T he construction recovery is gaining momentum, but inflation will remain modest. McGraw Hill Construction is predicting the dollar volume of its Dodge starts will increase 9% next year. But ENR forecasts this demand push will translate into only a cost nudge for its cost indexes. Taking all things into consideration, ENR predicts its Building Cost Index will increase 2.6% next year, following this year’s 2.2% increase. ENR’s Construction Cost Index is forecast to increase just 2.5% next year, following a 2.7% increase in 2013. The first thing to take into consider- ation is labor costs, which make up 81% of ENR’s Construction Cost index and 65% of its Building Cost Index. The 9% forecast increase in construction starts will butt heads with the current 9% un- employment rate reported by the Bureau of Labor Statistics for November 2013. While construction unemployment is down from recent double-digit rates, it is still relatively high for this stage of the construction recovery. ENR expects it will put a chill on next year’s wage hikes. The Construction Labor Research Council (CLRC), Washington, D.C., reports the average increase for multi- year contracts signed this year for 2014 is 2.9%, while the average increase for multi-year settlements from 2012 is 2.6%. Using the CLRC multi-year agreements for 2014 that already have been reached as a benchmark, ENR is forecasting the skilled-labor component of the BCI to increase 2.9% next year. The common labor cost component of the CCI is pro- jected to increase by 2.6% in 2014. “The multi-year settlements for 2014 may be on the high side,” says Carey Peters, executive director of CLRC. “We have noticed that the first year of those agreements tends to be lower than the second year. So, we expect new settle- ments in 2014 to be a little lower than 2.9%.” He also notes that only about a third of the increase is going into the worker’s pocket, with an ever-growing percentage of their paycheck going to pensions and health-care benefits. CLRC also sees a bump in wages coming. “We saw a lot of wage freezes over the last few years, but, eventually, you have to put something back in to the employee’s pocket,” says Peters. “We are definitely seeing fewer wage freezes. But, overall, I think we are looking at a modest increase in the total wage package next year.” On the materials side of the cost equation, McGraw Hill Construction’s forecast of a 9% increase in starts will put upward pressure on prices. The residen- tial construction market, which is forecast to increase another 26% in 2014, will be the growth driver, much as it was in 2013, and will continue to put pressure on prices for housing-related products, such as lum- ber, plywood and wallboard. “We are looking for housing to hit 1.2 million starts next year, and that would be a strong increase in demand,” says 4Q COST REPORT ECONOMICS Recovery Only Nudges Costs Despite a forecast 9% increase in construction, inflation is expected to remain below 3% By Tim Grogan MATERIALS PRICE INFLATION THROUGH 2016 2011 2012 2013 2014 2015 2016 ASPHALT PAVING 6.0 6.8 0.4 0.7 0.8 2.2 CEMENT –3.5 0.9 4.8 4.6 5.0 4.0 REINFORCING BARS 19.7 –5.0 –5.7 2.3 5.7 –8.7 CONST. MACHINERY 3.3 3.3 1.7 1.8 2.2 2.7 FABRICATED PIPE 6.5 3.9 1.2 1.0 2.3 1.0 GYPSUM PRODUCTS –2.2 12.5 14.7 7.3 6.0 3.6 LUMBER, SOFTWOOD –0.2 7.0 16.7 5.9 4.4 1.3 PLYWOOD –3.0 10.4 6.3 6.2 3.6 1.2 AGGREGATES 1.6 2.3 2.4 3.0 3.6 3.7 SHEET-METAL WORK 5.7 0.0 –1.0 1.1 2.6 2.2 STRUCTURAL STEEL 14.4 –9.3 –2.7 –0.9 5.8 –6.3 SOURCE: IHS GLOBAL INSIGHT INC. NOTE: ESCALATION RATES ARE ANNUAL AVERAGES. ENR’S 2014 COST FORECAST % CHANGE 2013 2014 12-13 13-14 BUILDING COST INDEX: 1913=100 5325.68 5463.69 +2.2 +2.6 SKILLED LABOR INDEX: 1913=100 9183.33 9449.96 +1.9 +2.9 WAGES, $/HR. 50.97 52.45 +1.9 +2.9 CONST. COST INDEX: 1913=100 9667.77 9909.16 +2.7 +2.5 COMMON LABOR INDEX: 1913=100 20598.03 21133.58 +2.7 +2.6 WAGE, $/HR. 39.14 40.16 +2.7 +2.6 MATERIALS COST INDEX: 1913=100 2968.58 3027.95 +2.8 +2.0 PORTLAND CEMENT, $/TON 110.79 113.50 +1.4 +3.0 LUMBER, 2X4, $/MBF 436.63 478.98 +6.3 +9.7 STRUCTURAL STEEL, $/CWT 49.62 49.12 +1.6 - 1.0 SOURCE: MCGRAW HILL RESEARCH & ANALYTICS / ENR. ENR’S COST INDEXES FORECAST TO DECEMBER 2014; PERCENT CHANGES ARE DECEMBER V. DECEMBER. SOURCE: IHS GLOBAL INSIGHT 800 Q1 750 700 600 Q2 Q3 Q4 Q1 Q2 Q3 Structural Steel and Rebar Price Forecast Q4 Q1 Q2 Q3 650 Q4 2012 2013 2014 $/Short ton Structrual Steel Rebar Forecast enr.com December 30, 2013 ENR 1
Transcript
The construction recovery is gaining momentum, but inflation will remain modest. McGraw Hill
Construction is predicting the dollar volume of its Dodge starts will increase 9% next year. But ENR forecasts this demand push will translate into only a cost nudge for its cost indexes.
