Materials price escalation switched gears in 2005 as petroleum-based products took the lead from steel prices, which fueled inflation in 2004. The latest round of double-digit price increases for copper, plastic, gypsum and asphalt products are not driving inflation as hard as steel prices did in 2004.

The annual inflation rate for 11 general building and valuation cost indexes fell from 8.5% a year ago to 5.5% this quarter. But this is still well above the average annual increases posted before 2004 (see chart).

One of the largest annual increases for this group of indexes was 7.8% recorded by a new index compiled by the Bureau of Labor Statistics, which measures the cost of building a new warehouse.

Related Links: Economics: Energy keeps driving inflation Big Box: Home stores impacting materials Copper: Prices jump 40% over a year ago Labor: Employment hits record high Methodology: Inflation’s major drivers Indexes: How to use ENR's indexes City Indexes: Costs from Atlanta to Seattle Previous Cost Reports ENR.com's Construction Economics Section 1 Q Cost Report 2006 The complete first quarterly cost report 2006 cover story with all data and analysis is free to ENR subscribers but can also be purchased for only $12.95. click here for more information.

Inflation measured by ENR’s Building Cost Index fell from a peak of 10.3% in October 2004 to 5.4% last January, the latest period for which data is available for all indexes. ENR’s index for March shows the annual rate of increase for the BCI slipping to 4.9%.

Indexes measuring the selling price of construction are increasing at about twice the rate as the general building and valuation indexes, which only measure the input costs of materials and labor. Three selling prices indexes measured a 10.1% annual increase this quarter, about the same as a year ago.

One of the most significant trends in industry inflation over the last year has been the growing gap between the average rate of increase for the selling price indexes and general purpose indexes. Both groups of indexes moved in tandem when inflation was ramping up, indicating that most inflation was a reflection of higher materials prices. But over the last year, the gap between the annual escalation rate of these two groups of indexes has grown to 5.6%. This would indicate that contractors are able to pass on most of the higher costs of materials and that margins are improving.

Lee Saylor produces both a selling price subcontractor index and a general materials and labor cost index. The subcontractor index is up 12% for the year, more than double the increase of the materials and labor index.

“The volume of construction activity, cost pressure on materials and the availability of skilled labor are the primary elements driving cost escalation,” says Karl F. Almstead, who puts together the Turner selling cost index, which is up 11% over a year ago. “Concerns over energy costs remain, along with questions of the impact and timing of rebuilding  following Hurricane Katrina.”

(Photo by Michael Goodman for ENR)