Construction materials costs are tumbling, contractor margins are shrinking, wage rate gains are easing and are steady to slightly down on a spot basis and equipment rental rates are slightly down. The recent plunge in design work reported by the American Institute of Architects promises better pricing for preconstruction costs. Interest cost for prime borrowers have also dropped although rates are up, often sharply, for less creditworthy borrowers. This is an unusual period of falling construction cost. But it will be brief, lasting only from October to perhaps January. Then project cost inflation will return but it will be very low into 2010 compared to the last few years.

This brief window of deflation is the result of a nearly simultaneous recession in the major countries of the world set off by the credit freeze in early September and the resulting forced deleveraging of lenders worldwide. Already, declining 3rd quarter GDP has been reported for the US, Japan and much of Europe as well as 2-4% drops in the GDP growth rate in major Asian and Latin American countries. Economic growth will decline much faster in the 4th quarter, dropping as much as 4% (annual rate) in the US.

The cost deflation primarily comes from lower prices for the commodities used in construction materials. Energy prices have dropped more than 60% with crude oil selling now for $46/bbl. Metals prices, especially steel, fell 14% in November, according to The Economist commodity price index. This follows a similar decline in October.

The drop in commodity prices will overshoot the equilibrium price as speculators scramble to close out their positions and suppliers discount heavily to reduce surplus inventory. At less than $50/bbl., crude oil is probably in this position. Crude prices will average somewhat higher in the next few months but the full impact of the drop from $150 is not yet in wholesale prices so the prices of diesel, asphalt and plastics will decline further into the winter.

The unusual price volatility in 2008 makes cost planning and bid estimating very difficult. You should bid the price at the time you expect to commit to a price for materials not the price when you prepare the bid. If you expect to buy by January, prices will be less than they are today and much less than a few months ago. If you expect to buy later in the winter, prices are likely to dip and come back to today’s level. If you are roughing out costs for later in 2009 or for 2010, anticipate a materials inflation trend initially at a 3% annual pace but rising to 4% by mid 2010.