RSMeans detects a speed-up in construction material prices

According to RSMeans’ Construction Cost Index (CCI), which is based on an average of 30 major American cities, the expense of building in January 2011 increased 2.3% versus January 2010. The composite index gain was comprised of materials at +1.8% and labor at +2.9%.

More recent evidence suggests the materials side of building costs is heating up. The latest quarter-to-quarter gain in the overall index, October 2010 to January 2011, was +3.7% annualized. But it was saved from a faster advance by a labor component that slowed to +1.9% annualized. Moving in the opposite direction, materials prices speeded up considerably to +5.6% quarter to quarter annualized. The cause was the revival in international commodity prices.

To calculate the CCI, Means combines nine different types of buildings in a composite model. The structure types provide strong representation from the mainly non-residential building segment of the market. Included are a factory, parking garage, store, office building, town hall, hotel, school and hospital. A low-rise apartment building contributes a residential aspect.

With respect to material inputs, some of the largest year-over-year cost changes came in concrete reinforcing (+10.9%), metal joists and decking (+5.5%) and tile and terrazzo (+6.4%).

Emphasis shifted in the latest quarter-to-quarter changes. Site and infrastructure preparation and demolition was +8.4% annualized; structural metal framing, +4.8%; metal joists and decking, +5.0%; glazing and curtain wall +3.9%; and fire protection, plumbing and HVAC +19.7%.

Higher prices for metals (e.g., copper at a record) are working their way downstream. Most important – due to oil’s usage in so many stages of the construction process – has been the jump in the world price of crude with the addition of a $10 to $15 USD per barrel risk premium.

There has been a substantial fall-out from Libya descending into chaos and regimes in other MENA (Middle Eastern and North African) nations facing unrest and challenges. Supply disruptions from Algeria, Oman, Iran or even Saudi Arabia would shock oil prices much higher.

For materials not as vulnerable to geopolitical conflict or separated from the emerging nations’ effect, change has been either more moderate or in the opposite direction. For example, quarter-to-quarter concrete forming prices in the latest period were -9.3% annualized; precast concrete, -9.7%; plaster and gypsum board, -14.7%; and ceilings and acoustic treatment, -4.9%.

In the U.S., the cities with the highest construction costs relative to the country as a whole are mainly the biggest centers, including most-expensive New York, followed by San Francisco, Oakland, Boston and Chicago. The cities where it is relatively inexpensive to build are mainly in the south. Tennessee, Texas and Florida provide the bulk of the lowest-cost urban areas.

It is interesting to note, however, that a number of the southern cities that rank low in nominal cost also rank high in terms of latest construction cost increases (quarter to quarter annualized), including  Jacksonville, Nashville, Ft. Lauderdale, Memphis, Austin, San Antonio and Atlanta.

In free market economies, bargains last only so long until opportunities are spotted and jumped on. This draws attention and attracts others into the bidding process, resulting in higher prices.

As in the U.S., the cities in Canada with the highest construction costs relative to the country as a whole are the big population centers. The five front-runners are Calgary, Edmonton, Toronto, Vancouver and Hamilton. The prominence of the two cities in Alberta is a carry-over from when the enegy-fueled mega project boom was so strong in the middle years of the previous decade.

The recession may have reduced the prevalence of construction cranes in Edmonton and Calgary for a while, but as oil prices scale the heights again, mothballed Heavy Oil projects are being dusted off and re-ignited. This will have consequences in terms of labor and material availability.

The five cities at the bottom of the relative construction-costs listing – Windsor (under the sway of the auto sector), Regina, Saskatoon, Halifax and St. John’s - are mainly smaller centers in more remote regions of Canada. Similar to the U.S., however, it is noteworthy that three of those cities – St. John’s, Saskatoon and Regina – are among the five urban areas with the fastest increasing construction costs (quarter to quarter annualized) in the final three months of last year.

The outlying regions in Canada are coming into their own as world demand for raw materials increases in leaps and bounds. Potash, uranium, diamonds, wheat, copper and offshore oil are all in increasing demand, with accompanying reasons for owners to commit to capital projects.

Materials sub-component of CCI – latest movements		Installation/Labor Sub-component of CCI – latest movements
30-city average hourly labor rates for skilled workers (20 trades) (including fringe benefits)