Construction Analytics

Home » Inflation Indexing

Category Archives: Inflation Indexing

Jobs vs Construction Volume – Imbalances

8-8-17

From January 2001 to June 2017, jobs growth exceeded construction volume growth by 13%. The attached plots show the imbalances in growth.

Jobs growth is # of jobs x hours worked.

Volume is construction spending adjusted for inflation, or constant $.

Sometimes rapid spending growth is accompanied by higher than average inflation. This occurred in the 1990’s and again in 2005-2006. While spending seems to indicate rapid growth, much of the growth in cost is inflation and volume growth can be significantly lower, even sometimes negative, as occurred in 2005-2006. However, jobs growth during these rapid spending growth periods appears to track much more in line with spending growth. This leads to over-hiring and a loss of productivity occurs.

There are two distinct periods when jobs growth advanced more rapidly than real construction volume, 2005-2006 and mid-2015 to mid-2017. In the eight year period in between, either jobs fell faster or, after January 2011, volume increased faster. If spending growth is used to compare, then jobs growth falls far short of construction spending. But, due to inflation, spending is not the correct parameter to compare to jobs. Jobs must be compared to volume. Since 2001, the imbalance shows jobs growth has exceeded volume growth.

2001 through mid-year 2017, jobs exceeded volume growth by 13%.

Jobs vs Volume 2001-2010 8-8-17

2001-2004 jobs and volume growth were nearly equal.

2005-2006 jobs growth exceeded volume growth by 20%. During this period, construction spending and volume reached a peak. From late 2004 into early 2006, we experienced 20% growth in spending, the most rapid growth period on record. But that was also the period of the most rapid inflation growth on record. Residential volume peaked in early 2006 but then dropped 20% by the end of 2006. Nonresidential spending was increasing, but almost all of the growth was inflation. Nonresidential volume remained flat through 2006. Inflation was greater than spending growth, so volume declined. Although volume declined, hiring continued and jobs increased by 15%.

2007-2010 volume exceeded jobs growth by 4%. Spending decreased by 30%. Both volume and jobs were in steep decline. More jobs declined than volume, however, this period started with nearly 20% excess jobs. For January 2010 to January 2011, jobs bounced around near bottom, but volume dropped 8% more. 2010 ended with an excess of 15% jobs. January 2011 was the low-point for jobs.

Jobs vs Volume 2011-2017 8-8-17

2011-June 2015 volume exceeded jobs growth by 10%. Spending increased by almost 40% and inflation was relatively low at only 3%/yr. This period helped absorb more than half of the excess jobs that were created in 2005-2006 and remained after 2010. By mid-2015, jobs exceeded volume by only 7%.

June 2015-June 2017  jobs growth exceeded volume by 7%.  Spending increased by 7%, but inflation was 7% over the same period.  Although volume was up and down, over this two-year period through June 2017 we posted zero growth in volume. All of the increase in spending was inflation. Jobs increased 7% in two years.

For the last 5 years, 2012-2016, jobs averaged 4.5%/yr. growth  Construction spending averaged 8.5%/yr. growth. Inflation, currently hovering around 4.5%, averaged about 3.5%/yr. during this period. So real volume growth was only 4% to 5%. In the first few years of the recovery, 2011-2014, the gap narrowed and volume improved over jobs, but for the last two years, jobs have been increasing faster than volume.

I do expect spending to continue at a 6% to 7% growth rate at least through 2018. But also, I expect inflation at 4% to 4.5%. If the spending forecast holds, and if jobs growth comes into balance, then that would indicate only a 2% to 3% jobs growth rate from now through 2018.

Also SEE Construction Jobs Growing Faster Than Volume

and Is There a Construction Jobs Shortage?

ARCHIVE – Construction Inflation Index Tables 2016 data

10-24-16 original posted
1-27-17 updated index tables and plots
8-6-17 archived this for 1-27-17 2016 content  –  Linked Master Index Tables has updated data

8-6-17  SEE Construction Inflation Index Tables For Updated 2017 Indices

Construction Cost Indices come in many types: Final cost by specific building type; Final cost composite of buildings but still all within one major building sector; Final cost but across several major building sectors (ex., residential and nonresidential buildings); Input prices to subcontractors; Producer prices and Select market basket indices.

Residential, Nonresidential Buildings and Non-building Infrastructure Indices developed by Construction Analytics, (in BOLD CAPS), are sector specific selling price composite indices. These three indices represent whole building final cost and are plotted in Building Cost Index  – Construction Inflation below and also plotted in the attached Midyear report link. They represent average or weighted average of what is considered the most representative cost indicators in each major building sector. For Non-building Infrastructure, however, in most instances it is better to use a specific index to the type of work.

BCI 1992-2018 5-15-17

Click Here for LINK to Cost Inflation Midyear Report 2016 – text on Current Inflation

All actual index values have been recorded from the source and then converted to current year 2016 = 100. That puts all the indices on the same baseline and measures everything to a recent point in time.

Not all indices cover all years. For instance the PPI nonresidential buildings indices only go back to years 2004-2007, the years in which they were created.

