Increased cost of materials hammers builders' margins.

• Position: Contractors of north carolina

Be careful what you wish for: You might get it. North Carolina contractors have been hoping for more private work for the past three years but instead had to settle for lower-margin public projects. Now private-sector work is back: Retail and multifamily residential building are booming, and even speculative office projects have begun to stir.

The problem is, the market is hot everywhere, including rapidly industrializing China and India. That has meant competition for building materials, which has driven up prices for such staples as steel, drywall and cement. "There's nothing good about these prices going up so quickly," says Bob Barnhill, president of Barnhill Contracting in Raleigh. "The unpredictability has been hard for us and subcontractors to deal with."

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Escalating steel prices forced officials at UNC Chapel Hill to cut a floor from each of three dormitories being built by Barnhill, and the concrete package for the Raleigh Convention Center that Barnhill is building with Parsippany, N.J.-based Skanska USA came in 10% higher than budget.

Rebuilding after hurricanes Katrina and Rita will only add to demand and price instability. Tony Plath, an associate professor of finance at UNC Charlotte who follows the construction industry for Charlotte-based Carolinas Associated General Contractors, expects increases of 5% to 10% this year for many materials and even higher for those produced with petroleum. "I'm telling contractors to put 20% wiggle room in their contracts for materials costs."

Some public-sector jobs might get put on hold while government figures out how to pay for them, Plath predicts. The private sector, however, will proceed. "A lot of companies need physical plant capacity, and they have been waiting to build. They've been profitable over this time so they have the money to go ahead."

Retail construction is especially strong in the state's three largest metropolitan areas and includes plans to expand Crabtree Valley Mall in Raleigh and projects in western Burlington and near a Dell computer factory in Winston-Salem. Even office construction, once stagnant because of high vacancy rates, is perking up. "We haven't seen speculative office building for almost three years," says Brian Reece, managing partner of Karnes Research in Raleigh. But it's beginning to creep back in some markets, including Chapel Hill and parts of Charlotte. In other places, office-vacancy rates remain in double digits. "We are...