Taking all things into consideration, ENR predicts its Building Cost Index will increase 2.6% next year, following this year’s 2.2% increase. ENR’s Construction Cost Index is forecast to increase just 2.5% next year, following a 2.7% increase in 2013.
The first thing to take into consider-ation is labor costs, which make up 81% of ENR’s Construction Cost index and 65% of its Building Cost Index. The 9% forecast increase in construction starts will butt heads with the current 9% un-employment rate reported by the Bureau of Labor Statistics for November 2013. While construction unemployment is down from recent double-digit rates, it is still relatively high for this stage of the construction recovery. ENR expects it will put a chill on next year’s wage hikes.
The Construction Labor Research Council (CLRC), Washington, D.C., reports the average increase for multi-
year contracts signed this year for 2014 is 2.9%, while the average increase for multi-year settlements from 2012 is 2.6%. Using the CLRC multi-year agreements for 2014 that already have been reached as a benchmark, ENR is forecasting the skilled-labor component of the BCI to increase 2.9% next year. The common labor cost component of the CCI is pro-jected to increase by 2.6% in 2014.
“The multi-year settlements for 2014 may be on the high side,” says Carey Peters, executive director of CLRC. “We
have noticed that the first year of those agreements tends to be lower than the second year. So, we expect new settle-ments in 2014 to be a little lower than 2.9%.” He also notes that only about a third of the increase is going into the worker’s pocket, with an ever-growing percentage of their paycheck going to pensions and health-care benefits.
CLRC also sees a bump in wages coming. “We saw a lot of wage freezes over the last few years, but, eventually, you have to put something back in to the employee’s pocket,” says Peters. “We are definitely seeing fewer wage freezes. But, overall, I think we are looking at a modest increase in the total wage package next year.”
On the materials side of the cost equation, McGraw Hill Construction’s forecast of a 9% increase in starts will put upward pressure on prices. The residen-tial construction market, which is forecast to increase another 26% in 2014, will be the growth driver, much as it was in 2013, and will continue to put pressure on prices for housing-related products, such as lum-ber, plywood and wallboard.
“We are looking for housing to hit 1.2 million starts next year, and that would be a strong increase in demand,” says
4Q COST REPORT ECONOMICS
Recovery Only Nudges CostsDespite a forecast 9% increase in construction, inflation is expected to remain below 3%
By Tim Grogan
MATERIALS PRICE INFLATION THROUGH 20162011 2012 2013 2014 2015 2016
ASPHALT PAVING 6.0 6.8 0.4 0.7 0.8 2.2
CEMENT –3.5 0.9 4.8 4.6 5.0 4.0
REINFORCING BARS 19.7 –5.0 –5.7 2.3 5.7 –8.7
CONST. MACHINERY 3.3 3.3 1.7 1.8 2.2 2.7
FABRICATED PIPE 6.5 3.9 1.2 1.0 2.3 1.0
GYPSUM PRODUCTS –2.2 12.5 14.7 7.3 6.0 3.6
LUMBER, SOFTWOOD –0.2 7.0 16.7 5.9 4.4 1.3
PLYWOOD –3.0 10.4 6.3 6.2 3.6 1.2
AGGREGATES 1.6 2.3 2.4 3.0 3.6 3.7
SHEET-METAL WORK 5.7 0.0 –1.0 1.1 2.6 2.2
STRUCTURAL STEEL 14.4 –9.3 –2.7 –0.9 5.8 –6.3
SOURCE: IHS GLOBAL INSIGHT INC. NOTE: ESCALATION RATES ARE ANNUAL AVERAGES.
