CPI Versus Construction cost increases
It’s in all the news, inflation is back. Construction firms have lived with inflation all along – when your margin is 3%, and construction cost inflation is 3%, you’d better capture that cost in your budgeting.
Over recorded construction cost history, inflation in the US economy (measured with CPI, the Consumer Price Index), has trended slightly below inflation in construction costs (measured with ENR’s BCI, the Building Cost Index).
During the last 2 years, construction inflation has jumped faster than economic inflation, and shows no signs of abating, other than an unrealized potential for reduced activity due to the rapidly increasing cost of financing.
What are CPI and BCI? CPI, produced by the Federal Bureau of Labor Statistics, surveys the consumer marketplace to identify the cost to consumers of a market basket of goods and services, priced at retail. BCI, from ENR magazine, is much less comprehensive, and prices a mixture of materials, steel, concrete and lumber, with labor wages from a group of union trades. BCI doesn’t include any profit calculations or other costs incurred by builders. Even so, BCI trends higher than the CPI, and in the last 2 years that lead has steadily increased.
The widening gap between the two indexes is due in part to the size of the market that CPI is measuring. Not everything CPI counts is increasing at high rates, while all of the items in the BCI index have increased over the past 2 years at historic rates.
While the Federal Reserve Bank is making strong efforts to combat inflation in the greater market, it remains to be seen if their efforts will be successful. Similarly, BCI data seems to indicate that construction costs continue to increase unabated. Looking forward, it seems reasonable to assume that the historic construction rate of cost increase of 3% is not likely, and that the range of possible escalation could extend anywhere from 4% to 12% this year, if current conditions persist.