Construction is booming in all corners of the globe and the intense demand it is creating is keeping pressure on costs. The inflationary pressures felt in the U.S. market from rising commodity and oil prices mirror that worldwide phenomenon.
The average building inflation for 20 countries in Europe, Asia, Middle East, Latin America and North America increased to 6.1% during 2006 from 5.3% the previous year, according to London-based international project and cost management firm Gardiner & Theobald Inc. in its fifteenth annual survey of international construction costs conducted exclusively for ENR. But the average masks a broad spread of inflation that ranges from less than 3% in 11 countries to double-digit increases in four.
One of the largest increases in construction inflation tracked by G&T was reported by its New York City office, which says construction costs there jumped 11.5% in 2006, following an 8.3% increase in 2005.
Some countries that appeared to be getting inflation under control have been pushed back into hyper-inflation. Argentina, which gradually reeled back inflation from 69% in 2002 to just 10% in 2005, was hit with a 24% increase in building costs during 2006. Likewise, building costs in Poland rose 20% in 2006 after falling to single-digits in 2004 and 2005, according to G&T.
Not all countries are succumbing to higher inflation. In Italy, building costs rose just 1.6% this year, following annual gains of 4.1% in 2005 and 5.2% in 2004. New Zealand recorded a similar easing of inflation with this year’s 1.4% increase, well below the 3.5% recorded in 2005 and 14.4% in 2004. South Africa also is having some success in containing inflation. Building costs in South Africa rose 6.9% in 2006, down from annual increases of 14.3% in 2005 and 18% in 2004, according to G&T.
“The escalation we saw between 2004 and 2006 was a global phenomenon,” says Jim Scotti, vice president and chief procurement officer for Fluor Corp., Irving, Texas. “We are in a suppliers’ market and there is no part of the world that is exempt from this.”
Delivery times and scheduling are becoming bigger problems than pricing, says Scotti. “Equipment is going to be the biggest surprise. We have seen projects go back to the drawing board from
a cost and scheduling standpoint, and if everybody’s programs go ahead as planned, the market for [big compressors and pressure vessels] will be very tight.” Scotti notes that delivery times for large heavy-wall vessels has doubled in the past year. “The scheduling problems are only going to get worse in 2007,” he says.
Hong Kong has gone from falling prices earlier in the decade to double-digit cost increases this year, says Julian Anderson, a principal in the Phoenix office of the international cost consultant Rider Hunt Levett and Bailey. “Cost escalation in Hong Kong will be about 10% this year, which is really high by their standards,” he says. “Hong Kong has been clobbered by the massive building boom in Macau,” says Anderson. Mechanical and electrical costs alone on projects in Hong Kong are being hit with 15 to 20% increases.
“Many commodities are now linked to global pricing, and booming economies like India, China [and] UAE and a renewed interest in infrastructure in Australia and New Zealand are pushing up prices for construction materials in India,” says Manoj Kanti Ghosh, senior vice president of Feedback Ventures, a New Delhi-based affiliate of G&T. “The cost of trained manpower in India has gone up significantly in the last two years,” he says.
As a construction hot spot, Moscow represents Eastern Europe’s Dubai, says Roger MacMorran, commercial manager for Bovis Lend Lease International in that city. Costs are rising, but “the main problem is the availability of good quality contractors from Russia and abroad,” he adds. “Turkish contractors are well established but western firms are not willing to come,” he says. Another challenge is the devalued ruble, which has fallen over 20% against a package of international currencies in three years, he says.
Poland’s construction market also is “very, very hot,” says Jan Holyst in G&T’s Warsaw office. Bid prices “are sky high and going up. Contractors won’t give a fixed-price contract or leave a tender open for more than 90 days,” he adds.
Materials price escalation in Poland has been severe. “Cement prices have rocketed and steel and rebar have gone up incredibly and are still going up,” says Holyst. At the same time, major labor migration to Western Europe is fueling wage inflation of up to 35% in the last year, he says. “The only thing that can keep [skilled workers] here is a substantial pay increase,” says Holyst.
Romania, due to join the European Union this January, is attracting a lot of investment, which has markets humming, says Gavin Moore, G&T’s country manager in Bucharest. Projects launched in the last 18 months are set to start construction in 2007, putting pressure on the industry’s capacity to deliver, Moore says. Finding contractors will be difficult but labor may be the bigger problem, he says. With labor emigrating to better paid regions of Europe, “labor prices are increasing,” Moore adds.
U.K. construction is “getting busier” from already higher levels, says Nick Rowe, a G&T partner in London. The U.K. is seeing the flip side of shifting European labor markets. “Substantial migration from Eastern Europe is slowing labor cost hikes,” says Rowe. “But, at the same time, professionals’ salaries are rising.” On the materials side, steel prices are still rising, but “nothing like two years ago,” he says. But copper price hikes of 70% in the last year are being felt in bids for electrical and plumbing contracts.
France also has an “extremely positive market on all fronts,” says Chris Gilmore in G&T’s Paris office. At about 4.7%, construction inflation is double the general rate in the economy partly because competition between contractors is easing. “Contractors are now pricing without discounts,” he says. “Over the last two years there has been a little margin recovery,” he adds.
For mid-size German contractors, “order books are nearly full and their prices are starting to rise for the first time in a long time,” says John Atkins, country manager for E. C. Harris, Düsseldorf. The unit price of smaller buildings has risen 5 to 10% this year, he adds.
Construction in Dubai remains frantic but there now are signs of a slowdown, according to Jeff Higgins, of G&T in the Gulf emirate. “Costs are going up substantially,” he adds. What concerns developers is not so much raw material costs but scarce contracting resources. Only three bidders emerged for a recent $270- million real estate job. New contractors are entering the market, says Higgins, but “it’s not helping construction costs.” The increasing difficulty in recruiting workers from India also is fueling inflation in labor costs, he adds.
South Africa’s construction “is very buoyant,” says Calvin Setzkorn, a partner in Schoombie Hartmann Preller, Pretoria. Concrete supplies are not keeping up with demand and steel prices have increased 12% in the last three months, says Setzkorn. But he expects steel prices to fall back 8% in 2007. Contractors depend heavily on migrants for skilled workers, he notes.