Inflation that was contained through the expansion of the last decade may be crushed by the severe downturn in today's commercial markets. "I'm putting 0% escalation into my current estimates," says Larry Cockrum, president of Ripley, Miss.-based consulting firm Cockrum & Associates and current president of the American Society of Professional Estimators. "I priced a recent job as I normally would and then discounted everything 8% and that is probably where it is going to hit."
Severe competition is more than undercutting the modest increase in direct labor and material input costs reflected by 11 general purpose commercial building cost indexes tracked by ENR. This group of indexes posted an average 0.5% increase this quarter and is up 2.2% from a year ago. This compares to a 0.7% quarterly increase and a 2.4% year-to-year increase during the first quarter of 2002.
Indexes that track the actual selling price of construction show a different story (see chart below). The Turner Construction Co. index, which reflects competitive conditions, showed no movement this quarter and is up just 0.5% from a year ago.
The gap between the Turner index and other general purpose indexes gives an indication of the degree of discounting and margin cutting in today's market. "In general, the pricing of materials has remained flat, and while labor costs have had some upward [movement], they do not seem to be having a significant influence," says Karl Almstead, a Turner vice president responsible for its index. "Increases in insurance and surety costs are adding to pricing pressure. However, in total, the market appears to be absorbing the increased cost factors because the overall business environment is becoming more competitive."
Source: ENR Construction Economics Dept.,
Turner Construction Co. and R.S. Means Co. Inc.
Even some of the general purpose indexes are showing a slowdown in inflation. "Our index is increasing at one of the slowest rates we have seen for a while," says Roger Grant, vice president with R.S. Means. "In fact, we have seen a few areas where prices have actually settled back a little bit, particularly in the wood and plastic areas."
The Means building cost index increased just 0.2% this quarter and is up 2.4% for the year. This is down from an annual escalation rate of 3.7% for the same quarter of 2002. "Chalk it up to not a lot of demand on the commercial side," says Grant.
ENR's indexes showed little movement, with the CCI holding steady and the BCI slipping 0.1% for the quarter ending in January. During those three months, the labor component increased 0.5% for the CCI and 0.9% for the BCI. However, lumber prices fell 5% during this period, negating the impact of higher labor costs on the indexes.
Since January, lumber prices in ENR's indexes have stabilized while the labor component increased 1.1% for the CCI and 0.7% for the BCI. In March, however, both indexes were hit with a sharp 2.5% decline in structural steel prices (see p. 30). The lower steel prices helped pull the annual escalation rate for the BCI down from 1.9% in January to 1.5% in March. But the drop-off in structural steel prices had little impact on the CCI because materials account for only 10% of that index, compared to 18% for the BCI. The CCI's annual escalation rate in March was 1.9%.
But the real bite out of inflation is occurring in the bidding process as contractors and subcontractors cut their margins. "I do budget estimates for architects, so I'm pricing the whole project," says Cockrum. "And across the board we are seeing people bid these jobs at or below costs." He notes a case in which one ASPE member discounted equipment on a mechanical job by 40%, cut supervision to the bone and still had its bid beaten by 20%. "Things are really tight," says Cockrum.
Construction's Most Important Cost Indexes
The Austin Co., ClevelandThe index is based on pricing in major industrial areas for a 116,760-sq-ft steel-framed industrial structure and an 8,325-sq-ft office building. Estimates are based on labor and basic material costs including site work, electrical, mechanical, HVAC and process services. Published quarterly.
E.H. Boeckh Co., Milwaukee, a Marshall & Swift Co.The index covers 11 building types in 213 cities throughout the U.S. and 53 cities in Canada. The index has costs for 115 elements in each location19 building trades, 89 materials and seven tax and insurance elements. Boeckh researches both union and merit shop wage rates, and the indexes utilize the prevailing wage for a specific location. The index reported here is an average of 20 U.S. cities for a composite of five types of commercial and industrial buildings. Published monthly.
