RSMeans’ Construction Cost Index Increased 3.5% in January
In January 2008, RSMeans’ Construction Cost Index (CCI) increased 3.5% year-over-year, but only 1.7% on a quarter-to-quarter basis, annualized. There have only been a couple of times (see accompanying graph) when lower figures have been posted for either of these measures going back four years. The present is a particularly pressure-free time with respect to construction cost hikes.

Material Cost Increase Negligible in Latest Quarter
In the latest quarter, material costs rose 3.5% on a year-over-year basis, but only 0.4% on an annualized quarter-to-quarter basis. There have been three major sub-component areas of material price increases on a year-over-year basis: (1) concrete (+5.2%), led by concrete reinforcing (+7.8%); (2) metals (+6.1%), led by structural metal framing (+7.7%); and (3) openings (+9.4%), led by doors and frames (+8.9%). Internationally-set concrete, steel and energy prices lie behind these increases.

On a quarter-to-quarter basis, all of the sub-component material changes were less than one percentage point in either direction, except for concrete reinforcing (+2.1%) and flooring (+1.2%) on the upside and plaster and gypsum board (-2.5%) on the downside. The latter is a fallout from weak residential construction markets.

Labor Rates Running +3.5% to +4.1%
Annual labor cost increases appear to be ranging between +3.5% and +4.1%, depending on the measure. At the lower end, the “installation” (i.e., mainly labor) component of RSMeans’ composite index records a 3.8% year-over-year increase and a 0.9% quarter-to-quarter gain, which becomes 3.5% when annualized. At the upper end, RSMeans’ measure of labor rates for skilled workers in 20 trades (including fringe benefits) shows a year-over-year increase of 4.1% in January. Both of these measures are in line with the latest increase in the all-items Consumer Price Index (+4.0%).

A Good Time to Build for Those with Steely Nerves
The Conference Board’s consumer confidence indicator is at its lowest level (64.5) in five years. This is causing some owners contemplating investment to get cold feet. In a way, this is a shame. For those with steely nerves, the time to build might be quite propitious. Interest rates have fallen again, provided you can line up the financing. Costs are likely to continue under control due to a number of factors, as outlined in the next paragraph. Finally, the economy is likely to break for the better by the second half of this year. Investment in significant capital projects should have relatively long-term time horizons.

There are a number of signs that things should stay relatively quiet on the price front for a while. (1) The U.S. slowdown is starting to have some ripple effects on other economies (e.g., Europe and China). As a consequence, the pressure is coming off internationally-traded commodity prices. Included here are oil, copper, steel and concrete. (2) There have been recent indications that the value of the U.S. dollar is stabilizing. This will lower import prices. (3) Residential markets in the U.S. remain depressed. It will be some time (i.e., not until well into 2009) before there will be upward pressure on housing-related material prices due to an excess of demand. (4) A lack of confidence in the U.S. economy generally is taking the edge off what should be a much stronger non-residential construction market, again serving to keep costs down.

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