ENR’S 2014 COST FORECAST% CHANGE
2013 2014 12-13 13-14
BUILDING COST INDEX: 1913=100 5325.68 5463.69 +2.2 +2.6
SOURCE: MCGRAW HILL RESEARCH & ANALYTICS / ENR. ENR’S COST INDEXES FORECAST TO DECEMBER 2014;PERCENT CHANGES ARE DECEMBER V. DECEMBER.
SOURCE: IHS GLOBAL INSIGHT
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Robert Berg, chief economist with the Bedford, Mass.-based forecasting firm RISI. “We are looking for 2x4 western spruce prices to increase 9% next year, ending next year at around $405 per thou-sand board-feet,” he says. That 9% hike will be less than this year’s 12% increase but that is because mills will be increasing production, says Berg. ENR is predicting the lumber component of its indexes to increase 9.7% next year, following this year’s 6.3% gain.
Steel prices are expected to continue to fall through the first quarter of next year but then rebound in the second half of 2014, says John Anton, steel analyst with the forecasting firm IHS Global Insight, Washington, D.C. “Structural steel started 2013 with a price increase but then trended down all year long,” he says.
Structural-steel prices hit $780 a ton in the first quarter of this year but then declined to $744 by the fourth quarter. Prices will bottom out at $732 per ton over the next three months but then bounced back to $769 by the end of next year, a 4.9% rebound, Anton predicts.
While domestic demand is rising, the threat of imports is keeping a cap on prices. “Imports don’t show up so much in tonnage, but they are a sword hanging over the domestic mills’ head,” says Anton. He estimates that domestic steel prices are about $100 a ton more expen-sive than the global price.
Much of this year’s decline in mill prices for structural steel has not caught up with ENR’s wholesale contractor price. As a result, ENR is forecasting the steel component of its indexes to decline 1% next year.
The Portland Cement Association, Skokie, Ill., is forecasting cement consumption to increase 8.1% next year, following this year’s 4.5% increase. That rising demand will result in a 4.6% price increase in 2014, which will be followed by another 5% hike in 2015, says Charlie McCarren, Global Insight’s construction materials analyst. ENR is forecasting the cement component of its indexes to increase 3.0% next year, after rising 1.4% in 2013. n
CONSTRUCTION MATERIALS PRICE MOVEMENT IN 2013APRIL MAY JUNE JULY AUG. SEPT. OCT. NOV.
1BASE: 1967=100; 2BASE: 1977=100; 3BASE: 1980=100; 4BASE: 1993=100; 5FORMERLY SMITH GROUP, 1992=100; 6BASE: APRIL 2005=100; 7BASE: 1992=100; 8POWERPLANT FOR A 550-MW COMBINED-CYCLE FACILITY.
4Q COST REPORT ECONOMICS
Industry Execs Confident The Market Is in Growth ModeBut more work raises prospects of labor shortages and wage inflation in 2014
A fter five years of tough markets and hopes of a recovery that never quite seemed to materialize, construction
industry executives now believe the indus-try is back on the path to growth and the elusive turnaround has arrived. While some sectors remain sluggish, most indus-try executives surveyed believe the overall market is growing.
The ENR Construction Industry Confidence Index survey for the fourth quarter shows the vast majority of respondents—328 executives of large construction and design firms—believe the market is experiencing a sustained recovery. The CICI index stands at 69 on a scale of 100, an indicator of a growth market. This equals the record CICI rating from the second quarter of this year, and it is two points above the 67 rating from the third quarter of 2013.
The CICI measures executive senti-ment about the current market and reflects their views on where it will be in
the next three to six months and over a 12- to 18-month period. The index is based on responses to surveys sent out to more than 3,000 U.S. firms on ENR’s lists of the lead-ing contractors, subcon-tractors and design firms. The latest results are based on a survey conducted from Nov. 20 to Dec. 16.
