This is a post from Jim Haughey's blog that covers the US construction industry.
Jim Haughey is the Chief Economist for Reed Construction Data and has over thirty years experience as a business economist, including twenty years monitoring the construction market. He has a Ph.D. degree in economics from the University of Michigan and has previously taught at the University of Michigan, Ohio University, Michigan State University and the University of Massachusetts.
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Construction Industry Forecasts
Notes from Jim Haughey - Jun 11, 2010
The GDP price data through the first quarter show a 1% rise in residential construction costs over two quarters and a 0.3% rise in nonresidential and heavy construction costs in the first quarter. Partial material price and wage data for the second quarter suggest that construction costs continued to rise slowly during the spring. First quarter construction costs were down 6.3% from the 2007 peak for residential construction and 6.2% for nonresidential and heavy construction.
The drop in contractors’ margins can not be measured directly. In the residential market, both materials prices and hourly wages rose 5.9% while total building cost dropped 6.2%. Nominally, this rise in labor and materials cost contributes 4-4.5% to the overall cost of construction. In turn, this implies that builders’ margins fell 10-10.5% of the total cost of the building which would drop margins to the zero range. While this happened in some cases, overall margins likely remained positive although very depressed. This calculation ignores cost reductions from material substitutions and improved labor productivity.
Unfortunately, labor productivity is not formally measured in the construction market. Over the same periods in manufacturing, labor productivity increased 4.9%Productivity in construction has lagged productivity in manufacturing for many years based on a variety of proxy measures. But the gap may be closing with the recent adoption of BIM and improved construction management. A 4% productivity gain over this period would contribute about a 2% total cost reduction and trim the margin decline for homebuilders to 8-10% of the total building costs or slightly positive but very depressed.
Similar calculations in the nonresidential and heavy market yield an estimate of contractor’ margins broadly in the 5% of total cost range.
Current projections of materials and labor cost as well as building sales prices suggest that contractor margins suggest that margins could be slightly lower in the spring and summer but improving by yearend although still depressed. Next year, more rapid gains in building prices will permit margins to improve faster but not fully back to the normal range.