SEE Construction Inflation Index Tables For 2017 Tables

index-table-2000-to-2018-updated-2-17-17

SEE BELOW FOR LARGER IMAGE

When construction is very actively growing, total construction costs typically increase more rapidly than the net cost of labor and materials. In active markets overhead and profit margins increase in response to increased demand. When construction activity is declining, construction cost increases slow or may even turn to negative, due to reductions in overhead and profit margins, even though labor and material costs may still be increasing.

Selling Price, by definition whole building actual final cost tracks the final cost of construction, which includes, in addition to costs of labor and materials and sales/use taxes, general contractor and sub-contractor overhead and profit. Selling price indices should be used to adjust project costs over time.

Here’s a LINK to a good article by Faithful & Gould that explains “If you want to avoid misusing a cost index, understand what it measures.” 

quoted from that article,

wiggins-cost-iindex

R S Means Index and ENR Building Cost Index (BCI) are examples of input indices. They do not measure the output price of the final cost of buildings. They measure the input prices paid by subcontractors for a fixed market basket of labor and materials used in constructing the building. These indices do not represent final cost so won’t be as accurate as selling price indices.

Turner Actual Cost Index nonresidential buildings only, final cost of building

Rider Levett Bucknall Actual Cost Index in RLB Publications nonresidential buildings only, final cost of building, selling price

IHS Power Plant Cost Indices specific infrastructure only, final cost indices

  • IHS UCCI tracks construction of onshore, offshore, pipeline and LNG projects
  • IHS DCCI tracks construction of refining and petrochemical construction projects
  • IHS PCCI tracks construction of coal, gas, wind and nuclear power generation plants

Bureau of Labor Statistics Producer Price Index only specific PPI building indices reflect final cost of building. PPI cost of materials is price at producer level. The PPIs that constitute Table 9 measure changes in net selling prices for materials and supplies typically sold to the construction sector. Specific Building PPI Indices are Final Demand or Selling Price indices.

PPI Materials and Supply Inputs to Construction Industries

PPI Nonresidential Building Construction Sector — Contractors

PPI Nonresidential Building Types

PPI BONS Other Nonresidential Structures includes water and sewer lines and structures; oil and gas pipelines; power and communication lines and structures; highway, street, and bridge construction; and airport runway, dam, dock, tunnel, and flood control construction.

National Highway Construction Cost Index (NHCCI) final cost index, specific to highway and road work only.

S&P/Case-Shiller National Home Price Index history final cost as-sold index but includes sale of both new and existing homes, so is an indicator of price movement but should not be used solely to adjust cost of new residential construction

US Census Constant Quality (Laspeyres) Price Index SF Houses Under Construction final cost index, this index adjusts to hold the build component quality and size of a new home constant from year to year to give a more accurate comparison of real cost inflation

Beck Biannual Cost Report develops indices for only five major cities and average. The indices may be a composite of residential and nonresidential buildings. It can be used as an indicator of the direction of cost but should not be used to adjust the cost in either of these two sectors.

Mortenson Cost Index is the estimated cost of a representative nonresidential building priced in six major cities and average.

Other Indices not included here:

Consumer Price Index (CPI) issued by U.S. Gov. Bureau of Labor Statistics. Monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services, including food, transportation, medical care, apparel, recreation, housing. This index in not related at all to construction and should never be used to adjust construction pricing.

Leland Saylor Cost Index  Clear definition of this index could not be found, however detailed input appears to represent buildings and does reference subcontractor pricing. But it could not be determined if this is a selling price index.

Sierra West Construction Cost Index is identified as a selling price index but may be specific to California. This index may be a composite of several sectors. No online source of the index could be found, but it is published in Engineering News Record magazine in the quarterly cost report update.

Vermeulens Construction Cost Index can be found here. It is described as a bid price index, which is a selling price index, for Institutional/Commercial/Industrial projects. That would be a nonresidential buildings sector index. No data table is available, but a plot of the VCCI is available on the website. Some interpolation would be required to capture precise annual values from the plot. The site provides good information.

The Bureau of Reclamation Construction Cost Trends comprehensive indexes for about 30 different types of infrastructure work including dams, pipelines, transmission lines, tunnels, roads and bridges. 1984 to present.

Click Here for Link to Construction Cost Inflation – Midyear Report 2016

1-27-17 – Index updated to Dec. 2016 data

index-table-2000-to-2009-updated-2-17-17

index-table-2010-to-2018-updated-2-17-17

8-6-17  SEE Construction Inflation Index Tables For Updated 2017 Indices

 

Construction Forecasting Presentation

Attached PDF of my Forecasting presentation delivered 5-22-17 at Advancing Building Estimation in Houston

EdZ presentation ABE Forecasting Costs 5-22-17

A few bullets from this presentation

  • Construction Starts is not construction spending
  • Cash flow = Spending = Revenue
  • Revenue is not Volume of work
  • Spending minus inflation = Volume
  • Understand what’s in an Index to avoid misguided inflation adjustments
  • We can’t ignore productivity
  • Spending activity has just as much influence on inflation as labor and material cost.