For the third quarter in a row, the surveyed industry executives believe all the market sectors measured by the CICI are now in growth mode. For the survey, we asked execs to assess current and future market prospects in general and any of the 15 market sectors in which they currently work. In all 15 of the survey’s markets, more executives saw growth in their particular market sector than those in the same sector saw decline.
Another positive sign is that all market
sectors had a CICI rating over 50, indicating expected mar-
ket growth over the next 18 months. The petroleum market ranked as the highest-rated market, with a CICI rating of 82, followed by multi-unit
residential, rated at 76, and the industrial-manufacturing
and hotels-hospitality markets, both at 67. The markets for K-12 educa-tion and entertainment-theme parks-cultural were judged the weakest, with ratings of 53 and 54, respectively.
Caution Among CFOsThe CICI findings parallel the results of the latest Confindex survey from the Construction Financial Management Association, Princeton, N.J. CFMA polls 200 CFOs from general and civil contrac-tors and subcontractors. While a Confin-dex rating of 100 indicates a stable market,
By Gary J. Tulacz
4Q COST REPORT CONFIDENCE SURVEY
PROSPECTS BY INDIVIDUAL SECTORS BY FIRMS WORKING IN THOSE MARKETSCURRENTLY (%) 3-6 MONTHS (%) 12-18 MONTHS (%)
NUMBER OF DECLINING STABLE IMPROVING DECLINING STABLE IMPROVING DECLINING STABLE IMPROVINGFIRMS ACTIVITY ACTIVITY ACTIVITY ACTIVITY ACTIVITY ACTIVITY ACTIVITY ACTIVITY ACTIVITY
SOURCE: MCGRAW HILL CONSTRUCTION RESEARCH & ANALYTICS / ENR. FIGURES MAY NOT ADD UP TO 100% DUE TO ROUNDING.
69INDUSTRY
CONFIDENCE INDEX
INCREASES TWOPOINTS
enr.com December 30, 2013 ENR 3
Quarterly Cost Report Confidence Index
SOURCE: MCGRAW HILL CONSTRUCTION RESEARCH & ANALYTICS / ENR.
’10’11 ’12 ’13
60
45
30
15
00Q2 Q3 Q4Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
58
69 67
5146
3742
5650 50
6475 69
enr.com December 30, 2013 ENR 4
higher ratings show growth is expected.“Our Confindex remained steady at
127 [on a scale of 200] for the fourth quar-ter,” says Stuart Binstock, CEO of CFMA. But he says there is a contrast in what CFMA members see now and what they anticipate in 2014. He notes that the cur-rent “business conditions” component of the Confindex rose to 147 in the fourth quarter from 142 in the third quarter; also, up from 38% last quarter, 44% of the CFOs polled this quarter said margins were better than a year ago.
However, Binstock says the portion of the survey relating to the availability of financing dropped to 111 from 114, and the year-ahead outlook rating fell to 132 from 135. “Our members are worried that the banks are tightening credit for proj-ects,” he says. Further, CFMA members are worried about labor shortages in the near future, which would put pressure on labor costs and margins, Binstock says.
Labor ConcernsENR’s CICI survey this quarter asked about the prospects of labor shortages in 2014. Of the executives polled, 47.9% said they expected labor shortages next year. Skilled craft labor is expected to be in shortest supply, with 40.9% of respon-dents expecting craft-labor shortfalls.
In other job categories, 24.4% expected shortfalls among project and construction managers, 17.1% expected shortages among architects and engineers, and 16.8% expected a need for estimators. Many executives commented that the recession had taken a toll on personnel,
saying that middle managers and seasoned pros with five to 12 years of experience—the first ones to be laid off during the downturn—would be in short supply.
While CFMA members expressed concern about a tightening of credit markets cutting into project financing, CICI respondents said credit continues to be available. In the fourth quarter, 33% of CICI respondents said credit for proj-ect financing was easier than it was six months ago, while only 8.8% said credit was tighter. However, this is down from 39.1% in the third quarter.
“Banks had been unsure about the [Federal Reserve’s] policy and future lend-ing rates, so they have been less willing to make loans on long-term projects,” says Anirban Basu, CEO of economic consul-tant Sage Policy Group Inc., Baltimore, and CFMA economic adviser.
