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PPI Construction Materials Inputs Index

2-20-18

Producer Price Index of Materials Inputs to Construction.  The 1st two plots are PPI Final Costs. All other plots are PPI Input costs. Changes in PPI Input costs at the producer level may not reflect changes in actual pricing to contractors or changes in final cost as installed to building owner. Cost do not reflect retail markup or mark down and do not reflect overhead and profit markups that may change according to market activity.

PPI for Construction Inputs IS NOT an indicator of construction inflation. It does not represent selling price, the final cost of materials put-in-place which includes cost of labor, overhead and profit.

Cautions When Using PPI Inputs to Construction!

PPI Inputs and Inflation not only can vary widely but also may not even move in the same direction. See the above link for a table comparing PPI% vs Inflation%.

PPI Final Bldg 2-20-18

PPI Final Trades 2-20-18

PPI Nonresidential Building Types

PPI Nonresidential Building Construction Sector — Contractors

Specific Building and Contractor PPI Indices are Final Demand or Selling Price indices. They are plotted above.

Bureau of Labor Statistics Producer Price Index measures PPI cost of materials price at producer level. The PPIs that constitute Table 9 of the BLS PPI Report measure changes in net prices for materials and supplies typically sold to the construction sector, but do not represent the final cost installed. They are known as PPI Inputs. They are plotted below.

PPI Materials and Supply INPUTS to Construction Industries

Here’s a brief summary of some of the PPI statistics tracked here:

  • One year (2017) change
  • biggest increases > Diesel fuel, Scrap Steel, Copper and Aluminum Mill Shapes, Steel Pipe, Lumber & Plywood
  • smallest increases > Insulation, Brick, Sheet Metal, Asphalt Roofing, Ornamental Metals, Structural Steel
  • only declines > Fabricated Steel Bar Joists and Rebar, Asphalt Paving

 

  • Two year (2016+2017) changes
  • biggest increases > Diesel fuel, Steel Scrap, Copper and Aluminum Mill Shapes, Steel Pipe, Lumber & Plywood, Gypsum Products
  • smallest increases > Asphalt Roof Coatings, Brick, Precast Concrete, Insulation, Sheet Metal, Steel Bar Joists & Rebar, Flat Glass
  • Only decline > Asphalt Paving

 

  • Three year (2015>2017) changes
  • biggest increases > Cement, Readymix Conc, Flat Glass, Gypsum Products
  • smallest increases >  Sheet Metal, Structural Steel, Steel Joists & Rebar, Brick
  • biggest declines > Asphalt Paving, Steel Scrap, Steel Pipe, Asphalt Roofing, Diesel Fuel

Most stable pricing over last 5 years, these items did not change by more than 4%/yr in any given year during the last 5 years and net the smallest total change for 5 years:  Asphalt Roofing -1% in 5 years, Fabricated Structural Steel +3.4%, Sheet Metal+2.7%, Building Brick +7%.

PPI Inputs to Industries 2-20-18

PPI Materials Brick Block 2-20-18

PPI Materials Cement 2-20-18

PPI Materials Glass Roof 2-20-18

PPI Materials Gyp Wood 2-20-18

PPI Materials Metals 2-20-18

PPI Materials Steel 2-20-18

The indices plots above are generated by indexing the December to December percent changes in the table below. Data updated to include Jul 2018 published August 2018.

PPI Materials Percents 2006-2018 9-11-18

PPI Trades Final Cost Percents 2006-2018 9-12-18

PPI Buildings Final Cost Percents 2006-2018 9-12-18

Each month, puts out tables and explanation of recent changes in producer price indexes and employment cost indexes for construction materials inputs, and building types and subcontractor final demand cost. Best source available.  Watch this AGC page for monthly updates to the PPI

Inflation in Construction 2018 – What Should You Carry?

2-15-18, updated 3-10-18, 6-28-18

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. These costs are captured only in Selling Price, or final cost indices.

General construction cost indices and Input price indices that don’t track whole building final cost do not capture the full cost of inflation on construction projects.

To properly adjust the cost of construction over time you must use actual final cost indices, otherwise known as selling price indices.

ENRBCI and RSMeans input indices 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. This plot of cost indices for nonresidential buildings shows how input indices did not drop during the 2008-2010 recession while all other final cost indices dropped.

