2021 Q3 to Q4 Construction Costs and Projected Market Escalation Study1

2021 Q3 TO Q4 CONSTRUCTION COSTS AND PROJECTED MARKET ESCALATION STUDYSponsored by cove.tool

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2021 Q3 to Q4 Construction Costs and Projected Market Escalation Study

About the Author

PATRICIA KUSUMADJAJA

Patricia is a Virtual Design and Construction Director at cove.tool. She has over eight years of experience working in the AEC industry, namely in architectural cost estimating, VDC, and project delivery. Patricia earned her Bachelor of Architecture in 2015 from Kennesaw State University and her CEP from the AACEi in 2020. She strives to make a difference in the way owners, construction and architectural professionals view high-performance design, with the hope that sustainability and environmental consciousness becomes a non-negotiable priority in all future building design and construction.

2021 Q3 to Q4 Construction Costs and Projected Market Escalation Study3

Table of ContentsSECTION 1 SUMMARY

SECTION 2 RESEARCH FINDINGS

SECTION 3 SOURCES

1.1 1.21.31.4

Scope of Market Survey Recent and Projected Market EscalationContractor ConfidenceBuilding Performance

2.1 2.22.32.4

ENR Construction IndicesPPI for ConstructionMaterialsLabor

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2021 Q3 to Q4 Construction Costs and Projected Market Escalation Study

Section 1 - Summary

The goal of this effort is to determine the current and projected future local construction market conditions that may affect the upcoming building construction project. The evaluation of market conditions focused on the ability of contractors and suppliers to support the project within a competitive bidding environment. To analyze the competitiveness of the national construction market, factors were researched,

1.1 SCOPE OF MARKET ANALYSIS

such as market escalation, limitations on supply of key materials, interest in the contractor community, and availability of construction personnel.

Based on the opinions of those surveyed, and the research of other sources, it is believed the market conditions as outlined will cover a period of 6 months from the date of this report.

2021 Q3 to Q4 Construction Costs and Projected Market Escalation Study5

In the third quarter of 2021, Cumming Construction Management Inc. (CCORP) released their Construction Market Analysis and reported that the US construction industry “is much more active than expected. Overall volume is expected to peak this year before pre-pandemic trends resume next year. As shown in the construction annual spending chart below, residential construction continues to dominate the market, particularly after more than a year of remote work for many people.” Healthcare and education sectors follow suit and are expected to continue to remain busy. The proposed federal infrastructure plan is also expected to boost the market’s activity should it pass.

The Bureau of Labor Statistics noted that the Consumer Price Index (CPI) indicates that there has been a 5.4% CPI increase over the last 12 months.

1.2 RECENT AND PROJECTED MARKET ESCALATION

Source: Cumming Insights, Q3

Source: The U.S. Energy Information Administration

Prices 2019 2020 Delta2019-2020

2021 Delta2020-2021

Brent Crude Oil (dollars per barrel)

$63.34 $41.69 -35.20% $71.38 71.22

Gasolineb (dollars per gallon)

$2.60 $2.18 -16.15% $2.97 36.27%

Dieselc(dollars per gallon)

$2.06 $2.56 -16.34% $3.24 26.56%

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2021 Q3 to Q4 Construction Costs and Projected Market Escalation Study

Most of this increase can be traced back to the rising cost of fuel. 2019-2020 saw a decrease in terms of fuel price according to the EIA, as illustrated in the table above. In the last year (2020-2021), fuel prices increased exponentially by an average of 10.4% over 2019’s prices. It is projected that fuel prices will remain volatile in the next few months as winter approaches, boosting demand while inventory remains low.

Based on literature research, field experience and inputs from suppliers and construction professionals, a 3.5% escalation rate for the next 6 months is reasonable, with the possibility that escalation could decrease to 3.0% by Q1 of 2022 if some lessening in demand and normalization in supply are realized. A few contributing factors to the escalation rate are material and labor dynamic market conditions, as well as other miscellaneous factors, such as:

• Taxes, tariffs and import fees imposed on goods• Global and domestic demand for raw materials• Factory operations, which lead to an increase or decline in manufacturing capacity• Natural disasters that affected resource and manufacturing availability (hurricanes, freezes, floods, etc.)• Wage rates• Labor availability due to labor disruptions, such as the pandemic and/or an increase or reduction in labor demand due to a change in numbers of active projects• Subcontractor demand and subcontractor availability • Leads and delivery times for goods and raw materials

All of which are subject to some level of change (either lesser or greater) in the next several months as the market adjusts to conditions post-COVID and the new Administration continues to reassess world relationships.

