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BTH – 20 Snips From Recent Articles
2-17-17 Behind The Headlines
- From the Jan 2011 bottom of the recession in construction to current, both net jobs (jobs x hours worked) and volume (spending after adjusted for inflation) have increased equally by 28%.
- Growth of only 100,00 to 140,000 new jobs in 2017 would be the slowest growth in 5 years and will look like a hiring slowdown. Some might attribute it to lack of available workers. In large part it may be due to a balancing of workforce to real volume growth.
- Staffing patterns (appear to) lag changes in work volume.
- These six Nonresidential Buildings markets, which make up 80% of all nonresidential buildings spending, posted the following growth in starts leading into 2017: Office +37%, Lodging +40%, Educational +11%, Healthcare +21%, Commercial Retail +11% and Amusement/Recreation +21%
- Nonresidential buildings 2017 starting backlog is 45% higher than at the start of 2014, the beginning of the current nonres bldgs growth cycle.
- Office construction starting backlog for 2017 (projects under contract as of Jan 1, 2017) is the highest in at least 8 years, more than double at the start of 2014 when the current growth cycle of office construction spending began.
- For 2017, the amount of construction spending (on manufacturing buildings) from starting backlog has dropped 25% from the level of 2016. Even an increase of 50% in new 2017 starts would not make up for that loss.
- More infrastructure projects started construction in the 1st 6mo of 2015 than any time in history. This will boost infrastructure spending through 2017.
- 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 entire construction industry best growth rate ever achieved (in 2016 constant$) absorbed $1 trillion in new spending over 5 years. Infrastructure has not absorbed $1 trillion newly added work in 25 years.
- long term best average rates of growth (indicate) we could increase infrastructure spending through new stimulus between $7 billion to $10 billion a year
- Construction spending, from 1st release to last revision of data, has been revised upward every month since August 2013. That would indicate the first reports of an “unexpected decline” almost always get revised up in following months.
- In the last 36 months, there were 16 Census construction spending releases that initially showed a decline vs the previous month. Five months showed a decline vs the previous year. After revisions every month was revised up from the original posted amount. There remained only 2 significant mo/mo declines. There were no remaining year/year declines.
- Current year YTD “not-yet-revised” values for new construction starts are always compared to the previous year YTD “revised values” which has the affect of making current year growth appear lower than it should. In the last 10 years the YTD revisions to previous year values have never been down.
- Residential starts in 2016 posted the best year since 2005-2006. Residential starts bottomed in 2009 and have now posted the 7th consecutive year of growth.
- Total construction spending in 2017 will reach $1,236 billion supported by a 4th consecutive year of strong growth in nonresidential buildings.
- Office construction reached a new all-time high in September 2016. Spending will be in the range of +20% to +30% year over year growth for 2017 with total coming in at $91 billion.
- It’s real damn hard to add $100 billion in new construction volume in a year. After adjusting for inflation, construction volume has never increased by $100 billion. It has increased by $75 billion 4 times and 3 more times by $50 billion.
- If you want to avoid misusing a cost index, understand what it measures.
- Selling Price, by definition whole building actual final cost, tracks the final cost of construction. Selling price indices should be used to (adjust costs for inflation so you can) compare costs over time.
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%.
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.
Due to construction inflation, a company that was building $700 million in nonresidential buildings in 2005 needs to build $1 billion today just to remain the same size as in 2005. Increasing revenues by 5% annually in a period when inflation is increasing by 5% is not increasing annual volume. While revenue may be increasing, volume would be static. Over a period of years, if this were to occur, since some companies will grow, the amount of volume available to bidders could potentially restrict growth in the number of bidders able to secure new work or in the growth in the size of companies.
In this table, both the index values and the resultant annual escalation are shown. The index value gives cumulative inflation compared to 2016$.
SEE ALSO these other posts
Are We at New Peak Construction Spending?
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.
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 >>> Links
- 10-24-16 Originally posted
- 2-11-22 added INFRASTRUCTURE index table Q4 2021
This post is preserved for the multitude of LINKS back to sources of cost indices and for the explanation of the difference between Input indices and Output or Final Cost Indices. For all latest indices plots and table see the latest yearly Inflation post.
