It is no secret that the price of construction materials has increased dramatically over the last three years. The price surge has been attributed to COVID-19, foreign wars, and other events throughout the globe, such as a Suez Canal blockage and an unprecedented ice storm in Texas, among other reasons. Consequently, through the use of allowances, contingencies, and other contract mechanisms, owners and contractors have been apportioning in unique ways the risk associated with these inflationary pressures. It was not unusual for a hard bid or a guaranteed maximize price (GMP) contract to have carve-outs for certain material price escalations. Even today, delivery times for some products, such as electrical switchgear, have been extended by certain suppliers.
But perhaps 2023 marks an inflection point? The producer price index for “Final Demand Construction” and “New Industrial Building Construction,” below, issued by the Federal Reserve Bank of St. Louis, both indicate prices have generally flattened this year, albeit with a slight uptick the last few months. From this author’s perspective, more contractors are willing to provide a hard bid or GMP without carve-outs for material price escalation. This could be a function of both lower inflation in the market as well as fewer construction starts, meaning more competition.
U.S. Bureau of Labor Statistics, Producer Price Index by Commodity: Final Demand: Final Demand Construction [PPIDCS], retrieved from FRED, Federal Reserve Bank of St. Louis (Oct. 30, 2023), https://fred.stlouisfed.org/series/PPIDCS.
U.S. Bureau of Labor Statistics, Producer Price Index by Industry: New Industrial Building Construction [PCU236211236211], retrieved from FRED, Federal Reserve Bank of St. Louis (Oct. 30, 2023), https://fred.stlouisfed.org/series/PCU236211236211.