What’s next in Construction Escalation?
Updated: Jul 25
After a few years of insanely bad news for construction costs – 20% annual inflation, supply chain disruptions, and lead times longer than the eye can see – there is growing evidence that the upward pressures on cost are reducing.
At a conference last week, I spent some time chatting with a salesman for a joist and deck manufacturer, trading war stories about the business. He noted with some relief that their lead times had fallen back to nearly normal ranges of weeks rather than months. He continued to blame most of the issues in the last two years for his business on Amazon’s crazy building schedule of millions of sf of warehouses, and also thought the easing we seem to be seeing now is due to Amazon halting it’s construction binge.
Other anecdotal information such as reducing lead times for windows, doors, door frames and other common assemblies adds to the potential good news, as does the Engineering News Record Building Cost Index (ENR BCI), which shows construction cost inflation down to 8.3% for 2022, from 12.4% in 2021. Shorter term look-backs cut out the inflation we had over the summer, and so from July to December, the total inflation has been around 1%. Annualizing this would be around 2%, well below average construction cost inflation.
Dollar volume of construction is still quite high as inflated building projects are moving through the process, but capacity is not as strained as you might imagine. Projects bid in the last year average a 20% price bump over projects bid in 2018 and 2019, so much of that dollar volume increase doesn’t translate into more actual construction activity.
So current conditions are looking bright, from the cost side. Reduced supply side pressures, adequate capacity in the industry to continue building, and likely sustained demand for postponed projects.
But what are the risks?
Supply chain risks continue to linger. Big picture risks appear to be moderating, but that doesn’t mean that your project won’t suffer from some of the sporadic shortages that the market is currently encountering. Labor shortages are continuing, which is driving cost to some extent. Productivity also appears to be declining, employment is quite high, but more workers are putting in less value.
I expect relatively low construction escalation over the next year. Deflation is possible, but highly unlikely, except in the case of a collapse in demand if the US economy tanks. Materials and assembly supplies will continue to be uncertain, along with energy prices, but on the whole, expect moderation.