2-1-23 SEE Construction Inflation 2023
2-11-22 SEE Construction Inflation 2022
11-10-21 See 2021 Construction Inflation
See the article Construction Inflation 2020
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 highlighted BOLD CAPS in the tables below), are sector specific selling price (final cost) 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.
The following plots of Construction Analytics Building Cost Index are all the same data. Different time spans are presented for ease of use.
See the article Construction Inflation 2022
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 wherever 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 June 2019.
- 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.
quoted from that article,
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, however the index includes a quantity of steel so leans much more towards nonresidential buildings. RS Means is specifically nonresidential buildings only. These indices do not represent final cost so won’t be as accurate as selling price indices. RSMeans Cost Index Page RS Means subscription service provides historical cost indices for about 200 US and 10 Canadian cities. RSMeans 1960-2018 CANADA Keep in mind, neither of these indices 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.
Notice in this plot how index growth is much less for ENR and RSMeans than for all other selling price final cost indices.
8-10-19 note: this 2010-2020 plot has been revised to include 2018-2020 update.
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. Boston, Chicago, Denver, Honolulu, Las Vegas, Los Angeles, New York, Phoenix, Portland, San Francisco, Seattle, Washington,DC. Also includes cost index for Calgary and Toronto. RLB also publishes cost information for select cities/countries around the world, accessed through RLB Publications.
Mortenson Cost Index is the estimated cost of a representative nonresidential building priced in seven major cities and average. Chicago, Milwaukee, Seattle, Phoenix, Denver, Portland and Minneapolis/St. Paul.
Beck Biannual Cost Report in 2017 and earlier cost reports developed indices for six major U.S. cities and Mexico, plus average. In the most recent Summer 2021 report, while Beck provides valuable information on cost ranges for 30 different types of projects, the former inflation index is absent. Beck has not published city index values since 2017. Read the report for the trend in building costs. See discussion for Atlanta, Austin, Charlotte, Dallas/Fort Worth, Denver, Tampa and Mexico
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 Materials Inputs and Final Cost Graphic Plots and Tables in this blog updated 2-10-19
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.
RS MEANS Key material cost updates quarterly
National Highway Construction Cost Index (NHCCI) final cost index, specific to highway and road work only.
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.
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
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
TBDconsultants San Francisco Bay Area total bid index (final cost).
Other Indices not included here:
CoreLogic Home Price Index HPI for single-family detached or attached homes monthly 1976-2019. This is a new home and existing home sales price index.
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.
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 with input from 16-20 U.S. cities, however it states, “The Sierra West CCCI plays a major role in planning future construction projects throughout California.” This index may be a composite of several sectors. The link provided points to the description of the index, but not the index itself. No online source of the index could be found, but it is published in Engineering News Record magazine in the quarterly cost report update.
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. A review of website info indicates almost all the work is performed in California, so this index may be regional to that area. Updated Index Page
DGS California Construction Cost Index CCCI The California Department of General Services CCCI is developed directly from ENR BCI. The index is the average of the ENR BCI for Los Angeles and San Francisco, so serves neither region accurately. Based on a narrow market basket of goods and limited labor used in construction of nonresidential buildings, and based in part on national average pricing, it is an incomplete inputs index, not a final cost index.
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.
CALTRANS Highway Cost Index Trade bids for various components of work and materials, published by California Dept of Transportation including earthwork, paving and structural concrete. Includes Highway Index back to 1972, quarterly from 2012.
Colorado DOT Construction Cost Index 2002-2019 Trade bids for various components of work published by Colorado Dept of Transportation including earthwork, paving and structural concrete.
Washington State DOT Construction Cost Index CCI for individual components or materials of highway/bridge projects 1990-2016
Minnesota DOT Highway Construction Cost Index for individual components of highway/bridge projects 1987-2016
Iowa DOT Highway Cost Index for individual components of highway/bridge projects 1986-2019
New Hampshire DOT Highway Cost Index 2009-2019 materials price graphs and comparison to Federal Highway Index.
New York Building Congress New York City Construction Costs compared to other US and International cities
U S Army Civil Works Construction Cost Index CWCCIS individual indices for 20 public works type projects from 1980 to 2050. Also includes State indices from 2004-2019
Eurostat Statistics – Construction Cost Indices 2005-2017 for European Countries
Comparative International Cities Costs – This is a comparative cost index comparing the cost to build in 40 world-wide cities If this International Cities Costs is a parity index, which involves correcting for difference in currency, then you must know the parity city in each country, which in the US I think is Chicago.