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For Q3 of 2021, ENR reported an Industry Confidence Index of 65, down three points from the previous quarter. While contractors, executives and owners remain confident, that confidence has slightly cooled due to supply chain disruptions, labor shortage, and more. Anirban Basu, CEO of Sage Policy Group, an economic consulting group, noted that “Many people are now suggesting these supply chain disruptions will last into 2023.” Additionally, while firms are seeing an increase in activity, the levels of activities are unequal across markets. Commercial offices, entertainment, theme parks, hospitality, and retail “remain at less than half of their pre-pandemic levels” according to Basu.

1.3 CONTRACTOR CONFIDENCE

We conducted a survey with contractors, building elements manufacturers, and installers to investigate their perspective and outlooks based on every day, boots-on-the-ground experiences. All contractors who we interviewed concur that subcontractors are staying busy, that there is a material shortage, and feel that although it is difficult to predict, the market is more likely to remain busy for the next two years.

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2021 Q3 to Q4 Construction Costs and Projected Market Escalation Study

Questions Turner Skansa New South GilbaneIs your current workload affecting your pricing of projects?

Yes, only slightly Many factors impact pricing, current workload is generally increasing pricing

Pricing of future projects yes, in the next 12-24 months

No - prices are mostly locked in but increasing prices for future projects

Are subcontractors generally staying busy?

Yes Yes Yes Yes, very

Are there any labor shortages? If so, what trades?

Yes, generally across all trades but it hasn’t been as bad as it sounds in the news

Yes, but hasn’t been critical enough to delay projects

Yes, mostly on-site positions such as concrete pourers, etc.

Yes - all trades but particularly low-mid skill level such as brick layers, concrete, and general construction sub trades

Are there any material shortages such as concrete, steel, plywood & etc.?

Yes, steel Yes, resins in paint and ABS pipe

Yes, also backlog on equipment rentals and acquisition

Yes - all across. Steel has been very expensive in particular and is probably more volatile than lumber

Has your pricing been affected by any material shortage and by what %?

Yes, varies depending on what the material is. Glass has been expensive and so is lumber

Current pricing for future projects has generally increased with differences trade to trade

Yes, around 15% in the last 18 months

Yes. Depending on the week and material, anywhere from 4% - 40%

How do you see the current market in your area? Busier than normal? Average or slower than normal?

Busier than normal Busier than normal Busier than normal Busier than normal

How do you see the current market for next two years?

Strong but we are also anticipating a tapering

Two years anticipate will be different as supply and demand settles.

Continuing to be busy but slower

Hard to predict. There is strong interest for owners and developers to build to take advantage of low interest rates, but difficult to justify the cost of construction

Has there been any increase/decrease in the pursuance of sustainable buildings in the last year? If so, by what % and why do you think this is?

About the same Yes, sustainability has grown as a key factor, don’t have a %. The social/political atmosphere has changed enough that folks want to at least crunch the numbers if not more.

No, first cost is typically the deterring factor and now more so particularly with office buildings

Multi-family residential has seen a major jump. Sustainable buildings are more sought after in cities such as LA and NY where demand for sustainable, high-performance buildings are higher. Many owners would like to but very concerned over first costs and ROI

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When it comes to building performance and choosing to invest in sustainable building strategies, contractor executives report that the current social/political atmosphere has encouraged owners to seriously consider and further investigate sustainability as a priority. Still, the common misconception of the initial premium investment and return on sustainable buildings deter many owners from choosing to prioritize sustainability.

Research shows that green buildings do not necessarily need to cost more than their conventional alternatives. A study conducted by the World Green Building Council (WGBC) noted that “[the misconception of higher costs] may be due to an inability to forget historical data, or a lack of awareness that costs are coming down … Another factor could be that showpiece or demonstration buildings for sustainability may have additional costly ‘finish’ upgrades which are not directly related to green cost, and these are the buildings that are often featured in industry publications. They often also feature highly visible green technologies, such as photovoltaics and large building-integrated wind turbines, are used to reinforce a green image but that may not be financially viable, especially if these are not coupled with a robust overall environmental strategy.” Recent pricing releases by manufacturers of sustainable products also show the decrease of costs directly related to certain green building strategies.