However, Basu says the Fed’s an-nouncement, on Dec. 18, that it would gradually taper off its economic stimulus program, rather than sharply curtail it, coupled with a promise to maintain its “exceptionally low” lending rates, should boost banks’ confidence and encourage them to lend on new projects.
A continuing concern is the level of public funding for projects. ENR asked survey respondents whether they believed federal project funding would increase, decrease or remain largely unchanged in 2014. Only 6.4% said they expected federal funding for construction to rise in 2014, while 37.7% believed it would fall by up to 5%, and another 21.6% believed it would decline by at least 5%. n
How Different Types of FirmsView the Overall Market
SOURCE: MCGRAW HILL CONSTRUCTION RESEARCH & ANALYTICS / ENR.FIGURES MAY NOT ADD UP TO 100% DUE TO ROUNDING.
Improving DecliningStable
Present 3-6Months
12-18Months
3 Years
Subcontractors
Present 3-6Months
12-18Months
3 Years
General Contractors,Construction Managers,Engineer-Constructors
Present 3-6Months
12-18Months
3 Years
All Firms
Present 3-6Months
12-18Months
3 Years
42% 48% 61% 49%
51% 44%
6% 8%
34%
46%
5% 5%
Designers
36%
8%
57%
47%
8%
45%
61%
7%
33%
53%
10%
38%
38%
10%
52%
51%
5%
44%
64%
3% 6%
33%
58%
36%
8%
54%
38%
7%
45%
48%
5%
34%
62%
7%
40%
52%
4Q COST REPORT CONFIDENCE SURVEY
As in the US, Housing Leads UK Construction RecoveryShortages spike materials prices as purchasing managers see a surge in activity
I t’s been a while since construction-cost consultants in the United Kingdom have recorded upwardly moving prices.
But with growing signs of confidence in the industry, many interviewed by ENR are forecasting a relatively robust 4% increase in U.K. construction costs in 2014. The consensus is for that trend to continue into 2015 and beyond.
The overall U.K. economy is expected to grow 1.5% next year, following this year’s 0.7% increase, according to a forecast by Rider Levett Bucknall, Melbourne, Australia. RLB predicts overall inflation in the U.K. will be 2.5% during 2014.
After one of the deepest recessions in memory, the industry is under-resourced, with even bricks in short supply, says Gavin Murgatroyd, a director of cost con-sultant Gardiner & Theobald LLP, Lon-don. Having shed staff, some contractors can’t muster bids for contracts, he adds.
A recent survey by Markit Economics Ltd., Henley-on-Thames, London, with the Chartered Institute of Purchasing and Supply (CIPS), Stamford, Lincolnshire, reinforces this point: Their new Purchas-ing Managers’ Index indicates the most robust expansion, since before the reces-sion, of construction activity in 2013.
“Delivery times continue to lengthen, to the greatest degree since 1997,” reports David Noble, chief executive of Markit-CIPS, the division which puts together the Purchasing Managers’ Index. “Along with increasing cost, there are worries that this will have an impact on output.”
The Markit-CIPS Purchasing Manag-ers’ Index (see chart) measures the activity that 170 purchasing managers in the con-struction industry are seeing. A value of 50 equals no change; below 50, decreasing
activity; and above 50, increasing activity. The latest index is well above 50 and at its highest level since 2007.
While a shortage of resources creates upward pressure on costs, there are some anti-inflationary factors, says Simon Rawlinson, head of strategic research and insight at EC Harris LLP, London. With its high proportion of casual workers, compared to its continental European counterparts, U.K. labor “can be adjusted very quickly to levels of workload,” Rawlinson says.
Residential construction is the most active sector, says Murgatroyd. But he expects commercial building to become more active over the next couple of years, especially in and around London, helping to put pricing pressure on materials such as structural steel.
Infrastructure plans also are adding momentum to the market as major proj-ects go forward. These include the U.K.’s next high-speed railroad, the Hinckley Point C nuclear plant and London’s Tideway mega-sewer, says Murgatroyd.
Rawlinson expects residential construction in 2014 to increase 8% over this year. He attributes the increased activity to two home-loan support
programs launched by the government. Critics say the government plans are
creating an imbalance between housing supply and demand, which will push home prices up. One plan provides state guarantees for first-time homebuyers to secure 95% mortgages at a time when the base lending rate is 0.5%. Critics wonder how such borrowers will cope with the inevitable future interest-rate hikes.
