Finance
Russia Cost Hikes May Fall on Contractors, Not Owners, Expert Says
Ukrainians shelter under a bridge in Kyiv on March 5.
Photo by Mvs.gov.ua/Wikimedia Commons/Creative Commons Attribution 4.0 International
As the Russian invasion of Ukraine drives up commodity prices, and similarly, materials costs, many contractors may have unrealistic expectations about their ability to pass along the increases to project owners, warns Anirban Basu, CEO of Sage Policy Group and chief economist for the Associated Builders and Contractors.
The conflict is exacerbating pre-existing issues for job owners and suppliers that are elevating bids and delivery costs, Basu told the Construction Users Roundtable (CURT) in a presentation April 1. But despite those rising costs, he added that recent surveys of ABC members have shown that they expect sales, employment and profit margins to rise in the coming year.
“That's the one that has shocked me, because what the contractors are saying is, ‘We think we can pass along these cost increases to construction users, to the project owners," Basu said, "and I've been saying, I'm not so sure that's true.”
The $1.2-trillion Infrastructure Investment and Jobs Act will keep contractors working on public projects busy for the foreseeable future, but Basu said he’s worried about private construction.
A decline in residential construction jobs in March may be linked to housing construction slowing amid rising interest rates. Basu expects that slowdown could extend to private nonresidential construction sometime next year, or possibly later this year. Plus, interest rates are moving up as the Federal Reserve looks to curb inflation, and it remains to be seen how the Fed’s efforts will pan out.
“So I’ve been surprised that the contractors have been so optimistic, particularly about profit margins,” he said.
The economic impacts of the invasion may extend for years beyond the end of the war.
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Russia is one of the top exporters of metals used in construction materials such as iron and steel, aluminum and nickel, World Bank data show. Since initiating the invasion, Russia has also become the world’s most sanctioned country, with more than 5,300 sanctions added since Feb. 22, in addition to about 2,700 in place before, according to compliance screening platform Castellum.AI.
Those sanctions likely won’t go away when the war ends, Basu said. Many of them could remain in place for years, limiting access to Russian materials in the West.
The added sanctions mean there’s an opportunity for the U.S. to displace Russia as a natural gas supplier for Europe, and to export more oil, Basu said. However, he noted that U.S. oil producers have not been significantly increasing their rig count, and the Biden administration has limited some pipeline projects as it looks to promote clean energy development.
“So if we're going to use oil in this country, or if the world's going to use oil, I would rather see the Americans gain market share,” he said. “And certainly for our own needs, I would rather see us gain market share and pipeline capacity—our energy has to be able to move. So I would say that some of this policymaking has to be rethought.”
