RSMeans’ construction cost index has started to advance again. In the latest quarter, as reported for July 2009, the composite figure moved ahead 2.9% quarter-to-quarter annualized, although it remained unchanged compared with its level of a year ago. In the preceding quarter, it was -7.9% annualized and in the one before that, it was -2.4%.

The most recent quarter-to-quarter annualized change in the materials cost sub-index was -2.2%. The year-over-year change in the materials sub-index was -4.7%. July of last year was when world oil prices were at their peak (i.e., $145 USD per barrel). Many other commodities used significantly in construction building products were also high-priced last July. Declines set in shortly afterwards as financial firms teetered and toppled with respect to insolvency and stock markets collapsed in September. Average hourly labor rates have held up well, according to RSMeans. The 20-trade 30-city average hourly rate for skilled workers increased +4.6% year over year in the latest measurement period.  story continued below

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)

What’s the Future for Construction Costs?

The obvious question is, “Where do construction costs go from here?” It would appear that the recent era of bargain construction costs has run its course. First, inventories have been run down to the point where they need to be replenished. This means that discounting to reduce stocks is mostly over. Second, homebuilding indicators are staggering to their feet again. Prices are stabilizing for both new and existing homes. New home sales have been inching upwards for the past three months. The number of unsold homes has been declining. Therefore, the mathematical formula that calculates number-of-months inventory has improved dramatically. At 7.5 months, it has corrected about halfway to the point where it would indicate a market in much better balance (see graph).

Third, infrastructure stimulus is coming down the pipeline. This will put increased demand on raw material inputs. This leads to a fourth point − commodity prices are on the march again. The per-barrel oil price ($70) is now double what it was in February ($35). Chinese and other East Asian demand will bid up metal and mineral costs.

Private-sector Restraints on Costs

Private sector investment will continue to be restrained for a while. Profits are squishy although, in many cases, they have been supported by variable cost cuts. The latter have often been at the expense of workers, through layoffs. This might help each individual company, but collectively, it lowers total final demand and prolongs the recovery phase.  

Therefore, the prognosis is for increasing construction costs, but in a gradually ascending manner, rather than a rocketing take-off way, at least through the early part of next year. Beyond that, the outlook needs constant monitoring to avoid being caught flat footed.