OECD International Purchasing Power Parity Index
Turner And Townsend International Construction Markets 2016-2017
Turner And Townsend International Construction Markets 2018
Rider Levitt Bucknall Caribbean Report 2018
US Historical Construction Cost Indices 1800s to 1957
Click Here for Link to Construction Cost Inflation – Commentary
2-12-18 – Index update includes revisions to historic Infrastructure data
1-26-21 The tables below, from 2011 to 2020 and from 2015 thru 2023, updates 2020 data and provides 2021-2023 forecast.
NOTE, these tables are based on 2019=100. Nonresidential inflation, after hitting 5% in both 2018 and 2019, and after holding above 4% for the six years 2014-2019, is forecast to increase only 2.5% in 2020, but then 3.8% in 2021 and hold near that level the next few years. Forecast residential inflation for the next three years is level at 3.8%. It was only 3.6% for 2019 but averaged 5.5%/yr since 2013 and returned to 5.1% in 2020.
11-10-21 Follow the link at the bottom to 2021 Inflation
The Tables below 2001 to 2010 and 2011-2020 are updated to Q4 2021 with any revisions to past years posted on source websites.
The Table below 2015 to 2023 is updated to Q4 2021
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, divide Index for year you want to move to by Index for year you want to move cost from. Example : What is cost inflation for a building with a midpoint in 2022, for a similar nonresidential building whose midpoint of construction was 2016? Divide Index for 2022 by index for 2016 = 110.4/87.0 = 1.27. Cost of building with midpoint in 2016 x 1.27 = cost of same building with midpoint in 2022. Costs should be moved from/to midpoint of construction. Indices posted here are at middle of year and can be interpolated between to get any other point in time.
All forward forecast values, whenever not available, are estimated by Construction Analytics.
2-13-23 Construction Inflation 2023
Steel Statistics and Steel Cost Increase Affect on Construction?
9-18-16 update Mar 2018
Recent articles suggest that steel cost is expected to increase and this will almost certainly affect the cost of construction. But just how much of an affect would a cost increase have on total building cost? The cost increase that is being talked about is the mill price cost of steel, or something like pipe and tube producer price (PPI), since pipe and tube is a world trade item, but not a Fab Steel PPI. None of these include total cost of steel installed. The PPI is the price after fabrication. Total cost is the contractor’s bid or selling price installed which includes all markups (or markdowns).
PPI Steel Materials Inputs plot updated 2-10-19 to include 2018 data
The questions we need to answer are:
- How much of a cost increase will we see in the raw product, manufactured raw steel?
- How much steel is used in a building?
- What affect will a raw material cost increase have on the cost of steel installed?
- How much does that change the cost of the building?
It might help to start with a basic understanding of steel manufacturing and use.
Basic Oxygen Steel (BOS) steel making uses between 25 and 35% recycled steel to make new steel. BOS steel usually has less residual elements in it, such as copper, nickel and molybdenum and is therefore more malleable than EAF steel so it is often used to make automotive bodies, food cans, industrial drums or any product with a large degree of cold working. Cold rolled steel is in this category which would include gypsum wall system steel studs and HSS Hollow Structural Sections.
Electric Arc Furnace (EAF) steel making contains more residual elements that cannot be removed through the application of oxygen and lime. It is used to make structural beams, plates, reinforcing bar and other products that require little cold working. EAF steel uses almost 100% recycled steel. Most steel that goes into a building or civil structure is in this category. 2/3rds of all steel manufactured in the US is EAF steel.
Typically quoted benchmark steel pricing that I’ve seen is based on either cold-rolled-coil sheet steel or hot-rolled-coil sheet steel. This is a common product used for the automotive industry or appliance, but not so much for the construction industry (steel studs vs structural steel). EAF Structural steel is nearly 100% dependent on recycled steel so is not as much affected by price changes of iron ore, as is BOS steel.
The United States is the world’s largest steel importer. Of the 30MMT imported, 50%+ of that comes from our top few import suppliers, Canada, Brazil, South Korea and Mexico. Russia supplies 7%-9%. No other country supplies more than 5% of our imports. China supplies less than 2% of our steel imports, The U.S. is responsible for almost 10% of global steel imports, more than double the second largest importer. The U.S. annually imports about $20-$25 billion of steel, $2 billion from Mexico.