BCI 2005-2020 Firms 10-14-18

CPI, the Consumer Price Index, tracks 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. Historically, Construction Inflation is about double the CPI, but for the last 5 years construction inflation averages 3x the CPI.

Producer Price Index (PPI) Material Inputs costs to all construction (which exclude labor) are up +4.2% in 2017. More specific input costs for nonresidential structures in 2017 are up 4.3%. Infrastructure cost are up over 5% and single-family residential inputs are up 4.3%. But material inputs 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. Unemployment in construction is the lowest on record. The JOLTS ( Job Openings and Labor Turnover Survey) is at or near all-time highs. A tight labor market will keep labor costs climbing at the fastest rate in years.

 

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

Inflation can have a dramatic impact on the accuracy of a construction budget. Usually budgets are prepared from known current costs. If a budget is being developed for a project whose midpoint of construction costs is two years in the future, you must carry an appropriate inflation factor to represent the expected cost of the building at that time.

The level of construction activity has a direct influence on labor and material demand and margins and therefore on construction inflation. Nonresidential Buildings and Non-building Infrastructure backlog are both at all-time highs. 75% to 80% of all nonresidential spending within the year comes from starting backlog. In 2018 spending from nonresidential backlog will be up nearly 8%-10%. In the last three years nonresidential buildings spending from backlog is up more than 25%, non-building infrastructure up only 10%.

Most spending for residential comes from new starts. Residential new starts in Q1-2017 reached an 11 year high. For Q1-2018 starts are up another 4% over Q1-2017. Spending from new starts is up 100% in the last 6 years, 30% in the last 3 years.

Current indications are that 2019 backlog will be up 6%-8% across all sectors.

Taking into account the current (Jan 2018 12 mo) CPI of 2% and the most recent 5 years ratio of Construction Inflation to CPI, along with accelerated cost increases in labor and material inputs and the high level of activity in construction markets, I would consider the following forecasts for 2018 inflation as minimums with potential to see higher rates than forecast.

Residential construction saw a slowdown in inflation to only +3.5% in 2015. However, the average inflation for five years from 2013 to 2017 is 5.8%. It peaked at 8% in 2013. It climbed back over 5% for 2016 and reached 5.8% in 2017. Midyear 2018 indexes are between 5.0% and 6.5%. Anticipate residential construction inflation for 2018 at least 5% to 6%.

Nonresidential Buildings indices have averaged 4% to 4.5% over the last five years and all have reached over 5% in the last three years. Nonresidential buildings inflation totaled 18% in the last four years. My forecast shows nonresidential buildings spending in 2018 will reach the fastest rate of growth in three years, which historically has led to accelerated inflation.

Recent news of a steel tariff needs to be addressed as an added factor to inflation. In another article on this blog, (see steel cost increase), I calculated the 25% tariff on steel would cost nonresidential buildings 1%. Some Infrastructure could be much more, i.e., bridges 4-5%. Residential impact would be small. A 25% increase in mill steel could add 0.65% to final cost of building just for the structure. It adds 1.0% for all steel in a building. If your building is not a steel structure, steel still potentially adds 0.35%. 

Anticipate construction inflation for nonresidential buildings for 2018 and 2019, excluding steel impact, of 5% to 5.5%, rather than the long-term growth average of 4%. Adjust for steel impact.

Following Graph updated 9-11-18 – Several indices Q1 or Q2 2018 information has been updated. Reliable nonresidential buildings selling price indexes have been over 4% since 2015. Currently some indexes are forecasting inflation over 5% for 2018. One index is now forecasting 6.5%. Construction Analytics forecast (line) for 2018 is currently 4.75%. This may move higher due to the impact of tariffs which may not yet be fully reflected in any indices.

Inflation Range 2000-2019 plot 9-11-18

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 17% from 2010 to 2014, dropped 2% in 2015-2016, then increased 2% in 2017. Inflation for refineries and petrochemical facilities has dropped 5% in the last 4 years.

Input costs to infrastructure are down slightly from the post-recession highs, but most costs have increased in the last year. Input cost to Highways are up 4.7% and to the Power sector are up 5.8% in 2017. Work volume in Transportation and Pipeline projects is increasing rapidly in 2017 and 2018. Expect inputs in these markets to show large increases in 2018.

