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Constant Dollar Construction Growth

11-2-17

Construction spending had been chugging along very nicely from 2012 through 2016 with annual growth ranging between +6.5% and +11.0%. The average spending growth for those 5 years is 8.5%/yr. For 2017, spending growth will come in at only just over 5%.

Perhaps what may be more important is the inflation adjusted growth or constant dollar growth. Constant dollar growth measures volume. Volume growth ranged from +3.0% to +8.0% in the 5 years from 2012 through 2016. The average constant$ growth for those 5 years is 5.4%/yr. The rest of the spending growth was inflation dollars. For example: a year in which spending growth is 7% but that has 4% inflation ends up with only 3% constant$ volume growth.

From 2005 peak volume ($1,448 bil in 2017$) to the lows reached in 2011 ($954 bil), constant dollar volume dropped 34%. Since the 2011 low, volume has increased 31%. In rapid growth years volume increases between 6% to 8%/yr. In average or low growth years, constant dollar volume growth ranges closer to 2% to 3%/yr.

Spend current vs constant 2017 11-8-17

2017 will post the highest composite construction inflation in 11 years, 4.5%. Residential inflation has averaged 6%/yr for the last 5 years. With 2017 at 5% construction spending growth, the lowest in six years, and at the highest inflation in years, 2017 volume growth will fall to only +0.6%.

Residential, with nearly 12% spending growth in 2017, still holds onto the best volume growth in 2017 at slightly over 5%. Residential has recorded the highest volume growth in 5 of the last 6 years, the lowest coming in at +5%, averaging 8%/yr for 6 years.

Nonresidential Buildings constant dollars is down slightly for 2017, posting a volume decline of -0.2%. This was predictable since Manufacturing, after recording 90% growth from 2011 to 2015, has worked off a big backlog and dropped 15% (from an all-time high) in the last two years, most of that drop in 2017. For 2017 that drop offset $8 billion of growth from other markets. Nonresidential Buildings volume increased 20% in the previous 3 years.

Non-building Infrastructure volume is down 6% in 2017 after growing only 5% in the previous 2 years. However, the non-building infrastructure sector led all growth in 2014 at +8.5%. It should be noted that 2015 posted the all-time high for Infrastructure spending. The largest declines since then are in Environmental Public Works projects, Sewer/Water/Conservation. All three markets posted declines in new project starts in 3 or 4 of the last 4 years. Spending in 2017 is down 17% from the most recent high in 2015.

Public works spending is responsible for 80% of the dollar decline in non-building infrastructure spending since the high in 2015.

In 2018, Nonresidential Buildings and Non-building Infrastructure lead spending growth.  Residential spending will slow considerably after six years of solid growth. Constant$ volume growth after inflation will climb back to +2.3% with the two nonresidential sectors over 5% and residential dropping to a volume decline.

Spend Sector Constant 2006-2018 11-2-17

 

 

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?

Here is the 11-7-17 extension of latest info Construction Jobs / Workload Balance

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

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

Saturday Morning Thinking Outloud #5 – Jobs Growth

For all of 2014-2015-2016

  • Total Construction jobs increased from 5,950,000 to 6,700,000, +12.6%
  • Total Construction spending increased from $960bil to $1,170bil, +22%

BUT, much of that spending increase is inflation. We need to compare to constant dollars which = Volume. Inflation was particularly high in residential work, over 15% for the 3 years, which means $1.00bil in spending 3 years ago would be worth more than $1.15bil today. Converting everything to constant Oct 2016 dollars, after inflation we get:

  • Total Construction volume increased from $1,070bil to $1,170bil, +9.4%

So, for the 3 years, jobs increased by 12.6% while real work volume increased by 9.4%.

A more thorough analysis, which takes hours worked into consideration, shows from the Jan 2011 bottom of the recession in construction to current, both jobs and volume have increased equally by 28%. But jobs growth is often out-of-balance with real volume growth. In the beginning of the recession years of 2008-2011 firms let go of people much faster than work volume declined. 2009 showed a big gain in productivity. By 2010-2011 firms hadn’t let go enough to match the loss in spending. Then from 2012-2014 workload grew faster than firms filled jobs. Since 2011 we are sort of on an even keel.

For the last 3 years, jobs increased more than real construction volume. I pointed this out in my last detailed jobs report.  The 6 months from Oct 2015 – March 2016 encompassed the fastest new construction jobs growth period in a decade. It’s no surprise to me that jobs growth has been slow since March this year. Frankly, I wouldn’t be the least bit surprised if it remains slow for awhile. When we look at jobs growth vs. volume growth, there is reason to believe that slow jobs growth is not entirely due to labor shortages. Part of the blame is due to recent over-hiring.

