Competition Holds Costs in Check, Despite Cost Hikes
Steel, cement and lumber prices all rebound but don’t budge inflation a bit. Well, maybe a little.
The input prices of steel, cement and lumber are all rebounding from recession lows, but overall inflation is not budging. Well, maybe a tiny bit. Lumber prices have taken full advantage of the housing recovery, rising 16% above a year ago, according to ENR’s 20-city average price for the most commonly used species of 2x4 lumber. Structural-steel prices are expected to increase 8% this year, reversing two years of declines, IHS Global Insight predicts. The forecasting firm is also calling for a 3.7% increase in cement prices this year.
“Cement prices are on a run,” says Deni Koenhemsi, senior economist at IHS. “Industry consolidation and strong demand are keeping prices high, but we do expect escalation to ease off in the coming years, from 3.7% in 2017 to 1.7% by 2020,” she says.
Rebar and structural-steel price pressure also will start to ease by 2018, says John Anton, IHS steel analyst. He predicts structural-steel prices will bounce back 8% this year, after falling about 15% during the past two years. However, this year’s bump will be rolled back another 6.2% in 2018, he suggests.
Despite this upward pressure in costs from basic building materials, overall construction inflation has seen little movement. In January, ENR’s 20-city average building cost index was up 2.9% for the year, compared to an annual escalation rate of 1.2% the previous year. The Rider Levett Bucknall selling cost index in January was up 5.1% for the year, compared to a 5.2% annual increase posted by the same index a year ago.
Prices are still increasing at an overall average rate of about 0.5% per month for in-place costs, says Mary Wallers, president of the cost consulting firm Sierra West. “There is still a short supply of skilled workers, and that continues to push subcontract costs higher,” says Wallers. With the labor issues, “we fully anticipate substantial increases in labor costs,” she says.
And that would undercut one of the biggest anchors to cost stability. In 2016, the average increase for union wages was just 2.6%, according to the Construction Labor Research Council’s latest survey. CLRC estimates that this year’s union contract settlements will increase by about 2.8%, based on the terms of second-year agreements in reported contracts. But labor shortages and strong markets are starting to push labor costs in ways not tracked by these statistics.
In many regions, the strength of the construction market is reflected in executive compensation. Since 2013, salary increases for executives have averaged around 4%, according to data from Personal Administration Services (PAS). While that is below traditional norms, bonuses have improved, and some recruiters report seeing companies pay bonuses totaling more than 150% of base pay in 2016. Jeff Robinson, president of PAS, says salaries may have tightened because of lingering concerns from the last recession.
“People have long memories about how they suffered,” he says. However, many companies are letting executives share the success of a strong construction market through bonuses (see p. 28).