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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.

More commentary will be added soon.

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. All data updated to include Dec 2017 published January 2018.

PPI Materials Percents 2006-2017 2-20-18

Watch this AGC page for monthly updates to the PPI

2018 Construction Outlook Articles Index

Articles Detailing 2018 Construction Outlook

Links will open in a new tab

These links point to articles here on this blog that summarize end-of-year data for 2017 and present projections for 2018.

Spend current vs constant 2018 3-4-18

Most Recently Published

2018 Construction Spending Forecast – Nonresidential Bldgs 3-28-18

2018 Construction Spending Forecast – Mar 2018

Construction Economics Brief Notes 3-10-18

Construction Spending is Back 3-9-18

Construction Jobs 3-8-18

Publicly Funded Construction 2-28-18

PPI Materials Input Index 2-20-18

Down the Infrastructure Rabbit Hole 2-16-18

Inflation in Construction 2018 – What Should You Carry? 2-15-18

Residential Construction Jobs Shortages 2-3-18

2018 Construction Spending – Briefs 1-26-18

Cautions When Using PPI Inputs to Construction! 1-15-18

Indicators To Watch For 2018 Construction Spending? 1-10-18

Spending Summary 2018 Construction Forecast Fall 2017 12-3-17

Backlog 2018 Construction Forecast Fall 2017 11-10-17

Starts Trends 2018 Construction Forecast Fall 2017 11-8-17

In What Category is That Construction Cost? 11-15-17

Construction Jobs / Workload Balance 11-7-17

Constant Dollar Construction Growth 11-2-17

Is Infrastructure Construction Spending Near All-Time Lows? 10-10-17

Summary

2018 Construction Spending Forecast – Mar 2018

2018 Construction Spending – Briefs 1-26-18

Spending Summary 2018 Construction Forecast Fall 2017 12-3-17

Construction Spending is Back 3-9-18

2017 Results

2018 Construction Spending Forecast – Mar 2018

Spending Summary 2018 Construction Forecast Fall 2017 12-3-17

2018 Starting Backlog & New Starts

2018 Construction Spending – Briefs 1-24-18

Backlog 2018 Construction Forecast Fall 2017 11-10-17

Starts Trends 2018 Construction Forecast Fall 2017 11-8-17

Construction Starts and Spending Patterns 9-26-17

2018 Spending Forecast

2018 Construction Spending Forecast – Mar 2018

2018 Construction Spending – Briefs 1-26-18

So, About Those Posts “construction spending declines…” 10-4-17

Construction Spending Almost Always Revised UP  5-1-17

Nonresidential Buildings

2018 Construction Spending Forecast – Nonresidential Bldgs 3-28-18

2018 Construction Spending Forecast – Mar 2018

2018 Construction Spending – Briefs 1-24-18

Nonres Bldgs Construction Spending Midyear 2017 Forecast 7-24-17

Residential

2018 Construction Spending Forecast – Mar 2018

Residential Construction Jobs Shortages 2-3-18

Infrastructure Outlook

2018 Construction Spending Forecast – Mar 2018

Down the Infrastructure Rabbit Hole 2-16-18

2018 Construction Spending – Briefs 1-24-18

Is Infrastructure Construction Spending Near All-Time Lows? 10-10-17

Infrastructure – Ramping Up to Add $1 trillion 1-30-17

Calls for Infrastructure Problematic 1-12-17

Public Construction

2018 Construction Spending Forecast – Mar 2018

Publicly Funded Construction 2-28-18

Spending Summary 2018 Construction Forecast Fall 2017 12-3-17

Infrastructure & Public Construction Spending 3-5-17

Materials

PPI Materials Input Index  2-20-18

Jobs

Construction Jobs 3-8-18

Residential Construction Jobs Shortages 2-3-18

Construction Jobs / Workload Balance 11-2-17

Construction Jobs Growing Faster Than Volume 5-5-17

Inflation

Inflation in Construction 2018 – What Should You Carry? 2-15-18

Constant Dollar Construction Growth 11-2-17

Construction Inflation Index Tables UPDATED 2-12-18

Construction Cost Inflation – Commentary  updated 2-13-18

US Historical Construction Cost Indices 1800s to 1957

 

 

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

  • 8-6-17 updated index tables and plots to 2017 base = 100
  • 2-12-18 updated index tables to Dec 2017 data (major revisions to HiWay index)

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

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.

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.

2-12-18 – Index updated to Dec 2017 data

Index Table 2001 to 2020 updated 4-20-18

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

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 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.

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

Index Table 2001 to 2010 updated 4-20-18

Index Table 2011 to 2020 updated 4-20-18

 

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.

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

Construction Cost Inflation – Commentary

2-13-18

General construction cost indices and Input price indices that don’t track whole building final 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.

2-12-18 plots updated to Dec 2017 data

BCI 1992-2019 2-12-18

BCI 2005-2019 2-12-18

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 equal with the four-year high. It’s expected, after final revisions are posted, that 2017 spending will increase 6+% and maintain a consistently high four-year level of spending.  

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.

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 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.

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 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.

Anticipate residential construction inflation for 2018 at least 5%.

Several indices for Nonresidential Buildings 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. 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, 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 during the next two years near a growth rate of 5% 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 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% to 4% inflation for 2018 with the potential to go higher in rapidly expanding markets..

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 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 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 3.7% 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

Construction Inflation Cost Index

Note: The original post you’ve reached here was written in Jan 2016. For the latest information follow this link to the newest post on Inflation.

Construction Cost Inflation – Commentary updated 2-13-18

Also See  Construction Inflation Index Tables Table of 25 indices 2001-2020 updated 2-12-18.

This data gets updated twice a year.

Thank You. edz

Jan. 31, 2016

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

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

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

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

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

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

Building Cost Inflation Index

 

Construction Inflation

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.

Construction Inflation 2000 - 2017 plot 1-8-16

( Also See 1-31-2016 comments and chart on inflation )

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