1.4 BUILDING PERFORMANCE AND COST

As an example, the National Renewable Energy Laboratory (NREL) reported that the last decade has seen a sharp decline in photovoltaic (PV) cost; a 64% decline for residential-scale, 69% in commercial-scale and 82% for utility-scale. NREL Senior Financial Analyst, David Feldman said, “A significant portion of the cost declines over the past decade can be attributed to an 85% cost decline in module price. A decade ago, the module alone cost around $2.50 per watt, and now an entire utility-scale PV system costs around $1 per watt . . . With similar reductions in hardware costs for storage systems, PV and storage have become vastly more affordable energy resources across the nation.”

Moreover, when green strategies, program management and cost management are integrated earlier in the design and development process, achieving a cost-effective, high-performance building is feasible. The Integrated Project Delivery (IPD) method has garnered traction in recent years and has been proven successful for managing and developing a cost-effective, high-performance project.

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2021 Q3 to Q4 Construction Costs and Projected Market Escalation Study

Section 2 - Research Findings

The Construction indices above indicate that while construction costs continue to increase overall, material prices are seeing minimal changes. Lumber experienced a decrease of 4.1% while steel cost sees a slight increase of 2.3%. This indicates that the driver of continuing construction cost increase is the shortage of skilled and unskilled labor.

2.1 ENR CONSTRUCTION INDICIES

Construction Costs

(+) 8.0%October

2021

The Construction Cost Index’s

annual escalation rate rose to 8%

this month

1913=100 Index Value Month YearCONSTRUCTION 12464.94 0.0% (+)8.0%COMMON LABOR 12355.78 0.0% (+)1.3%

WAGE, $/HR 46.80 0.0% (+)1.3%

Building Costs

(+) 14.2%October

2021

The Building Cost Index’s annual inflation raterose to 14.2%

1913=100 Index Value Month YearBUILDING 7244.90 (+)0.4% (+)14.2%SKILLED LABOR 10978.76 0.9% (+)2.6%

WAGE, $/HR 60.58 0.9% (+)2.6%

Material Costs

(+) 0.0%October

2021

The MCI remained steady this month, with minimal change

1913=100 Index Value Month YearMATERIAL 4935.01 (+)0.0% (+)35.2%CEMENT $/TON 150.10 (-)0.3% (+)1.5%STEEL $/CWT 73.42 (+)2.7% (+)31.5%LUMBER $/MBF 1010.64 (-)4.1% (+)49.5%

(Source: https://www.enr.com)

(Source: https://www.enr.com)

(Source: https://www.enr.com)

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According to Bureau of Labor Statistics (BLS) data, the Producer Price Index (PPI) for final demand in general decreased 0.5% from August to September, seasonally adjusted.

2.2 PPI FOR CONSTRUCTION

Source: Bureau of Labor Statistics

These graph and data points indicate that the construction market has seen a significant increase in the last year. By looking at the October 2019 data point at 229.9 and October 2020 data

point at 232.9, the increase remains relatively steady at 1.3%. In contrast, the October 2021 data point at 278.1 shows a significant jump of 19.4% over the last 12 months.

Although project costs are typically made up of materials (60%) and labor (40%), it can initially appear that the rising cost of material goods (a nearly 5.5% annual increase in the past 24 months) bears most of the responsibility of cost. However, recent reports indicate that labor shortage and wage increases are the primary driving forces behind the increase of construction cost.

The larger annual increase (2020-2021) of approximately 20% is exacerbated by the comparative data points and the impact of COVID-19. Hence, the comparison to 2019 is a more realistic assessment of the market. As noted by Investopedia’s Associate Editorial Director, Ben Woolsey: “To keep the recent increases in perspective, however, it’s important to note that the year over year increase, while significant, is using a time at the height of the pandemic last year as a point of comparison. Since spending was at an unusually low point in [May of]2020 the magnitude of the percentage increase in [May 2021] was magnified.”

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2021 Q3 to Q4 Construction Costs and Projected Market Escalation Study

ENR releases the following material price indices on a monthly basis. The materials shown below are materials that are considered ‘key drivers of construction cost.

The COVID-19 pandemic has also posed significant challenges to supply chain and manufacturing, which in turn impacted material prices. Many plants and factories were deemed “unessential” at the beginning of the pandemic and were forced to temporarily shut down while company leaders brainstormed ways to return

2.3 MATERIALS

to work safely. Environmental disasters, such as the freezing temperatures that befell Texas in February 2021 also unexpectedly halted production of concrete and plastic, among many other raw materials (AGC).