 

Slides in this presentation come from the following articles:

1st Qtr Update 2017 Construction Spending Forecast

Inflation Index vs Spending

Construction Jobs Growing Faster Than Volume

Construction Inflation Index Tables

Inflation Index vs Spending

The two plots lined up here represent spending and spending corrected for inflation or real volume growth in the top plot versus construction inflation in the bottom plot. On the Inflation plot, the black line represents final selling price, actual inflation. The red line represents the ENR Building Cost Index which is a fixed market basket of labor and materials, not a complete selling price index. All plots are for nonresidential buildings only.

The index shows how cost inflation climbs in periods when spending is accelerating and the index slows when spending is increasing slowly. Also we can see that the major decline in spending resulted in a major deflation in the index. Note the ENR BCI does not show the major decline in the inflation index. That’s because the ENR BCI is not final selling price. It shows what the cost of labor and materials did during that period,  but does not capture how contractors adjusted their margins down so deeply due to loss of volume.

The takeaway from this comparison is this:

  • Labor and material indices do not show what real total inflation is doing
  • When spending increases rapidly, inflation increases rapidly
  • When spending increases slowly, inflation increases slowly
  • An understanding of which direction and how much spending is moving is more important to predicting inflation than the change in the cost of labor and materials

 

Index vs Spending 1993-2016 5-13-17

 

See Also 1st Qtr Update 2017 Construction Spending Forecast

Is There a Construction Jobs Shortage?

3-10-17

The imbalance between construction spending and construction jobs is nothing new. It’s been going on for years. It reflects more than just worker shortages. It captures changes in productivity due to activity. It also helps explain why sometimes new jobs growth rates do not follow directly in step with spending growth. A big part is that it reflects hiring practices. That imbalance can be affected by either over or under-staffing and that can be affected by inflation.

2000-2008 The Expansion

For the 1st several years, nonresidential construction spending was flat or down. Then for two years spending was up only slightly, but constant $ volume (spending inflation adjusted) had actually decreased. Nonresidential jobs fell from 2001-2003 but then grew for several years during this period when constant $ volume was decreasing, creating productivity losses.

On the other hand, residential spending grew 80%, but after adjusted for inflation, volume grew only 23%. Most staffing increases during this period were for residential construction and jobs/volume growth was pretty consistent. Residential saw mixed productivity during this period. In 2006 residential volume had already started declining.

It is not uncommon when work is plentiful that productivity declines. In 2004-2005, spending increased by 24%, but inflation was hovering around 8% to 9%/year. Constant $ volume (spending after inflation) increased by only 6%. Jobs grew faster, by 9%. Net productivity decline.

In 2006, nonresidential work was starting to take off, increasing 45% from 2006 though 2008. During this period jobs increased by only 8% and volume added 16%. Excess volume was able to absorb a good portion of the jobs/volume imbalance from 2000-2006.

See the line chart below “Productivity = Annual $ Put-In-Place per worker. These up or down periods for each of these sectors discussed here can easily be seen in rising or falling $PIP volume on that chart, sectors plotted separately. The bar graph “Total Annual Productivity Change”, is the composite total of the three sector graphs.

productivity-by-sector-2001-2016-2-3-17

Net volume in 2006 declined, but jobs increased another 5%. For the three-year period 2004-2006, spending increased by 28%, but after inflation, real volume increased by less than 5%. Jobs increased by 14%. Productivity declined by nearly 10%.

Heading into 2007, residential firms had excess staff, as measured by the negative imbalance of jobs/volume. Compounding productivity issues, when spending started to decrease significantly, it took longer for companies to downsize their workforce. The workforce was not reduced to match the volume of work lost. Residential construction was first to show the strain, already having started to decline in 2006 and continuing to decline through 2009.

2006-2010 The Residential Recession

Residential construction was 1st hit by the recession in early 2006.  For the 4 years 2006-2009, residential volume dropped 55%. It remained flat for two more years, down a few more percent. Over six years starting 2006, residential jobs dropped only 40%.

The Annual $ PIP line chart above shows that for 2006-2009 there were only residential losses, or negative balance between jobs/volume. Both nonresidential sectors were improving slightly at the time. The total negative bars in those years is entirely due to residential.

2009-2011 The Nonresidential Recession

Nonresidential Buildings construction didn’t fall into recession until 2009. In the two years 2009-2010, nonresidential buildings lost over 30% in volume but only 22% in jobs.

This chart simply shows the imbalance between the number of jobs and the dollar volume of work put in place for each year compared to the year before. In a simple form that can be referred to as a change in productivity. In all these charts, jobs/year are adjusted for hours worked and dollars are always constant $ inflation adjust to 2016$.

Prod ALL 2001-2016 3-9-17

In 2009 my chart shows a huge productivity gain. It is almost entirely due to Non-building infrastructure, which never did fall into deep recession. Combined residential and nonresidential buildings only in 2009 would have shown a net 1% gain.

2011-2012 Early Recovery

Starting 2011, firms had lost significant revenue but had retained more staff than needed. There was so much excess staff (in relation to how much total revenue was available) that almost no reasonable gains in spending could wipe away the losses in productivity. Volume improved by 1%, but hiring resumed and jobs grew by 1%. Due to excess staff still on payrolls, productivity showed a 6% decline.

For the next few years, when we look at jobs growth vs. volume growth, there is reason to believe that slow jobs growth (2011 through 2013) may not be all due to labor shortages. Although we lost more than 2 million jobs, there remained excess jobs when compared to the amount of volume that was available.

