- With the Russian invasion of Ukraine, U.S. contractors face a triple threat of war, inflation and supply chain snarls as they struggle to source building materials.
- The conflict is likely to drive fuel, copper and aluminum prices higher, while cargo ships in the area have been halted or delayed, wrote Ken Simonson, chief economist for the Associated General Contractors of America in his weekly Data Digest newsletter Friday.
- "The war in Ukraine and the West's response are likely to have multiple effects on construction materials costs and availability," Simonson wrote. The average price of on-highway diesel fuel was $4.05 a gallon last week, the highest level in almost nine years, he noted, with futures for heating oil, a close proxy for diesel, jumping another 12 cents. "The outlook for other materials is mixed."
Russia is a major producer of aluminum and copper, which had already surged 33% and 25% respectively, year over year in January. That means prices materials forged from those metals could balloon even higher.
The added pressures from the incursion come at a time when U.S. construction and shipping costs were already rising. Supply shortages, worsened by surging demand, have led to the largest annual spike of input prices to construction since 1987, when data collection began.
On average, input prices for nonresidential construction surged more than 24% over the past year, according to an analysis of the U.S. Bureau of Labor Statistics' Producer Price Index by the Associated Builders and Contractors.
"It's as bad as any time during COVID," Ernst & Young's global construction and engineering practice lead Erin Roberts told Construction Dive. "You've got all this demand after a brief pause shutting down the supply chain, and it's just causing havoc."
Inflation and IIJA
Even before Russia invaded Ukraine last week, the specter of inflation was already casting shadows over how much the $1.2 trillion in the Infrastructure Investment and Jobs Act can ultimately accomplish.
Construction costs for government buildings were up 13.2% year over year in January, according to the Bureau of Labor Statistics. The cost for the construction of highways and streets was up 20%, while steel mill products rocketed up 113%, and plastic construction products rose 35%, according to a recent article in the Wall Street Journal.
"As the cost of materials for these projects goes up, there are going to be fewer projects that you're able to do," Jim Tymon, executive director of the American Association of State Highway and Transportation Officials, told the Journal. "All of those factors are going to have an impact on just how far this influx of new federal funding is going to go in addressing our infrastructure problems."
State departments of transportation may consider less ambitious projects they can complete more quickly.
"There's this hidden effect of inflation, which is that it should push you to choose projects that have less risk of delay and there's more certainty of cost," Leah Brooks, an economist at George Washington University, told the Journal. "Those are probably smaller projects."
However, some observers point out even if IIJA funding won't go as far as initially predicted, it will be spread out over five years. That means if supply chains don't recover before 2023, as many forecast, the money will continue to flow for years once more materials become available.
Architectural billings stay flat
Inflation and supply chain issues may also be impacting other areas of construction, such as nonresidential buildings, when viewed through the lens of the Architectural Billings Index.
A gauge of how busy architects are drawing future designs, the ABI is a forward-looking indicator for construction activity to come. But while the index rose to 56 — anything above 50 indicates growth — in the initial recovery from the COVID-19 crisis, it has languished around 51 for the past three months.
Firms in the Northeast continue to see the weakest conditions, with billings declining five months in a row. Firms in the West also reported billings declines in recent months. Firms in the South, however, are bucking the trend with January billings the strongest since well before the Great Recession, Simonson noted.