Bureau of Reclamation, Denver BuRec publishes construction cost indexes for 34 different types of dam and water projects under its jurisdiction. ENR publishes these in its second and fourth quarterly cost reports. ENR publishes BuRec's general property index that measures costs for office and maintenance buildings associated with its projects. Published quarterly.
Engineering News-Record, New York CityENR publishes a construction and a building cost index, which are updated in the first issue of each month.
Factory Mutual Engineering, Norwood, Mass.This is a weighted aggregate cost index based on the wage rates of eight trades and costs of seven materials. The weight of these factors in the index is derived from an analysis of construction input to five typical industrial buildings, ranging from a single-story, steel-framed warehouse to a multistory, reinforced-concrete building. The index reported by ENR is an average of 164 locations in the U.S. In addition, Factory Mutual computes indexes for residential construction as well as industrial process machinery and equipment. Indexes are available for Canada. Published semi-annually.
Fru-Con Corp., Ballwin, Mo.This index is based on an average industrial building in the St. Louis region, priced with the contractor's current material and labor costs. Adjustments are made for changes in construction materials and building methods. The index is weighted by using different percentages of labor, concrete, mortar, clay products, lumber, plastics, metals, paint and glass. Published monthly.
Handy Whitman, BaltimoreThis is a six-region average index for a reinforced concrete building, published by Whitman, Requardt and Associates. The index reflects materials prices for ready-mix concrete, lumber, steel bars, brick, concrete block and wages for laborers and six skilled trades. Handy-Whitman indexes also are available for electric, gas and water utilities. Published semi-annually.
Marshall and Swift, Los AngelesThe index is an average of 100 U.S. cities that Marshall and Swift combines into various regional, district and national indexes. These basic indexes can be divided further into five building types: fire-proofed steel, reinforced concrete, masonry, wood and pre-engineered steel frames. Selected materials, labor rates, taxes, business factors, as well as the cost of construction funds, are factored into the indexes. The M&S index supplied to ENR is broken out into three regional indexes: the Eastern region, which includes New England, Mid-Atlantic and Southeastern states; the Central region, which includes Great Lakes, Plains, Southeast and Southwest states; and the Western region, which includes the Mountain, Southwest and Northwest states. In addition, M&S publishes equipment indexes for 48 industries. Also available from M&S are indexes for 18 Canadian cities. Published monthly.
R.S. Means Co. Inc., Kingston, Mass.This index is based on a composite building representing current design practices. It has quantity weightings assigned to 66 construction materials, 21 crafts and 6 types of construction equipment rentals. The index published here is an average of the 30 largest U.S. cities. A breakdown for 305 other U.S. and Canadian cities is available. Published quarterly.
Lee Saylor Inc., SacramentoThe firm compiles two indexes. The labor-material cost index weighs labor and materials at 54% and 46%, respectively. The labor factor is based on quotes for nine crafts in 16 cities. The materials factor reflects 23 materials in 20 cities. The index can be broken out by concrete, steel or wood framing. The subcontractor index expresses an unweighted composite of in-place unit prices for 21 materials. Both indexes are compiled by The Wallers Group, Sacramento. Published monthly.
SmithGroup, DetroitThe index expresses actual in-place project costs. It uses building materials costs, freight rates and skilled and unskilled labor rates. It also factors labor efficiency and premiums, bidding competition, contractor profit margins and overhead. Contractor overhead includes taxes, project duration and material-expediting and labor procurement costs. The weighting method is the result of reviewing actual contractor schedules for values over several years. The index is based on 60% labor and 40% material. Published monthly.
Turner Construction Co. Inc., New York CityThis is a general building contractor price index based on actual selling prices that reflects current experience on labor rates, materials prices, labor productivity, management and plant efficiency and competitive conditions on projects across the U.S. Published quarterly.
U.S. Dept. of Commerce, Washington, D.C.Commerce publishes two construction-related cost indexes. The Composite Fixed-Weighted index is a ratio of the annual value of new construction put-in-place in current dollars to comparable values in 1992. The index reflects only changes in price. The Implicit Price Deflator is a similar index but reflects market conditions as well as price. Published monthly.
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