At least part of the blame for slower new jobs growth was that excess staff already on hand were being absorb by the new spending gains. For a period there was insufficient volume out in the market to support all the staff that had remained on board. Finally, there was increased revenues which would first reabsorb part of the excess labor before rehiring started.

2012-2016 The Construction Boom

It took three more years to see a significant move towards balancing jobs and real volume. In 2014, jobs increased 6% and constant volume increased 7%. For the first nine months of 2015, jobs increased 3% and volume increased 8%. This was a good productivity balance period.In the three years 2012-2014, volume increased 16% but new jobs grew by only 11%. The increased work volume absorbed a good portion of the excess staffing.

What reasons could cause contractors to think they need more staff?

One reason is contractors don’t typically track revenues in constant $, they track in current dollars. So any comparison to a previous year is to inflated data. To achieve business plan growth of 6%/year, is it necessary to grow staff by 6%/year? If during that period inflation is 4%, then real volume growth is only 2%/year and new staffing needs are far less than anticipated.

Basing staffing needs on current $ revenue growth can lead to the same kind of over-staffing we saw going into the recession. There is the potential that contractor’s hiring could be swayed by highly inflated spending when actually volume is not as strong as thought.

Spend Current vs Constant 2003-2016 3-9-17Jobs vs Hours 2011 to Dec 2016 3-9-17

From the Jan 2011 bottom of the construction recession through Dec 2016, both work output (jobs x hours worked) and volume (spending after adjustment for inflation) increased equally by 29%.

(note: BLS revisions to hours worked, issued in the 3-10-17 release changed total growth output from 29% to 30%).

There are always unequal up and down years, but this longer term period shows balanced growth returned after a tumultuous period. We were so far down on the scale after the recession it seems reasonable that we experienced this re-balancing.

Both 2014 and 2015 show productivity gains. That is unusual in that there have not been two consecutive years of productivity gains in 23 years (while my jobs data goes back to 1970, spending data goes back only to 1993).

The trend changed in October of 2015. Now when we look at jobs growth vs. volume growth, there is reason to believe that any jobs growth slow-down may be at least in part due to recent over-hiring.

2014-2016 Record Jobs Growth

In the last three years, we’ve added 840,000 construction jobs. We’ve also increased hours worked to an equivalent to 880,000 jobs, growth of 15%. That’s a faster rate of growth in three years than the 2004-2006 construction boom. To help explain that growth, real volume in 2014-2016 was far greater than the volume in 2004-2006, or any other three-year period for that matter. The last time we’ve seen jobs growth like this was 1995-1999.

2012 through 2016 is the greatest construction boom on record, whether measuring unadjusted current $ spending or constant $ real volume after inflation, flying past the 2000-2005 boom and narrowly beating out 1995-2000. And we started 2017 with backlog at a record level, so the boom continues.

5-Year Construction Booms Compared to 2012-2016  

  • 2012 – 2016 current $ +$377 bil +48% — constant $ +265 bil +29%
  • 2001 – 2005 current $ +$314 bil +39% — constant $ +30 bil <3%
  • 1996 – 2000 current $ +$254 bil +46% — constant $ +235 bil +21%

Notice how little growth actually occurred in the five-year period 2001 through 2005. While there was significant spending growth, most of it was inflation, and 90% of it was residential. During that period composite inflation increased more than 35%. Also, nonresidential construction was having a setback, dropping 15% in volume in that five years. The real story out of the 2001-2005 boom period is to compare residential work.

  • 2012 – 2016 Rsdn current $ +$211 bil +83% — constant $ +146 bil +46%
  • 2001 – 2005 Rsdn current $ +$280 bil +80% — constant $ +132 bil  +23%

Residential inflation 2001-2005 was a whopping 47%. But, total residential spending was up 80%. After adjusting for inflation, residential still added 23% to volume during that period. During both periods, residential volume grew more than jobs, so both periods had a net productivity gain.

Also in 2001-2005, nonresidential added 3% more jobs in a five year period in which volume dropped 15%. The very high levels of inflation help explain why staff may have grown to such excess during that period. Contractors were seeing revenues grow by 20%-30% and were slowly adding jobs in a period when real volume was dropping 3% per year.With the exception of residential growth, there was a downturn in other work. New jobs increased by only 11%, but due to rampant inflation, real volume increased by less than 3%. Nonresidential contributed all the negative productivity in 2001-2005.

2014-2015  Construction Spending for the Record Books

  • 2014 to 2015 current $ +$206 bil +23% — constant $ +158 bil +16%

No two consecutive years of construction come close to equaling the real volume put-in-place during 2014-2015. The two years 2004-2005 had greater growth in spending, but most of that was inflation, so had little growth in volume. In fact, we would need to consider three consecutive years to come close to 2014-2015 and the three years that comes closest is 1996-1998 and that would still be a few percent short. This volume growth is driving huge jobs growth.

From October 2015 through March 2016, jobs growth was exceptional. During that 6 month period we added 215,000 construction jobs, the fastest jobs growth period in a decade. That period topped off the fastest two years of jobs growth in 10 years. Record increases in jobs growth are not what we might expect if there is a labor shortage.

