Construction costs are bound to increase when demand is high and supply is low. Those facts are playing out across the country as Americans grapple with inflation, labor shortages, supply chain issues and other factors that may persist longer than anticipated. But why have building costs increased? This guide has what you need to know about construction cost increases and solutions that will help you overcome them.
Rising Construction Cost in the U.S.
If your experience on the job isn’t enough, these stats from housing and home improvement organizations, the U.S. Bureau of Labor Statistics and Associated General Contractors of America clearly show the rising construction cost in the U.S. How much did building materials increase since 2020? Gypsum products for sheetrock and drywall were up over 20% at the start of 2022 but have seen a slight cost reduction of just over 1% in recent months. The price of steel has been up nearly 75% since 2021, and lumber, especially softwood imported from Canada, has climbed about 80% during that time. Why Are Construction Costs Increasing?
Scan the list below, and you can quickly see why construction costs are increasing. From supply and demand to rising fuel prices and supply chain disruptions, there are many reasons why construction costs have increased.
Supply and Demand
Residential construction supply and demand have a direct impact on commercial construction. During normal economic downturns, homeowners assist with supply and demand by putting off home improvement projects. But the opposite has been true since 2020. Working from home and traveling less prompted homeowners to remodel, update and renovate their homes. The construction industry did not expect this uptick in demand. Furthermore, low-interest rates prompted record numbers of home sales and residential construction, especially for affordable housing. Simply put, supply could not keep up with demand. Rising costs, rising interest rates and other factors will influence demand, but the question remains whether supply can catch up.
Inflation
Inflation is at a 40-year high across all industries. In short, everything costs more. What is the current construction inflation rate, and how will it affect construction spending? While consumer prices for things like groceries and fuel have increased by over 8%, the construction industry has been hit much harder. Construction costs affected by inflation include virtually every aspect of the job. For example, concrete has gone up about 12% in the last year, according to the Producer Price Index, or PPI. Exterior paint prices are up 30%, and interior paint costs 21% more than in 2021. But that is nothing compared to softwood lumber, which has soared nearly 80%.
Rising Fuel Prices
Rising fuel prices have had a significant impact on construction spending too. Transporting materials to job sites costs more because of the increase in diesel fuel prices. Every vehicle and machine that runs on fuel has been affected too. If you need to transport workers to a job site, that cost has gone up as well. Though the price of oil is starting to decline, it takes time for those lower prices to be recognized at the pump.
Supply Chain Problems
Supply chain problems have been made worse by the pandemic and continue to disrupt the construction industry. Building materials are in short supply, and the resulting increase in costs has boosted project costs, which makes it difficult for contractors and subcontractors to bid on jobs. Moreover, it’s hard to predict how long the supply chain problems will persist. Port congestion has stalled deliveries in exporting countries and in the U.S. Labor shortages contribute to supply chain problems as well. In some cases, around the world, weather conditions have slowed the production of some building materials, which tightens the supply chain even further.
Labor Shortages
Construction and other trades have been affected by labor shortages for years. In addition, labor shortages often drive up labor costs. The challenge to find skilled workers is not new, and there has been a generational shift away from the trades. These struggles have been made worse by the current state of the economy, with inflation and supply chain issues hampering the construction industry. By some estimates, there are 25% more unfilled construction jobs than hires in 2022, according to real estate analysts. That need is unlikely to be met since the workforce is aging. The trade association Associated Builders and Contractors reports that 20% of construction workers are over age 55, which means one in five workers are set to retire in the next six years.
U.S. Government’s Infrastructure Plan
The U.S. government’s infrastructure plan, which took effect in early 2022, will increase the demand for commercial construction materials even further. However, it is not immune to the consequences of inflation, supply chain issues and labor shortages. That means fewer roads, bridges and tunnel projects will be completed as scheduled in states across the country. In all, $1 trillion has been earmarked for road and bridge construction nationwide. Bids are up to 30% higher than planned. The legislation that makes these projects possible is intended to be in effect for years, so if inflation goes down, the number of projects could increase.
Tariffs and Trade Issues
Tariffs and trade issues have also had a lasting impact on construction costs. Tariffs are a tax that is added to imported goods. For example, softwood lumber from Canada for home construction is subject to tariffs and, as mentioned above, has increased in price by nearly 80% in the past year. There is nothing you can do about tariffs and trade issues, but it’s true they affect your construction jobs if any of the raw materials you need are imported from other countries. The government controls tariff policies and can change or remove the rate at any time. That makes it difficult to manage construction budgets. Uncertainty around tariffs can cause delivery delays and vendor pricing.
How Much Construction Materials Have Increased?
There is no question costs are up industrywide, but exactly how much have construction materials increased? The answer varies depending on what type of materials they are. Overall, building materials prices have increased 20.4% from 2021 to 2022, according to the Producer Price Index Report from the U.S. Bureau of Labor Statistics. Since March 2020, with the start of the COVID-19 Pandemic, building materials prices have risen by 33%. To make matters worse, services used in construction, such as trade services, transportation and warehousing, have increased 18.5% since 2021 and 39% since the pandemic began.
