Death and Taxes
To quote Ben Franklin, and others, “in this world nothing can be said to be certain, except death and taxes”. For 2022, you might want to add construction cost increases to that very short list. Construction cost increases, as measured by Engineering News Record, in its Building Cost Index (ENR BCI), since 1990, have averaged 3.12% annually, with a standard deviation of 2.5%. For a simple comparison, In 1993, ’96, and ’08, costs increase peaks were around 5-6%, or slightly more than 1 standard deviation from the mean. In 2004, we topped out at 9.45%, or almost 4 SD’s above average. 2021 beat the pack at 12.8%, or more than 5 SD’s from the mean.
One fact about the construction industry is that our markets are highly competitive. Virtually all buildings are competitively bid. Rapid cost increases are most frequently followed by stagnant periods, even cost decreases if viewed on a monthly basis. It’s interesting to note that the 12.8% 2021 escalation occurred mostly from May through a peak recorded in August, with an immediate fall back to normal monthly rates. However, December prices, through the most current data are back up to an annualized rate that may have 2022 rivaling the 2021 record.
I’m sure we are all well aware of some potential reasons for this extraordinary situation, supply disruptions, labor shortages, generally higher risk of construction disruption, all traceable at least in part to the COVID pandemic we are slogging through. Today we can add disruptions due to the invasion of Ukraine, and the supply disruptions that are sure to follow, along with risk premiums as suppliers and contractors begin to factor in increased geopolitical risk.
So, to rework Ben’s quote - in 2022 nothing can be said to be certain, except death, taxes and construction cost escalation”.