe tariffs will be eliminated altogether.

Washington, D.C.-based forecasting firm Global Insight Inc. predicts that the producer price index for softwood lumber will decline 3.4% next year after averaging a 25% increase in 2004. ENR’s forecast is for the lumber component of its in-dexes to decline 8.7% by the end of next year.

McGraw-Hill Construction Dodge is forecasting an 8.3% increase in the value of new nonresidential building work in 2005, including gains of 12% for office buildings and 14% for industrial work. This will prop up demand for structural steel at the same time that the weak dollar helps restrict imports. Global Insight predicts that prices for light structurals will slip 1.7% next year after jumping 69% in 2004. However, some of this year’s increase won’t be reflected in ENR’s indexes until the first quarter of next year and, as a result, ENR’s forecast is for the indexes’ steel component to increase another 10.3% in 2005, after rising 31% this year.

The Portland Cement Association, Skokie, Ill., is forecasting cement consumption in 2005 to increase another 3%. This will keep markets tight and ENR predicts that its cement price will increase another 4.5% in 2005.