Nonresidential construction will experience wide variance in demand, material costs and labor availability, according to a Construction Inflation Alert released by the Associated General Contractors of America. “In 2008, some nonresidential segments will continue to grow, including power and energy, but others such as lodging will slow or decline,” says AGC's Chief Economist Ken Simonson. “Diesel, copper and steel are among material costs likely to accelerate, while others remain benign.”

The large increase in diesel fuel prices (over last year), along with the importance of diesel fuel to highway construction, makes it likely that highway costs will go up even more, according to AGC. Conversely, the slumping demand and rising supply of gypsum products may mean nonresidential and multi-unit residential building costs will increase less than 6%.

“These cross-cutting trends make it likely that the PPI for construction inputs will accelerate from the 4.5% rate of increase that prevailed in 2006 and 2007 to a 6 to 8% range by the end of this year,” adds Simonson. Looking beyond 2008, two factors make it likely that a 6 to 8% growth rate for construction input prices will be sustained. First, diesel fuel, steel and copper are in demand worldwide. Second, construction will always be dependent on physical delivery of heavy, relatively low-value materials for which transportation and fuel costs are a major part of the delivered price.

In 2007, despite the high level of nonresidential activity, contractors were able to find enough workers, thanks to a massive redeployment of specialty trade contractors from residential to lighter nonresidential projects. “In 2008, I expect labor shortages will worsen for a few crafts, pulling average wage rates higher, but in other segments such as residential specialty trades, the supply of some crafts will be plentiful,” Simonson predicts. For a copy of AGC's Construction Inflation Alert, visit www.agc.org/cia.