The United States consumes approximately 110 million tons of steel each year. More than 40 million tons is used in the construction industry. The next largest industries, automotive and equipment and machinery, together do not use as much steel as construction. The U.S. imports about 30% of the steel it uses.
The graphic chart above is by American Iron and Steel Institute.
Structural steel is the most widely used structural framing material for buildings used in the U.S. with nearly 50% market share in nonresidential and multistory residential buildings. Prior to the recession steel had a 60% market share.
Sources are also linked below.
What affect might a steel cost increase have on a building project? It will affect the cost of structural shapes, steel joists, reinforcing steel, metal deck, stairs and rails, metal panels, metal ceilings, wall studs, door frames, canopies, steel duct, steel pipe and conduit. Structural steel and reinforcing steel are hot-rolled long products, EAF steel. All the others are cold-rolled flat sheet BOS steel.
Here are some averages of the percentage of steel material costs as related to total project construction cost. For a building that is predominantly masonry, these percentages would be reduced considerably. For a heavy industrial building the percentages might be higher.
Assuming a typical structural steel building with some metal panel exterior, steel pan stairs, metal deck floors, steel doors and frames and steel studs in walls, then all steel material installed represents about 14% to 16% of total building cost.
Structural Steel only, installed, is about 9% to 10% of total building cost, but applies to only 60% market share of steel buildings. The other 6% of total building cost applies to all buildings.
Other steel is very likely higher to take into account any increased cost in major mechanical equipment such as chillers, pumps, fan powered boxes, cooling towers, tanks, generators, plumbing fixture supports, electrical panel boxes and cable trays.
If the structural steel subcontractor increases bid price by 10%, that raises the cost of the building by 1%, but if it is the mill price of steel that increases by 10% the increase to final building price is far less. It is the mill price of steel, rather than fabricated steel, that you would track in the producer price index (PPI).
The final cost of steel installed in a building is about four times the cost of the raw mill steel material used in making and installing the final product. Why so different? Well, for instance, structural steel cost includes: raw mill steel cost, delivery to shop, drafting, shop fabrication, shop paint, delivery to job site and shop markup. At the job site it includes: unload and sort, field installation crew, welding machine, crane and operator, contractor’s overhead and profit and sales tax.
Assuming a building as described above, a 10% increase in the cost of mill steel, which (material only) affects one fourth the cost of 16% of the total building cost, then a 10% increase in the cost of ALL mill steel may result in a composite price increase on a whole building of about 10% x ¼ x 16% = 0.4%. A 10% increase in the cost of mill steel just for structure may result in a composite price increase on a whole building of about 10% x ¼ x 10% = 0.25%.
So, if the mill cost of steel were to increase 10% from $700/ton to $770/ton prior to shop fabrication, for a $100 million building, that could add roughly 0.25% ($250,000) to the cost of the structural steel contract or roughly 0.4% ($400,000) to the total cost of all steel.
A 25% increase in mill steel could add 0.65% to final cost of building just for structure. It adds 1.0% for all steel in a building.
For a project such as a steel bridge, where not just 16% of cost is steel material, but potentially 40% to 60% of cost is steel, a 25% increase in mill steel might add as much as 3% to 4% to final cost.
links to relevant data
Steel Imports Report Global Steel Trade Monitor
Steel Capacity Utilization and Use American Iron and Steel Institute
Structural Steel Industry Overview AISC
World Steel Production – Consumption – Imports – Exports
Crain’s NY – Impact of steel tariffs already being felt in NYC
Construction Volume Vs Construction Spending
Construction volume is not the same as construction spending.
Spending is the number nearly everyone follows. Volume is spending minus inflation.
Two years that show the greatest differences between spending and volume highlight the affect of inflation. In 2004 and 2005 total construction spending grew by 11% and 12.5%, but after inflation, volume grew by only 3% and 2%. In the most recent year, construction spending in 2015 grew by 10.5% but total construction volume grew by only 7.5%.
For the four years 2012 through 2015 construction spending grew by 35% but after inflation volume grew by 21%. Inflation accounts for 14% of spending growth.