Infrastructure indices registered 2% to 4% gains in 2017. Anticipate a minimum of 3% to 4% inflation for 2018 with the potential to go higher in rapidly expanding markets. Tariff impact adds to this. Refer to Infrastructure Indices.

Watch for unexpected impacts from steel tariffs, potentially adding 5% to bridges. Also impacted, power industry, pipeline, towers, transportation. 

  • 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 3.7% 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 5.8% 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.

BCI 1992-2019 2-12-18

The two links below point to comprehensive coverage of the topic inflation and are recommended reading.

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

Click Here for  Cost Inflation Commentary – text on Current Inflation

 

 

 

Cautions When Using PPI Inputs to Construction!

The Producer Price Index (PPI) for material inputs to construction gives us an indication whether costs for material inputs are going up or down. The PPI tracks producers’ cost to produce the product and supply finished products to retailers or contractors. However, that is far from the total cost from the contractor.

A good example is steel. The producer price for steel from the mill might be $750/ton for long beams and columns. The only increases captured at the producer level might be the changes in cost for raw material, energy to manufacture and the producers labor and markup. But the structural steel contractor is then responsible for delivery to shop, detailing, shop fabrication, transport to construction site, load and unload, cranes and welding equipment needed to install, installation crews and finally overhead and profit accounting for at least eight more points of potential cost change. Finally the steel subcontractor must then assess the market conditions, whether tight or favorable to higher profits, to adjust the bid price or selling price. The final cost of steel installed could be $3000/ton.

The PPI for Construction Inputs IS NOT an indicator of construction inflation. It does not represent the selling price, nor does it give any indication of the trend, up or down, of selling price.

In 2009 PPI for inputs was flat but construction inflation, as measured by final cost of buildings, was down 8% to 10%. In 2010, the PPI for construction inputs was up 5.3% but the selling price was flat. Construction inflation, based on several decades of trends, is approximately double consumer inflation. However, from mid-2009 to late 2012, that long-term trend did not hold up. During that period, PPI ranged from 0% to +6.8%, but construction inflation/deflation ranged from -10% to +2.3%, lower than PPI for all four years, something which seldom occurs. Construction inflation/deflation was primarily influenced by depressed bid margins, which had been driven lower due to diminished work volume.

The following table shows the differences between the PPI Inputs from 2011 to 2017 and the actual inflation for the major construction sectors. This table shows clearly that PPI Inputs and Inflation not only can vary widely but also may not even move in the same direction.

AAA PPI vs Inflation 2011-2017

The PPI tables published by the Bureau of Labor Statistics do include several line items that represent Final Trades Cost or Whole Building Cost. Those PPI items don’t give us any details about the producer price or retail price of the materials used, but they do include all of the contractors costs incurred, including markups, on the final product delivered to the consumer, the building owner. I would note however that those line items in the PPI almost always show lower inflation than final Selling Price inflation indices developed separately from the PPI. Follow this link to table of inflation values which includes the PPI final cost for trades and buildings. 

Construction Managers responsible for working with the client to manage project cost, part of which includes preparing a full building cost estimate, should not rely on PPI values as an indication of inflation. Selling price inflation indices are more appropriate indices to use to adjust project costs.

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?”, the proper value for inflation (which differs by sector and differs every year) can make or break your estimate.

Contractors responsible for a particular building material, although the PPI Inputs will not track market conditions sale prices from producer to the contractor, can get some indication of whether material prices are rising or falling. Contractors should be aware of PPI trends to interpret the data throughout the year.

PPI TRENDS HELP TO INTERPRET THE DATA

  • 60% of the time, the highest increase of the year in the PPI is in the first quarter.
  • 75% of the time, two-thirds of the annual increase occured in the first six months.
  • In 25 years, the highest increase for the year has never been in Q4.
  • 60% of the time, the lowest increase of the year in the PPI is in Q4.
  • 50% of the time, Q4 is negative, yet in 25 years the PPI was negative only four times.

So when you see monthly news reports from the industry exclaiming, “PPI is up strong for Q1” or “PPI dropped in the 4th Qtr.” it helps to have an understanding that this may not be unusual at all and instead may be the norm.

