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ARLINGTON, VA-Higher than expected construction costs this year may prompt some developers to cancel, delay or scale back on projects in the pipeline, Ken Simonson, chief economist of the Associated General Contractors of America tells GlobeSt.com. The AGC has released new figures that predict the Producer Price Index will rise 6% to 8% this year, compared to the 4.5% rise in 2006 and 2007. That, on top of the current credit market environment and overall economy could well be the final blow for some projects still at the whiteboard stage, he says.

“I think it will be a lot harder for developers to absorb those kinds of increases this year,” Simonson says. “I can’t tell you exactly how many projects will be delayed or canceled or redesigned but I am sure we will hear more of that.” The last time PPI inputs increased to such as significant degree was in 2004 and 2005. “But then, owners were eager to get the job done and accepted” the higher costs.

This cycle, he says, material cost pressures will be much greater than labor cost pressures in most instances. “There is a greater availability of subcontractors that are no longer doing residential work who can shift to commercial.” Specialized labor for industrial and high-rise projects might be the only exception, he says.

The costs may take some off guard as historically public agencies have used a single figure–the CPI–for budgeting the acceleration of wages and construction supplies. This year Simonson says the CPI is expected to rise by 2.5% to 3.5%. In non-inflationary times the CPI is an acceptable substitute for the PPI. This year, though, “anyone who thinks the CPI will be a good guide for construction costs will be in for a shock.”

Furthermore Simonson also predicts that 6% to 8% growth rates for construction input rates will last beyond 2008: First, many construction inputs, such as diesel fuel, steel and copper are in demand worldwide. Second, construction will always be dependent on physical delivery of heavy, bulky, relatively low-value materials for which transportation and fuel costs are a major part of the delivered price.

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