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  • Writer's picturechris

Escalation - Is the dread beast on the way back?

Yes, I know it’s a little bit of a click-bait, but after a several months of declining construction cost escalation, (often close to zero on a monthly basis) there are hints of a renewal of pricing increases. Anticipating cost increases, is what this is about, and there is a hint here that the higher energy prices, higher financing costs and other macro inflators are having an impact on construction costs.

Pricing, while it has recently been increasing at a slowing rate, to normal levels, is not normal. Based on ENR BCI data, rates of increase have jumped around from close to zero percent on a monthly basis, up to almost a third of a percent, which if you annualize (multiply by 12 months), is a substantial rate of cost increase.

This is somewhat normal to be fair. When the media examines cost increases, they look at the big picture – it’s easy to explain, and is widely accepted. When looking at cost changes, the big picture is useful to some extent, but there is a much more interesting story below the surface. Individual markets - defined in any way you can think of, are changing in widely varying ways.

· Geographic – It's kind of a sloppy chart, but it shows how some northeastern (and other) cities like Boston, Philadelphia, Denver and New York are experiencing higher rates of cost increase than other areas. Some cities such as Atlanta are experiencing cost declines. The chart below shows the month to month change in construction spending for 3 cities. I'm not sold on it's accuracy - it may be a too granular look at the data, but it does indicate how local markets can differ widely.

· Markets - Commercial and residential are seeing totally different environments. Residential, roughly half of the total market, is showing a strong decline in spending increase, primarily due to reductions in construction starts and building activity, but also as some material costs (lumber) have declined. (note: good news on residential construction starts in May, changing the trend.) Non-residential, everything else, is showing a modest upward change in spending, probably due mainly to escalation of material and labor costs and increased infrastructure spending.

What is the take-away?

1. It’s a big market. Like the group of blind men inspecting the elephant, each market participant is going to see differing conditions.

2. Big picture escalation predictions are difficult to make with accuracy, but are really all that we have to predict long term.

3. Pay close attention to market conditions to avoid being caught by surprise at bid time.

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