And yet, the Jobs Opening and Labor Turnover Survey (JOLTS) is the highest it’s been in many years and that is a signal of difficulty in filling open positions. But, one of the known factors during a high level of market activity (lot’s of construction work – we are at record levels) is that workers know there is another and sometimes better job just down the road. During high levels of activity, unless the current employer is paying some kind of premium to keep them, workers may leave for greener pastures. That creates a high level of job churn.

Hiring Changes Lag Volume Changes

It is important to take note that it appears the two most recent six-month surges in jobs lag the period of greatest volume growth. I noted earlier that contractor staffing changes seem to lag movements in volume.

Since Sep 2015, jobs have been increasing more than real construction volume. For much of 2014 and 2015 construction spending real volume growth was exceeding jobs growth. Spending in 2016 slowed from the all-time record levels. That’s not totally unexpected as it would be highly unusual for that record level of growth to continue. But hiring continues.

Since Sept 2015, construction volume growth (spending minus inflation) slowed or stalled and completely contrary to what one would expect in a labor shortage, new jobs growth has been exceeding volume.

  • From Sep15 to Mar16  jobs increased+3.3%, volume increased +1.6%
  • From Mar16 to Aug16  jobs had no change, volume decreased -3.3%
  • From Aug16 to Feb17  jobs increased +2.6%, volume increased +0.10%

This most recent six-month period posted 177,000 jobs, the 3rd best for any consecutive six months since 2005-2006. Although we experienced a slow down in new jobs through the middle of 2016, that was bracketed by two of the three strongest six month growth periods in more than 10 years. For 18 months Sep’15 to Feb’17, jobs are up 7% higher than volume. For 2012-2014 volume grew 6% more than jobs.

For 2017, several economists are predicting total construction spending will increase by just over 6% (including my estimate of 6.5%). However, I’m also predicting that combined construction inflation for all sectors will increase by about 4.5%. That leaves us with a net real volume growth of only 2.0%. Therefore, for 2017, I do not expect jobs to increase by more than 2.0%, or 140,000. That number seems hard to swallow given we are already at 98,000 in the first two months. But remember, jobs have been growing faster than volume for the last 17 months. We could be due for another no-jobs-growth absorption period.

If jobs increase more than 140,000 and both spending and inflation hold to my predictions, then jobs will continue to outpace volume and that will show up on my plot as a productivity loss for 2017. Jobs have been getting ahead of volume for 17 months. Contractors may still be hiring, lagging the movement in real volume growth. It will take the next few months to see if that is the case but I would expect jobs growth to slow or stop for the next few months and I would not attribute that to labor shortages. As we’ve seen before, we should expect jobs/volume to come back to balance.

So, here we are powering our way through the greatest construction expansion ever recorded, with three years of jobs growth at a 11-year high and jobs growing faster than volume for the past 17 months. Does that seem like a jobs shortage to you?

For a continuation of this discussion see A Harder Pill To Swallow! and Construction Jobs Growing Faster Than Volume

Constant Dollars – Impact of Inflation

2-4-17

Current $ vs Constant $

This clearly shows the impact of inflation on comparing Construction Spending data. Reports commonly compare current $1.166 trillion 2016 total spending today back to the (then) current $1.150 trillion at 2006 peak. Of course that seems to establish a new high. But that is so misleading.

Constant $ adjusted for inflation converts all past spending into 2016$ for an equalized comparison. From the low point in 2011 we’ve increased spending by 51% but in constant 2016$ we’ve added only 31% in volume and we are still 16% below the 2005 peak.

As measured in comparable constant dollars, No, we are not back to previous levels of spending. We will probably not return to previous highs before 2020.

The widening gap from right to left, as we look back in time, is the cumulative affect of inflation. It might be only 2% or 4% looking back one year, but back to 2003 it’s 40%.

spend-current-vs-constant-2003-2016-2-3-17

Impact of Inflation

In all projections, the affect of inflation must be considered. Why is tracking inflation important? Well, as an estimator it’s necessary to assign the appropriate cost to items over time. And it’s needed to properly interpret construction economics. But it’s also important for business management.

bci2001-2016-2-9-17

Due to construction inflation, a company that was building $700 million in nonresidential buildings in 2005 needs to build $1 billion today just to remain the same size as in 2005. Increasing revenues by 5% annually in a period when inflation is increasing by 5% is not increasing annual volume. While revenue may be increasing, volume would be static. Over a period of years, if this were to occur, since some companies will grow, the amount of volume available to bidders could potentially restrict growth in the number of bidders able to secure new work or in the growth in the size of companies.

In this table, both the index values and the resultant annual escalation are shown. The index value gives cumulative inflation compared to 2016$.

index-2003-to-2017-edz-from-prod-2-17-17

 

SEE ALSO these other posts 

Are We at New Peak Construction Spending?

Construction Inflation Index Tables

Construction Cost Inflation – Midyear Report 2016

Are We at New Peak Construction Spending?

1-4-17

Total construction spending peaked in Q1 2006 at an annual rate of $1,222 billion. For the most recent three months it has averaged $1,172 billion. It is currently at a 10 1/2 year high at just 4% below peak spending.  But that ignores inflation.