Fearing an overheated housing mar-ket, the government recently withdrew from the mortgage sector the second plan. The “Funding for Lending” program provided cheap financing to banks, increasing the availability of loans.
While the potential of a new housing bubble worries observers, the industry’s ability to handle the current upturn is a more imminent concern. “Because the industry has been facing very difficult trading conditions for a long time, its capacity is not as strong as we like to think it is,” says Rawlinson.
Richard Threlfall, head of infrastruc-ture, building and construction at Lon-don-based financial consultant KPMG, agrees. “The industry’s inadequate capac-ity will create a suppliers’ market in the first half of 2014,” he says. n
By Peter Reina
4Q COST REPORT UNITED KINGDOM
SOURCE: Statistics Canada
160
Q1 2012
Non-Res
Commerical
155
150
145Q2
2012Q3
2012Q4
2012Q1
2013Q2
2013Q3
2013
Industrial
Institutional
15.0
20.0
25
30
35
40
45
50
55
60
65
70
Jul ’02
Jan ’04 Jan ’06 Jan ’07 Jan ’08 Jan ’09 Jan ’11 Jan ’12 Jan ’13
Strong Growth, Stable CostsA slowdown in the China market is expected to be short-lived
L ingering effects from the global financial crisis have continued to affect Asia and Oceania, but the
region still lays claim to some of the world’s fastest-growing economies, with robust construction markets.
China’s breathtaking growth in the past decade has been driven mainly by real estate investment, but, early this year, the government restricted housing purchases to reduce the threat of a potential bubble. The overall economy has slowed in the past two years, says Russ Sykes, director of China operations for SmithGroupJJR, Detroit, which has just opened an office in Shanghai. SmithGroup still sees China as a strong growth market.
The general building costs in China are only “rising slightly,” Sykes says. However, engineering and architectural costs are rising rapidly—15% this year alone, he says.
Any slowdown in China will be short-lived. “Market conditions in mainland China will recover, while those in Hong Kong and Macau will continue to boom,” says John Cross, Oceania research and development manager for Rider Levett Bucknall (RLB), Melbourne, Australia.
Material prices have remained fairly stable, with most materials being locally produced. “The overcapacity of China’s steel industry has kept steel prices down,” Cross says.
Standard construction-equipment costs have been flat, says Sykes, who has seen costs for mechanical equipment, such as elevators and chillers, rise 10% to 15% this year. All equipment must be sourced in China, which is cheaper than imports.
Cost escalation in Hong Kong has been about 8% in recent years, says Cross. Labor shortages are not serious in main-land China but have been a big concern in Hong Kong and Macau, says Cross.
“With the approach of the peak of infrastructure construction, the shortage of skilled labor and construction profes-sionals in Hong Kong will become even more severe in the coming quarters,” says Cross. “Tender prices in Hong Kong are expected to continue to increase in the 7% to 8% range well into 2014.”
“One of the most dynamic Asian construction markets is Indonesia,” says Cross. Dramatic growth has created demand for infrastructure and retail space for a growing middle class. “Retail space is currently in great demand as well as office space, particularly in Jakarta.”
“The Indonesian construction market is forecasted to grow over the next 10 years by over 6% per year,” according to RLB. The domestic manufacture of many construction materials and the ready availability of labor help reduce pressure on costs, says Cross.
Singapore’s GDP surged 3.8% year-on-year in 2013’s second quarter, and the
construction sector posted a 5.1% hike on robust private-sector construction, ac-cording to RLB. Construction costs con-tinued to rise under pressure from in-creased labor costs, which resulted from changes in the country’s policies aimed at reducing reliance on overseas workers. Tender prices increased 2.2% during the latest quarter, continuing a gradual re-bound that began in 2010, says RLB.
General market conditions remain stable in Australia, says Cross. But RLB predicts a wide range of construction-cost escalations: between 0.2% and 5.1% in 2013 and between 1.8% and 6.6% in 2014. Cross expects wage pressure and currency movement to push material prices higher in the next two years. n
By Thomas F. Armistead
4Q COST REPORT ASIA
The international cost report compiled by Gardiner & Theobald, which ENR has pub-lished for the past 21 years, is not available this year due to technical problems. It is sched-uled to be published in ENR again in 2014.
