"It is really kind of scary," says Thad Pirtle, vice president of Traylor Bros. Inc., Evansville, Ind. He runs the contractor’s $175-million equipment fleet and says he is "very, very concerned about inflation" going into next year.

Equipment prices shot up over the past several months and are likely to hold steady in 2005. A cooling residential sector could bring some price relief although delivery times still are tight through mid-year, observers say.

"My only problem is the availability of machines," says Mike Morrison, equipment manager for demolition contractor Brandenburg Industrial Service Co., Chicago. High demand for earthmoving machines–especially hydraulic excavators–has dealer shipments stretching out six months, he says.

U.S. sales picked up 16% this year and likely will post 8.4% gains next year, according to the Association of Equipment Manufacturers, Milwaukee (see chart). AEM Chairman Charles R. Stamp, vice president of public affairs for Deere & Co., Moline, Ill., says producers are optimistic as they continue to recover from a multiyear "business slump."

That’s good news for shareholders but bad news for customers. Companies like Peoria, Ill.-based Caterpillar Inc. are reaping huge price gains. Even though national prices rolled back 1% in November, they still are 6% higher than 2003, according to U.S. Dept. of Labor. That’s six times the annual average increase over the last four years.

Summary - New ‘Rules’ Favor Inflation
Forecast - Escalation Slows But Costs will Remain High
Steel - Demolition Firms Trim Bids to Get at the Valuable Scrap
Compensation - Design Firms Put Lid on Pay, Bonuses
International - Inflation Makes Worldwide Gains
Equipment Manufacturing Forecast, 2004-2005
Diesel Fuel and Equipment Prices

Equipment manufacturers continue to justify prices by blaming high steel costs. Matt Lamacki, sales manager for Patten Industries Inc., a Caterpillar dealer in Elmhurst, Ill., says it’s typical for Cat to start off the year with a price increase. But this year, "there was a [second] price increase in July," he says.

Jim Owens, Caterpillar Inc. chairman and CEO, is forecasting 2004 revenue to be up 30% and profit per share up 80 to 85%. He sees next year’s sales up 10%. Stock analysts note that Cat has posted a 3% list-price increase effective Jan. 1.

Other firms appear equally bullish. Bermuda-based Ingersoll-Rand Co. told analysts it realized 2 to 3% price gains for roadbuilding and Bobcat equipment during the third quarter. Terex Corp., Westport, Conn., announced a 4 to 6% price hike on cranes effective Nov. 1.

Dealers’ hourly rates for field service are going up, too. Rates were $60 to $65 a few years ago. Today, "I don’t think you’ll find anybody for less than $75 to $80," Pirtle says. Dealers in large metropolitan areas are charging nearly $100 per hour. "We’re just seeing the tip of the iceberg," Pirtle warns.

Costs for fuel and other consumables, such as grease and filters, are added concerns for contractors. "I think finally folks are discovering that they need to manage fuel," says Mike Vorster, professor at Virginia Polytechnic Institute & State University, Blacksburg.

Average prices in early December for on-highway diesel fuel were 59% higher than the same time last year, according to U.S. Dept. of Energy. National diesel prices fell 4.7%, to $2.07 per gallon. Analysts expect petroleum prices to remain high next year.

o matter how large or small, construction equipment fleets are feeling a one-two-three punch for machinery, fuel and support costs this year. Continually rising insurance premiums, rental rates and employee wages will keep estimators on guard in 2005.