Annual construction inflation varies for residential, nonresidential buildings and nonresidential infrastructure, and it varies sometimes so widely that each should be used only to adjust that specific group. Since 1993, long-term annual construction inflation for buildings has been 3.5% per year, even when including the recessionary period 2007-2011. During rapid growth periods, inflation averages more than 8% per year.
Historical average volume growth over the last 22 years is grossly distorted by the recession. Volume declined in 8 of those 22 years. In the worst three years of the recession, 2008, 2009 and 2010, volume declined by 28%. If we take out those three years the typical growth period averages are more apparent. The historical average volume growth in construction with recession data removed and after adjusting for inflation is 2% per year for 19 years.
Adjusting for inflation is changing current dollars to constant dollars.
Current dollars = dollars are reported in the value of the year reported, 2008 = 2008$, 2015 = 2015$. News reports almost always refer to current dollars and therefore do not account for the influence of inflation.
Constant dollars = all dollars adjusted to represent dollars in the year of comparison. This adjusts for inflation so 2008$ (and all other years) are converted to equivalent 2015$.
It’s not too hard to understand why we need to look at constant dollars when you think of it in terms of building a house. For example, a 2,500 sf house built in 2001 may have cost $250,000 then to build. Today to build that exact same house may cost $400,000. The house is no different, so volume remains the same. The only thing that changed is inflation. With respect to constant dollars for the same volume, $250,000 in 2001 dollars would be equal to $400,000 in 2015 dollars.
The common comparison is to look at growth in construction spending from year to year. What that does not tell us is how much of the spending growth is inflation and how much is a real increase in construction volume.
Constant dollars makes a huge difference in the analysis. Adjusting all previous years of spending allows us to compare changes in volume growth from year to year. This plot of total construction dollars shows current dollars would indicate we are now only 7% below the previous high and we’ve had growth of 37% from the recession low. Constant dollars, adjusting for inflation, shows volume is still 17% below the previous cycle high and we’ve had growth of only 22% since the recession lows.
Construction Inflation Cost Index
Note: The post you’ve reached here was originally written in Jan 2016. For the latest information follow this link to the newest data on Inflation. 8-15-19
ESCALATION / INFLATION INDICES
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.
Construction Spending – What You Need to Know About YTD Mo/Mo Yr/Yr
Common comparisons published in news reports for construction spending are, from best to worst:
- Current year-to-date vs same period previous year. YTD
- Current month vs previous month. Mo/Mo or MOM
- Current month vs same month last year. Yr/Yr or YOY
- Number of months to current value since last time that value achieved.
In some cases a comparison uses Not Seasonally Adjusted (NSA) dollars and in other cases Seasonally Adjusted Annual Rate (SAAR) dollars. NSA dollars is the actual amount spent within the month. SAAR dollars represents the annual rate that monthly amount would generate based on the normal proportion typical spent within that month. Typical spending is always much higher in summer months than winter to produce the same SAAR.
Year-to-date is the best comparison. It increases in strength as more months are added to the YTD. It is a value that gives a strong indication of growth over the previous year. Comparisons must be made using Not Seasonally Adjusted (NSA) dollars. Although it does lack adjustment for inflation, only one year of inflation is involved. Not adjusting for inflation is explained as the difference between current dollars and constant dollars.
Current month to month (MOM) comparisons are not generally affected by inflation but may not give a clear indication of movement due to monthly fluctuations. Comparisons absolutely must be made using Seasonally Adjusted Annual Rate (SAAR) dollars. It is a gross error to make month to month comparisons using NSA dollars, since there is a normal spending curve that shows the percent of total annual spending can vary considerably from month to month, sometimes by as much as 10%. This variation is accounted for in the SAAR.
When comparing to the same month last year (YOY), the question arises, “Is any big change in YOY caused by the current month performance or by the performance in the same month last year?” Again, YOY is missing adjustment for one year of inflation. Comparison can be NSA or SAAR dollars.
Number of months/years since current value was last achieved is almost always presented as a current dollar comparison. When dealing with cost, because of the long duration often involved it would be much better if it were a constant dollar comparison to account for construction inflation. However, construction inflation may not be readily available and this type of comparison is rarely if ever published using constant dollar comparisons. Comparison should use either entire year total dollars or should use SAAR dollars.