For more on jobs read this

Saturday Morning Thinking Outloud #3 – Construction Jobs

 

Why the big slow down in construction jobs this Year? Is work volume on the decline? Are labor shortages to blame?

These days, the most talked about reason for slower jobs growth is the lack of experienced workers available to hire.  In fact, recent surveys indicate about 70% of construction firms report difficulty finding experienced workers to fill vacant positions and the Job Openings survey has been at highs for several months.  That certainly cannot be overlooked as one reason for slower jobs growth, but that is not the only reason?

Although recent growth has slowed, even with all this talk of difficulty finding experienced construction workers, there has been very good jobs growth. For the 5 ½ year period from the low point in January 2011 to the present (August 2016) we added 1,240,000 construction jobs.

  • Jobs increased by 23% in 5 ½ years.
  • Spending growth increased 52% in that same 5 1/2 years.

Why is it that jobs don’t increase at the same rate as construction spending? Because much of that spending growth is inflation, not true volume growth. Volume is construction spending minus inflation. To get volume, convert all dollars from current $ in the year spent into constant $ by factoring out inflation.

  • Spending growth is not a true measure of increase in real volume.
  • Jobs growth should not be compared to spending growth.

 

volume-growth-jan11-thru-sept2016

Now that we have spending converted to volume, we need to adjust jobs to get real work output. The total hours worked affects the entire workforce so has a significant impact on output.

  • Jobs is not a true measure of work output.
  • Jobs x hours worked gives total work output.

jobs-equiv-sept-2016

Spending must be factored to remove inflation and jobs should be factored to include any change in hours worked.

  • In the 5 1/2 years from Jan 2011 to mid 2016, real construction volume and jobs/hours real output both increased by 28%.

Now we see over the long term, job/hours and real volume are moving in tandem. But there are always short term periods when they do not and that causes ups and downs in productivity.

In 2014-2015, jobs/hours grew by 11%, the fastest growth for a two-year span in 10 years. Real volume of work increased by 16% producing a real net increase in productivity. But productivity had declined significantly in 2010 and 2011. It’s not unusual to see productivity balancing out over time. In part, this is due to companies balancing their total employees with their total workload.

From October 2015 through March 2016, jobs growth was exceptional. 214,000 construction jobs were added in 6 months, topping off the fastest 2 years of jobs growth in 10 years. That is the highest 6-month average growth rate in 10 years. That certainly doesn’t make it seem like there is a labor shortage. However, the jobs opening rate (JOLTS) is the highest it’s been in many years and that is a signal of difficulty in filling open positions.

  • For the 6-month period including Oct’15 thru Mar’16 construction gained 214,000 jobs, the fastest rate of consecutive months jobs growth in 10 years. Then, after 3 months of job losses, July, September and October show modest gains.

I would expect growth such as we’ve had for two years and then that 6 month period to be followed by a slowdown in hiring as firms try to reach a jobs/workload balance. It appears we may have experienced that slowdown. Jobs declined for four of five months from April through August. Keep in mind, this immediately follows the fastest rate of jobs growth in 10 years. But it also tracks directly to three monthly declines in spending. (I predicted this jobs slowdown in my data 9 months ago. I predicted the 1st half 2016 spending decline more than a year ago).

It is not so unusual to see jobs growth slowed for several months. It follows directly with the Q2 trend in spending and it follows what might be considered a saturation period in jobs growth. The last two years of jobs growth was the best two-year period in 10 years. It might also be indicating that after a robust 6 month hiring period there are far fewer skilled workers still available for hire. The unemployed available for hire is the lowest in 16 years.

If spending plays out as expected into year end 2016, then construction jobs may begin to grow faster in late 2016. However, availability could have a significant impact on this needed growth.

Availability already seems to be having an effect on wages. Construction wages are up 2.6% year/year, but are up 1.2% in the last quarter, so the rate of wage growth has recently accelerated. The most recent JOLTS report shows we’ve been near and now above 200,000 job openings for months. With this latest jobs report, that could indicate labor cost will continue to rise rapidly.

As wages accelerate, also important is work scheduling capacity which is affected by the number of workers on hand to get the job done. Inability to secure sufficient workforce could impact project duration and cost and adds to risk, all inflationary. That could potentially impose a limit on spending growth. It will definitely have an upward effect on construction inflation this year. If work volume accelerates, expect labor cost inflation to rise rapidly.

 

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  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  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 differentiate residential from nonresidential. 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 residential construction 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

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