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While materials traditionally bear the reputation for being the major cause of construction cost, data shows that in 2021, labor may potentially reclaim that designation. The national construction industry remained busy throughout 2020 and so far into 2021, with spending on new projects amounting at $1,584.1 billion as of August 2021, an 8.9% increase from the same period of 2020.

The lack of enough skilled workers and a narrow talent pipeline has added extra hurdles, time, and costs to many current projects. The construction market is not the most attractive market to young graduates, and a significant portion of the construction workforce are entering retirement age. The COVID-19 pandemic has also added to this problem – taking out many qualified workers out of the labor force. Women and single parents, in particular, have left the workforce in great numbers due to a lack of childcare. Deportation

2.4 LABOR

efforts, particularly executed by the previous administration, have also contributed to much of the on-site construction worker shortage.

The Bureau of Labor Statistics reported that by the end of September, construction employment increased by 22,000 jobs. However, hiring rate remained stagnant as construction employment is still 201,000 jobs below its September 2020 level.

To attract more workers, many companies are increasing wages and offering monetary bonuses, as well as added benefits. The BLS noted that for total construction, hourly earnings averaged to $32.59 in April, 8.0% higher than the average for the non-farm private sector. This premium, however, is a 2.2% decrease from the 10.2% from April 2019. This implies that “financial attractiveness of construction may be diminishing as other sectors that are expanding faster raise pay to attract more workers.”

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2021 Q3 to Q4 Construction Costs and Projected Market Escalation Study

Section 3 - Sources“2.0 The Economic Benefits of Sustainable Design - Energy.” Office of ENERGY EFFICIENCY & RENEWABLE ENERGY, https://www1.eere.energy.gov/femp/pdfs/buscase_section2.pdf.

Ardani, Kristen, et al. “Cost-Reduction Roadmap for Residential Solar Photovoltaics (PV), 2017–2030.” National Renewable Energy Laboratory (NREL), National Renewable Energy Laboratory (NREL), https://www.nrel.gov/docs/fy18osti/70748.pdf

Associated General Contractors of America. “Construction Inflation Alert 2021.” May 2021.

The Beige Book, The Federal Reserve, 2021, pp. 2-K-2. May 2021.

“The Business Case for Green Building.” World Green Building Council, World Green Building Council, Apr. 2013, https://www.worldgbc.org/sites/default/files/Business_Case_For_Green_Building_Report_WEB_2013-04-11-2.pdf.

Construction Economics Index. Engineering News Report. https://www.enr.com/topics/604-construction-economics

Cumming Construction Management, Inc. “Cumming Insights.” May 2021.

“THE EMPLOYMENT SITUATION – OCTOBER 8, 2021.” U.S. Bureau of Labor Statistics, USDL, no. 21, ser. 0980, 4 June 2021. 0980, www.bls.gov/news.release/empsit.nr0.htm.

Famiglietti, Matthew, and Carlos Garriga. “Putting Recent Inflation in Historical Context.” Economic Research - Federal Reserve Bank of St. Louis, research.stlouisfed.org/publications/economic-synopses/2021/06/03/putting-recent-inflation-in-historical-context.

Lambert, Lance. “Southern loggers are pushing wood production to a 13-year high. So why is the price of lumber up 288%?”. June 11, 2021. https://www.msn.com/en-us/money/markets/southern-loggers-are-pushing-wood-production-to-a-13-year-high-so-why-is-the-price-of-lumber-up-288/ar-AAKVfLS?ocid=msedgntp.

“Market Conditions Report United States Q2-2021.” DPR Construction, June 2021.

“MONTHLY CONSTRUCTION SPENDING, AUGUST 2021.” United States Census Bureau, October 3, 2021, https://www.census.gov/construction/c30/pdf/release.pdf

“PRODUCER PRICE INDEXES – SEPTEMBER 2021.” U.S. Bureau of Labor Statistics, https://www.bls.gov/news.release/ppi.nr0.htm.

Toussaint, Kristin. “The Price of Solar Electricity Has Dropped 89% in 10 Years.” Fast Company, Fast Company, 8 Dec. 2020, https://www.fastcompany.com/90583426/the-price-of-solar-electricity-has-dropped-89-in-10-years.

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