 

PPI Construction Materials Inputs Index 2-20-18

Construction Inflation Index Tables

  • 10-24-16 Originally posted
  • 6-15-17 significant changes in both PPI data and I H S data
  • 2-12-18 updated index tables to Dec 2017 data (major revisions to HiWay index)
  • 9-12-18 updated index tables to include Q2 2018 data where available

This collection of Indices is published in conjunction with this linked commentary

Click Here for  Cost Inflation Commentary – 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.

2-12-18 plots updated to Dec 2017 data, includes revisions to historic Infrastructure. The following plots are all the same data. Different time spans are presented for ease of use.

BCI 1967-2018 7-10-18

BCI 1992-2019 2-12-18

BCI 2005-2019 2-12-18

 

Click Here for  Cost Inflation Commentary – 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.

All forward forecast values where-ever not available are estimated and added by me.

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 December 2017.

  • June 2017 data had significant changes in both PPI data and I H S data.
  • December 2017 data had dramatic changes in FHWA HiWay data.

SEE BELOW FOR TABLES

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. ENR does not differentiate residential from nonresidential. RS Means is specifically nonresidential buildings only. These indices do not represent final cost so won’t be as accurate as selling price indices. RS Means subscription service provides historical cost indices for about 200 US and 10 Canadian cities. RSMeans 1960-2018 CANADA Keep in mind, these indices do not include markup for competitive conditions. FYI, the RS Means Building Construction Cost Manual is an excellent resource to compare cost of construction between any two of hundreds of cities using location indices.

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

Rider Levett Bucknall Actual Cost Index  published in the Quarterly Cost Reports found in RLB Publications  for nonresidential buildings only, represents final cost of building, selling price. Report includes cost index for 12 US cities and cost $/SF for various building types in those cities. Also includes cost index for Calgary and Toronto.

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

See this 2-20-18 post for PPI Materials and Final Cost Graphic Plots and Table

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 residential construction cost inflation

Beck Biannual Cost Report develops indices for five major cities plus average. I did not see specifically if the index is or is not a composite of residential and nonresidential buildings. It can be used as an indicator of the direction of cost,  but may be better used in conjunction with other more specific sector selling price indices.

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 not 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.

Jones Lang LaSalle Construction Outlook Report National Construction Cost Index is the Engineering News Record Building Cost Index (ENRBCI), a previously discussed inputs index. The report provides some useful commentary.

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.

US Historical Construction Cost Indices 1800s to 1957

Click Here for Link to Construction Cost Inflation – Commentary

2-12-18 – Index updated to Dec 2017 data, includes revisions to historic Infrastructure

9-12-18 – 2018 data updated to include Q2 reports and Jul-Aug PPI data

Index Table 1991 to 2000 updated 2-12-18

Index Table 2001 to 2010 updated 4-20-18

Index Table 2011 to 2020 updated 9-12-18

How to use an index: Indexes are used to adjust costs over time for the affects of inflation. To move cost from some point in time to some other point in time, divided Index for year you want to move to by Index for year you want to move cost from. Example : What is cost today for a nonresidential building that was built in 2013? Divide Index for 2018 by index for 2013 = 104.5/84.7 =  1.234. Cost of building in 2013 times 1.234 = cost of same building in 2018. Costs should be moved to midpoint of construction. Indices posted here are at middle of year and can be interpolated to get any other point in time.

All forward forecast values where-ever not available are estimated and added by me.

Click Here for LINK to Cost Inflation Commentary – text on Current Inflation

Construction Cost Inflation – Commentary

9-12-16 original

updated 9-11-18

General construction cost indices and Input price indices that don’t track whole building final cost do not capture the full cost of escalation in 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.

2-12-18 plots updated to Dec 2017 data.  The following plots are all the same data. Different time spans are presented for ease of use.

BCI 1967-2018 7-10-18

BCI 1992-2019 2-12-18

BCI 2005-2019 2-12-18

Since 1993, the 25-year long-term annual construction inflation for nonresidential buildings has averaged 3.5%, even when including the recessionary period 2007-2011.  The long-term average inflation is 4% for the 20 non-recessionary years during that period. During rapid growth period of 5 years from 2004-2008, inflation averaged 8% per year. Since 2014, nonresidential buildings inflation has been over 4%/yr., averaging 4.3%/yr. for the last 5 years with a high of 4.7% in 2018.

Residential, from 2007- 2011 experienced 5 consecutive years of deflation, down 20%. In the 4-year boom just prior to that, 2003-2006, inflation averaged 9% per year. Residential inflation snapped back to 8.0% in 2013. From 2016 through 2018 it’s been between 5% and 6%.

