In the past year, construction teams around the world have been facing increased cost pressures with rising steel and lumber indices. Materials, commodities, labor and supervision, subcontractors, and opportunistic cost in general are escalating in many places.
Is Relief on the Horizon for Rising Construction Costs?
Key solutions to stay ahead of inflated cost can help combat the ongoing volatility of construction cost
Cost of Inflation by Geography
Download our key solutions to help combat ongoing construction costs.
In the Americas, the recent trend of 10-16% price increases over the last 12 months appears to be abating to 6-10% depending on the market. This is still above the 3-4% historical "normal range."
Anecdotally, we are beginning to see some subcontractor markets starting to compete in an effort to fill their 2023 backlog, which is starting to lower the rate of inflation. We are hoping that this will cause the "fever" to break in certain markets and fast track escalation to reduce more quickly.
In Europe, the previous 12-month increases of 10-25% (depending on country) have moderated but are still at elevated levels. Forecasts previously called for falling prices, but there is no sign of this to date. Supply chain issues have improved slightly, but the labor shortage has no end in sight - more detail on both below.
In Asia Pacific (APAC), they experienced 10-12%+ inflation over the last year. Steel and other materials still are not meeting demand, and there is a significant backlog outstanding. The Regional Comprehensive Economic Partnership (RCEP) looks to improve on this with raw materials and intermediate products moving upstream and downstream with fewer trade barriers.
Current Factors Impacting Construction Costs
Supply chain disruptions, although beginning to show pockets of improvement, are still fueling significant impacts on development and construction.
Material and equipment lead times are much longer than historical norms, with many equipment and specialty items stretching 12+months.
Commodities are seeing the market dip and rise depending on the material. Recent pullbacks to levels still above previous levels:
The Issue Moving Forward
Pre-COVID-19, the construction industry was short thousands of workers, and that only grew during the pandemic. Moving forward, labor shortages that have risen since the pandemic are not expected to resolve in the next 12 months, and are forcing project deferrals, increased project durations, and increased cost. The United States, European Union, and Canada are at historical low unemployment rates. Craft wages have risen at their fastest rate since 1982 (according to the AGC). Canada is experiencing a high percentage of workers retiring in the past 24 months which is adding to the labor squeeze, ensuring higher labor rates for the foreseeable future. We wouldn't be surprised if this is also true in the U.S. as well.
We are keeping our eye on the single family market in all regions; with the U.S. continuing to increase rates, few home sellers are willing to trade their 3% mortgage in for a 7% mortgage on the "move-up house," effectively freezing the single family market. The labor implications for the multifamily (still firing on all cylinders) and commercial markets are yet to be seen.
Many in the industry predict construction pricing to level or even reduce. We have not seen this yet, and anticipate a leveling around six months away, if it occurs at all. We expect it to vary widely by region, and will probably only last 3-6 months.
To combat the ongoing volatility of construction cost, here are key solutions to stay ahead of inflated cost:
- Revisiting budgets often and including more cost contingencies.
- Nurture and leverage relationships by staying in constant communication with the client.
- Modify design with innovation solutions.
- Due to supply chain issues, it's important to be hyper-focused on compiling and constantly reviewing a detailed tracking log.
- An efficient bidding process is critical. Depending on the region, market condition(s), and the ultimate project goal, the bidding strategy may be different and can be altered.
- Early procure long lead items that are critical to the construction schedule options nearer to downtown areas.
For more information on how to cut costs, reduce risk, and deliver greater long-term value, download our Conceptual Construction Group brochure.