Current dollars = dollars are reported in the value of the year reported 2008=2008$, 2015 = 2015$. 99% of news reports use current dollars and therefore do not account for the influence of inflation.
Constant dollars = all dollars adjusted to represent dollars in the year of comparison. Adjusts for inflation so 2008$ in this case are converted to equivalent 2015$.
It’s not to hard to understand why we need to use constant dollars when you think of it in terms of buying products like food or heating oil. Today heating oil costs $1.90/gallon. In 2008 heating oil cost $3.50/gallon. So, with respect to oil, $350 in 2008 dollars is no different than $190 in 2015 dollars.
In addition to the Year-to-date growth values, here’s two more less common stats for looking at the same information.
Percent change from the last cycle high current$ (contant 2015$)
- Residential – Q1 2006 $390b vs $$680b -43% (-50%)
- Nonresidential Buildings – Q1 2008 $392b vs $$439b -11% (-22%)
- Nonbuilding Infrastructure – Q1 2008 $298b vs $$286b +4% (-10%)
Percent change from the recent recession low current$ (contant 2015$)
- Residential – Q1 2011 $390b vs $$239b +64% (+48%)
- Nonresidential Buildings – Q1 2011 $392b vs $$267b +49% (+35%)
- Nonbuilding Infrastructure – Q1 2008 $298b vs $$243b +22% (+13%)
Constant dollars makes a huge difference in the statistics. Just take a look at Nonresidential buildings. Current dollars would indicate we are now only 11% below the previous high and we’ve had growth of 49% from the recession low. Constant dollars adjusting for inflation shows we are still 22% below the previous cycle high and we’ve had growth of only 35% since the recession lows.
You can find a complete section providing constant dollar cost comparison in my quarterly report. Access the report through the Featured Economic Report tab at the top of this blog
Construction Inflation
LINK to most recent articles on inflation 2019
11-17-2015
( Also See 1-31-2016 comments and chart on inflation )
Over the last 24 months work volume has increased and short-term construction inflation has increased to more than double consumer inflation. It appears construction inflation is already advancing faster than and well ahead of consumer inflation, which supports that consumer inflation is not an indication of movements or magnitude of construction inflation.
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 (which can differ every year) 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 years of recession (-8%), 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%.
- 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.
In the 5 years of rapid growth in spending for nonresidential buildings from 2004 through 2008, nonresidential buildings cost inflation totaled 39%, or averaged ~8% per year.
In the 6 years of spending during the residential construction boom from 2000 through 2005, residential building cost inflation totaled 47%, or averaged ~8% per year.
Neither the producer price index (PPI) for construction inputs nor the CPI are good indicators of total construction cost inflation.
Some construction cost indices include only the cost changes for a market basket of labor and materials and do not include any change for margins. Those indices are not a complete analysis of construction cost inflation.
Construction cost inflation must include all changes related to labor wages, productivity, materials cost, materials availability, equipment and finally contractors margins. Margins are affected by the volume growth of new work and demand for new buildings. So be sure to verify what is included in any cost index you reference for real construction cost inflation.
For the last three years residential construction inflation has averaged 5.7% and nonresidential buildings inflation has averaged 4.2%. Nonresidential buildings cost inflation has increased for five consecutive years. Both are likely to increase next year since anticipated volume in both sectors will grow next year.
In my construction spending data set, which goes back to 1993, there were six years with greater than 9% spending growth. By far the largest spending growth years were 2004 and 2005, 11.2% and 11.5%. We are about to repeat that historic level of spending growth. I am predicting 2015 will finish with growth of 11.6% and 2016 will experience 11% growth.
(8-12-16) 2015 finished at 10.6% because 2014 was revised up. Construction spending for 2016 will probably finish closer to 8%.
I expect historic levels of growth in spending will be accompanied by inflation relative to historic high growth periods. Don’t expect long term average inflation in high growth periods. Don’t be caught short in your construction cost budgets!
Graphic updated 1-8-16
The chart shows the low and high range of various independent nonresidential buildings construction actual cost indices. In 2015, the range of estimates was from 2% to 5%. The actual inflation came in at 4%. The plotted line is my result of where inflation actually ended up. A chart for residential construction would show much different values.
( Also See 1-31-2016 comments and chart on inflation )
Construction Analytics 