In constant inflation adjusted dollars spending is still 18% below the Q1 2006 peak.

spend-current-vs-constant2016-plot-nov-2016

Current headlines express exuberance that we are now at a 10 1/2 year high in construction spending but fail to address the fact that is comparing dollars that are not adjusted for inflation.

In the 1st quarter of 2006 total spending peaked at a annual rate of $1.2 billion and for the year 2006 spending totaled $1,167 billion. We are within a stone’s throw of reaching that monthly level and 2016 will reach a new all-time high total spending by a slim fraction. But all of that is measured in current dollars, dollars at the value of worth within that year, ignoring inflation.

Adjusting for inflation gives us a much different value. Inflation adjusted dollars are referred to as constant dollars or dollars all compared or measured in value in terms of the year to which we choose to compare. To be fair, we must now compare all backdated years of construction to constant dollars in 2016. What would those previous years be worth if they were valued in 2016 dollars?

By mid-2017 total construction spending will reach a new all-time high, but in constant inflation adjusted dollars will still be 17% below 2006 peak. We will not reach a new inflation adjusted high before 2020.

Residential construction spending is still 32% below the 2006 peak of $690 billion. In constant inflation adjusted dollars it is 39% below 2006 peak.

Nonresidential Buildings construction spending is only 3.5% below 2008 peak of $443 billion. However, in constant inflation adjusted dollars it is 18% below 2008 peak.

Non-building Infrastructure construction spending pre-recession peaked in 2008 at at an annual rate of $290 billion.  However, post recession it peaked in Q1 2014 at $314 billion. It is now 8% below the 2014 peak. In constant inflation adjusted dollars it is 12% below the 2014 peak.

For more on inflation SEE Construction Cost Inflation – Midyear Report 2016

Construction Inflation Index Tables 2017

10-24-16 original posted
1-27-17 updated index tables and plots
8-6-17 updated index tables and plots to 2017 base = 100

This collection of Indices is published in conjunction with this linked commentary Click Here for LINK to Cost Inflation Midyear Report 2017 – text on Current Inflation

Construction Cost Indices come in many types: Final cost by specific building type; Final cost composite of buildings but still all within one major building sector; Final cost but across several major building sectors (ex., residential and nonresidential buildings); Input prices to subcontractors; Producer prices and Select market basket indices.

Residential, Nonresidential Buildings and Non-building Infrastructure Indices developed by Construction Analytics, (in BOLD CAPS), are sector specific selling price composite indices. These three indices represent whole building final cost and are plotted in Building Cost Index  – Construction Inflation, see below, and also plotted in the attached Midyear report link. They represent average or weighted average of what is considered the most representative cost indicators in each major building sector. For Non-building Infrastructure, however, in most instances it is better to use a specific index to the type of work.

BCI 1992-2018 8-6-17

BCI 2005-2018 8-6-17.JPG

Click Here for LINK to Cost Inflation Midyear Report 2017 – text on Current Inflation

All actual index values have been recorded from the source and then converted to current year 2017 = 100. That puts all the indices on the same baseline and measures everything to a recent point in time, Midyear 2017.

Not all indices cover all years. For instance the PPI nonresidential buildings indices only go back to years 2004-2007, the years in which they were created. In most cases data is updated to include June 2017. These data have had significant changes since last issued in both PPI data and I H S data.

Index Table 2001 to 2020 updated 8-6-17.JPG

SEE BELOW FOR LARGER IMAGE

When construction is very actively growing, total construction costs typically increase more rapidly than the net cost of labor and materials. In active markets overhead and profit margins increase in response to increased demand. When construction activity is declining, construction cost increases slow or may even turn to negative, due to reductions in overhead and profit margins, even though labor and material costs may still be increasing.

Selling Price, by definition whole building actual final cost tracks the final cost of construction, which includes, in addition to costs of labor and materials and sales/use taxes, general contractor and sub-contractor overhead and profit. Selling price indices should be used to adjust project costs over time.

Here’s a LINK to a good article by Faithful & Gould that explains “If you want to avoid misusing a cost index, understand what it measures.” 

quoted from that article,

wiggins-cost-iindex

R S Means Index and ENR Building Cost Index (BCI) are examples of input indices. They do not measure the output price of the final cost of buildings. They measure the input prices paid by subcontractors for a fixed market basket of labor and materials used in constructing the building. These indices do not represent final cost so won’t be as accurate as selling price indices.

Turner Actual Cost Index nonresidential buildings only, final cost of building

Rider Levett Bucknall Actual Cost Index in RLB Publications nonresidential buildings only, final cost of building, selling price

IHS Power Plant Cost Indices specific infrastructure only, final cost indices

  • IHS UCCI tracks construction of onshore, offshore, pipeline and LNG projects
  • IHS DCCI tracks construction of refining and petrochemical construction projects
  • IHS PCCI tracks construction of coal, gas, wind and nuclear power generation plants

Bureau of Labor Statistics Producer Price Index only specific PPI building indices reflect final cost of building. PPI cost of materials is price at producer level. The PPIs that constitute Table 9 measure changes in net selling prices for materials and supplies typically sold to the construction sector. Specific Building PPI Indices are Final Demand or Selling Price indices.