5,500
5,000
4,500
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2011 2012 2013
SOURCE: RIDER LEVETT BUCKNALL
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20011 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6
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ls
2011 2012 2013
Beijing Shanghai Shenzhen
Chinese Portland Cement Prices
Chinese Rebar Prices
enr.com December 30, 2013 n ENR n 6
As Growth Returns to Markets, Labor Costs Are Escalating
A lthough the Canadian economy saw relatively weak growth in 2013, pockets of high demand continue
to drive above-average construction-cost escalations in specific regions, particularly in labor costs. Contractors in big energy markets, such as Alberta, are feeling the effects of strong, ongoing oil and gas production. Still, some predict the coun-try as a whole could see an improved economy in 2014, along with some across-the-board cost increases.
Across Canada, building permits dropped by an estimated 6% in 2013, to $76.3 billion (USD), according to McGraw-Hill Construction Analytics. That weakness stretches across all major sectors, including a 17% drop in indus-trial permits, a 9% drop in commercial permits, a 4% drop in institutional per-mits and a 3% drop in residential permits.
However, Canada’s economic growth could accelerate next year, with the GDP expected to rise to 2.3% in 2014 from an estimated rate of 1.7% in 2013, according to McGraw Hill Construction; in 2015, that rate could rise even more, to 2.6%. In light of the improved economic out-look, McGraw Hill Construction predicts that permits will rise 4%, to $79.6 billion, in 2014. Although commercial construc-tion permits could continue to decline, the industrial and institutional sectors will see gains of 5% and 6%, respectively.
In 2013, contractors nationwide reported minimal cost increases, but those costs could inch up next year. Paul
Westbrook, executive vice president at cost consulting firm Hanscomb, Toronto, says costs have remained relatively flat across the country this year, with Statistics Canada reporting a 0.9% increase in the third quarter of 2013 over the same period last year. Westbrook says the firm expected higher escalations in 2013 and is taking a conservative view of 2014.
“We started the year thinking growth would be in the 2% to 3% range, and we got 1%,” he says. “With the third-quarter reports we’re seeing, we are now looking for only 1% to 2% growth next year.”
On a regional level, Canada’s mid-western provinces continue to experience the largest gains, with Saskatchewan forecast to see 4.0% growth in GDP and Alberta expected to gain by 3.3% in 2013, according to McGraw Hill Construction.
Dave Filipchuk, president of western Canadian buildings at PCL Construction, Edmonton, says the firm saw cost hikes of 5% to 7% in Alberta and Saskatchewan, respectively, in 2013, compared to 3% escalation in most other provinces.
Although the escalations are relatively high, Filipchuk says that, in the short term, he doesn’t expect a big spike in de-mand that would drive up prices. “It’s more of a stable pattern now that, we be-lieve, is much more manageable,” he says.
For PCL and other companies in the region, labor shortages are the biggest source of pressure on prices. Filipchuk says the company is searching locally, na-tionally and globally to meet demand for staff positions and craft labor. “Local in-stitutions have not been able to satisfy the demand in professionals,” he adds. In ma-terials, Filipchuk says the company is not seeing big spikes in commodity pricing, even though it is relying on global mar-kets to meet demand for some materials, such as steel.
Seamus McDonnell, vice president of preconstruction at Stuart Olson Domin-ion Construction, Calgary, says the com-pany saw prices rebound in 2011, which led to a 4% escalation in costs in Alberta. However, that rate dipped to around 3% in 2012 and 2013. Going into 2014, he expects a return to 4% escalations.
McDonnell expects to see upticks of 2.5% to 3% in Vancouver and 2% to 2.5% in Winnipeg. “We’re starting to find a tightness in the market for subcontrac-tors bidding in Alberta,” he says. n
By Bruce Buckley
4Q COST REPORT CANADA
ENR CANADIAN COST INDEXESCONSTRUCTION COST CONSTRUCTION COST CONSTRUCTION COST CONSTRUCTION COST CONSTRUCTION COST
1913=100 DEC. ’13 % CHG. DEC. ’13 % CHG. DEC. ’13 % CHG. DEC. ’13 % CHG. DEC. ’13 % CHG.CITY INDEX YEAR INDEX YEAR INDEX YEAR INDEX YEAR INDEX YEAR
The international cost report compiled by Gardiner & Theobald, which ENR has published for the past 21 years, is not available this year due to technical problems. It is sched-uled to be published in ENR again in 2014.