Spending growth, up 41% 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.

Spending growth slowed to 7.0% in 2016, however, Construction spending growth for the four-year period 2013-2016 still totals 40% and remains near equal with the four-year high. It’s expected, after final revisions to 2017 are posted (in June 2019), that 2017 spending will increase to 5+% and maintain a consistently high four-year level of spending above pre-recession levels.  

Producer Price Index (PPI) Material Inputs (excluding labor) costs to new construction went up +2.4% in 2016 after a downward trend from +5% in 2011 led to decreased cost of -2.2% in 2015, the only negative cost for inputs in the past 20 years. Inputs costs to  all construction are up +4.2% in 2017. More specific input costs, nonresidential structures in 2017 are up 4.3%, infrastructure cost are up over 5% and single-family residential inputs are up 4.3%. But material inputs accounts for only a portion of the final cost of constructed buildings. Through August 2018, nonresidential building input costs are up 6% and residential up 7%.

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. Unemployment in construction is the lowest on record. A tight labor market will keep labor costs climbing at the fastest rate in 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 RSMeans input indices 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. This plot of cost indices for nonresidential buildings shows how input indices did not drop during the 2008-2010 recession while all other final cost indices dropped.

BCI 2005-2020 Firms 10-14-18

CPI, the Consumer Price Index, tracks 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. Historically, Construction Inflation is about double the CPI. However for the last 5 years it averages 3x the CPI.

Taking into account the current (Jan 2018 12 mo) CPI of 2% and the most recent 5 years ratio, along with accelerated cost increases in labor and material inputs and the high level of activity in markets, I would consider the following forecasts for 2018 inflation as minimums with potential to see higher rates than forecast.

 

Residential construction, from 2007- 2011, experienced five consecutive years of deflation, down 20%. In the 4-year boom just prior to that, 2003-2006, inflation averaged +9% per year. Residential construction inflation saw a slowdown to only +3.5% in 2015. However, the average inflation for five years from 2013 to 2017 is 6%. It peaked at 8% in 2013. It climbed back over 5% for 2016 and reached 5.8% in 2017. At mid 2018, residential final cost inflation indexes are 5% and 6.5%. Anticipate residential construction inflation for 2018 and 2019 between 5% and 6%.

 

Nonresidential Buildings inflation, during the rapid growth period of five years from 2004-2008, averaged 8% per year. Inflation averaged 4.2% per year for the 4 years 2014-2017.

Several indices for Nonresidential Buildings have averaged 4% to 4.5% over the last five years and have reached over 5% in the last three years. Nonresidential buildings inflation totaled 18% in the last four years. Input indices that do not track whole building cost would indicate inflation for those four years at 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, potentially underestimating cost. My forecast shows nonresidential buildings spending in 2018 will reach the fastest rate of growth in three years, which historically leads to accelerated inflation. Anticipate construction inflation for nonresidential buildings for 2018 and 2019 between 4.5% to 5.5%, rather than the long term average of 3.5% to 4.0%.

 

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 17% from 2010 to 2014, dropped 2% in 2015-2016, then increased 2% in 2017. The IHS Pipeline and LNG indices are down 25% from 2014 to 2017. Coal, gas, and wind power generation indices have gone up only 6% in seven years. Refineries and petrochemical facilities have dropped 5% in the last 4 years. Input costs to infrastructure are down slightly from the post recession highs, but most have increased in the last year. Input cost to Highways are up 4.7% and to the Power sector are up 5.8% in 2017. Work in Transportation and Pipeline projects is increasing rapidly in 2017 and 2018.

Infrastructure indices registered 2% to 4% gains in 2017. Anticipate a minimum of 3.5% to 4.5% inflation for 2018 with the potential to go higher in rapidly expanding markets, such as power or highway.

This plot for nonresidential buildings only shows bars representing the predicted range of inflation from various sources with the line showing the composite final cost inflation. Note that although 2015 and 2016 have a low end of predicted inflation of 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 of the range and the actual cost are established by selling price indices.

graph updated 9-11-18

Inflation Range 2000-2019 plot 9-11-18

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 adding an escalation factor to the summary of an estimate for a project with a midpoint 2 years out, 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 3.7% 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 5.8% 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

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