PPI Materials and Supply Inputs to Construction Industries

PPI Nonresidential Building Construction Sector — Contractors

PPI Nonresidential Building Types

PPI BONS Other Nonresidential Structures includes water and sewer lines and structures; oil and gas pipelines; power and communication lines and structures; highway, street, and bridge construction; and airport runway, dam, dock, tunnel, and flood control construction.

National Highway Construction Cost Index (NHCCI) final cost index, specific to highway and road work only.

S&P/Case-Shiller National Home Price Index history final cost as-sold index but includes sale of both new and existing homes, so is an indicator of price movement but should not be used solely to adjust cost of new residential construction

US Census Constant Quality (Laspeyres) Price Index SF Houses Under Construction final cost index, this index adjusts to hold the build component quality and size of a new home constant from year to year to give a more accurate comparison of real cost inflation

Beck Biannual Cost Report develops indices for only five major cities and average. The indices may be a composite of residential and nonresidential buildings. It can be used as an indicator of the direction of cost but should not be used to adjust the cost in either of these two sectors.

Mortenson Cost Index is the estimated cost of a representative nonresidential building priced in six major cities and average.

Other Indices not included here:

Consumer Price Index (CPI) issued by U.S. Gov. Bureau of Labor Statistics. Monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services, including food, transportation, medical care, apparel, recreation, housing. This index in not related at all to construction and should never be used to adjust construction pricing.

Leland Saylor Cost Index  Clear definition of this index could not be found, however detailed input appears to represent buildings and does reference subcontractor pricing. But it could not be determined if this is a selling price index.

Sierra West Construction Cost Index is identified as a selling price index but may be specific to California. This index may be a composite of several sectors. No online source of the index could be found, but it is published in Engineering News Record magazine in the quarterly cost report update.

Vermeulens Construction Cost Index can be found here. It is described as a bid price index, which is a selling price index, for Institutional/Commercial/Industrial projects. That would be a nonresidential buildings sector index. No data table is available, but a plot of the VCCI is available on the website. Some interpolation would be required to capture precise annual values from the plot. The site provides good information.

The Bureau of Reclamation Construction Cost Trends comprehensive indexes for about 30 different types of infrastructure work including dams, pipelines, transmission lines, tunnels, roads and bridges. 1984 to present.

Click Here for Link to Construction Cost Inflation – Midyear Report 2017

8-6-17 – Index updated to June 2017 data

Index Table 2001 to 2010 updated 8-6-17

Index Table 2011 to 2020 updated 8-6-17

Click Here for LINK to Cost Inflation Midyear Report 2017 – text on Current Inflation

Construction Cost Inflation – Midyear Report 2017

Construction Inflation – Midyear Report

8-6-17

General construction cost indices and Input price indices that don’t track whole building cost do not capture the full cost of construction projects. To properly adjust the cost of construction over time you must use actual final cost or selling price indices.

Click Here for Link to a 20year Table of 25 Indices

Inflation in construction acts differently than consumer inflation. When there is more work available, inflation increases. When work is scarce, inflation declines. A very large part of the inflation is margins, wholesale, retail and contractor. When nonresidential construction was booming from 2004 through 2008, nonresidential inflation averaged almost 8%/year. When residential construction boomed from 2003 to 2005, inflation in that sector was 10%/year. But from 2009 through 2012 we experienced deflation, the worst year being 2009. Residential construction experienced a total of 17% deflation from 2007 through 2011. From 2008 to 2010, nonresidential buildings experienced 10% deflation in two years.

BCI 1992-2018 8-6-17

BCI 2005-2018 8-6-17

Since 1993, long-term annual construction inflation for nonresidential buildings has averaged 3.5%, even when including the recessionary period 2007-2011. During rapid growth periods, inflation averages more than 8%. 

Spending growth, up 40% in the four-year period 2012-2015, exceeded the growth during the closest similar four-year periods 2003-2006 (37%) and 1996-1999 (36%), which were the two fastest growth periods on record with the highest rates of inflation and productivity loss. Growth peaked at +11%/year in 2014 and 2015, exceeded only slightly by 2004-2005. Although spending growth slowed to only 6.5% in 2016, Construction spending growth for the four-year period 2013-2016 totals 39% and remains near the four-year high. It’s expected that 2017 spending will increase 6.3% and maintain a consistent high four-year level of spending.  

Material input costs to construction went up +2.4% in 2016 after a downward trend from +5% in 2011 led to decreased cost of -2% in 2015, the only negative cost for inputs in the past 20 years. Inputs costs are expected to rise +3% in 2017. But that accounts for only a portion of the final cost of constructed buildings.

Labor input is currently experiencing cost increases. When there is a shortage of labor, contractors may pay a premium to keep their workers. All of that premium may not be picked up in wage reports. Potential labor shortages in an area might result in +8% to +10% inflation on labor cost just over the last two years.

Nationally tracked indices for residential, nonresidential buildings and non-building infrastructure vary to a large degree. When the need arises, it becomes necessary that contractors reference appropriate sector indices to adjust for whole building costs.

Click Here for Link to a Table of 25 Index Values

ENRBCI and ENRCCI are prefect examples of commonly used indices that do not represent whole building costs, yet are widely used to adjust project costs. An estimator can get into trouble adjusting project costs if not using appropriate indices.

The cost of new residential construction is up on average 6%/year over the last four years. It peaked at 8% in 2013 but dropped to 3.4% in 2015. It’s been back up over 5% for 2016 and 2017 to date. Anticipate residential construction inflation for 2017 and 2018 between 5% and 6%.

Several indices for nonresidential buildings have averaged 4% to 4.5% over the last four years and all are indicating construction inflation of 4.5% to 5% or more for 2017. For the last four years, nonresidential buildings inflation has totaled nearly 18%. Input indices that do not track whole building cost would indicate inflation for those four years is only 10%, much less than real final cost. For a $100 million project escalated over those four years, that’s a difference of $8 million, protentially underestimating.

Don’t be caught short! Anticipate construction inflation for nonresidential buildings during the next two years leaning towards the higher end rapid growth rate of 5% to 6% rather than the long term average of 3.5%.

Non-building infrastructure indices are so unique to the type of work that individual specific infrastructure indices must be used to adjust cost of work. The FHWA highway index increased 7% in 2012, dropped 4% in 2013-2014, increased 4% in 2015 and dropped 5% in 2016. The IHS power capital cost indices vary by power sector. Pipeline and LNG indices are down more than 20% in the last three years. Coal, gas, and wind power generation indices have gone up only 6% in six years. Refineries and petrochemical facilities have dropped 6% in the last 4 years. Most input costs to infrastructure are down from the post recession highs, but most have increased in the last year. All infrastructure indices through midyear are indicating 2% to 4% increases for 2017.

This plot for nonresidential buildings only shows bars representing the predicted range of inflation from various sources with the line showing the actual composite final cost inflation. Note that although 2015 and 2016 have a low end of predicted inflation less than 1%, the actual inflation is following a pattern of growth above 4%. The low end of the predicted range is almost always established by input costs, while the upper end and the actual cost are established by selling price indices.

Inflation Range 2000-2018 plot 8-6-17

In every estimate it is always important to carry the proper value for cost inflation. Whether adjusting the cost of a recently built project to predict what it might cost to build a similar project in the near future or answering a client question, What will it cost if I delay my project start by one year?, whether you carry the proper value for inflation can make or break your estimate.

  • Long term construction cost inflation is normally about double consumer price inflation (CPI).
  • Since 1993 but taking out 2 worst years of recession (-8% to -10% total for 2009-2010), the 20-year average inflation is 4.2%.
  • Average long term (30 years) construction cost inflation is 3.5% even with any/all recession years included.
  • In times of rapid construction spending growth, construction inflation averages about 8%.
  • Nonresidential buildings inflation has average 3.8% since the recession bottom in 2011. It has averaged 4.2% for the last 4 years.
  • Residential buildings inflation reached a post recession high of 8.0% in 2013 but dropped to 3.4% in 2015. It has averaged 5.9% for the last 5 years.
  • Although inflation is affected by labor and material costs, a large part of the change in inflation is due to change in contractors/suppliers margins.
  • When construction volume increases rapidly, margins increase rapidly.
  • Construction inflation can be very different from one major sector to the other and can vary from one market to another. It can even vary considerably from one material to another.

Click Here for Link to a Table of 25 Index Values

Construction Inflation Cost Index

Note: The original post you’ve reached here was written in Jan 2016. For the latest information follow this link to the newest post on Inflation written 8-6-2017.   Construction Cost Inflation – Midyear Report

Also See  Construction Inflation Index Tables Table of 25 indices 2001-2020 updated 8-6-2017.

This data gets updated twice a year.

Thank You. edz

Jan. 31, 2016

Construction inflation for buildings in 2016-2017 is quite likely to advance stronger and more rapidly than some estimators and owners have planned.

Long term construction cost inflation is normally about double consumer price inflation. Construction inflation in rapid growth years is much higher than average long-term inflation. Since 1993, long-term annual construction inflation for buildings has been 3.5%/yr., even when including the recessionary period 2007-2011. During rapid growth periods, inflation averages more than 8%/yr. 

For the period 2013-2014-2015, nonresidential buildings cost indices averaged just over 4%/yr. and residential buildings cost indices average just over 6%/yr. I recommend those rates as a minimum for 2016-2017. Some locations may reach 6% to 8% inflation for nonresidential buildings but new work in other areas will remain soft holding down the overall average inflation. Budgeting should use a rate that considers how active work is in your area.

Infrastructure projects cost indices on average have declined 4% in the last three years. However, infrastructure indices are so unique that individual specific indices should be used to adjust cost of work. The FWHA highway index dropped 4% in 2013-2014 but increased 4% in 2015. The IHS power plant cost index gained 12% from 2011-2014 but then plummeted in 2015 to an eight year low. The PPI industrial structures index and the PPI other nonresidential structures index both have been relatively flat or declining for the last three years.

These infrastructure sector indices provide a good example for why a composite all-construction cost index should not be used to adjust costs of buildings. Both residential and infrastructure project indices often do not follow the same pattern as cost of nonresidential buildings.

Anticipate construction inflation of buildings during the next two years closer to the high end rapid growth rate rather than the long term average.

Building Cost Inflation Index

See more comments on Construction Inflation here

%d bloggers like this: