by Brianna Crandall — December 2, 2016 — Facilities managers currently involved in or part of planning a renovation or new build project should note that construction costs rose in November for the first time since December 2014, according to a report from global market analysis firm IHS Markit and the Procurement Executives Group (PEG). The headline current IHS PEG Engineering and Construction Cost Index registered 50.7 in November, up from 48.7 in October. Strength was evident in labor markets, although not in construction materials or equipment prices, which continued to see pockets of weakness.
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According to the report, the current materials/equipment price index came in at 49.3 in November, its second consecutive monthly reading below 50. Six of twelve categories tracked in the materials sub-index showed falling prices, three had rising prices, and three remained unchanged. Price increases in copper-based wire and cable as well as steel continued to filter down to final demand categories such as transformers and electrical equipment. However, weakness persists in exchangers, pumps and turbines.
Emily Crowley, senior economist at IHS Pricing and Purchasing, explained:
October’s employment report confirmed what anecdotal evidence has pointed to for some time: the construction labor market is experiencing shortages and the tightening labor market is finally resulting in stronger wage growth. Average hourly earnings for construction workers rose 4.0 percent year-over-year in the third quarter, the strongest wage growth the sector has seen in seven years. The industry unemployment rate is tracing record lows with the number of job vacancies is on the rise, indicating firms are having trouble filling positions. Improving nonresidential proposal activity will keep pressure on construction labor demand, and consequently, labor costs.
After six months of soft figures, the current subcontractor labor index rose to 54.1 in November, according to the report. Regionally across the United States, subcontractor labor costs were mixed. In the Northeast and West, labor costs rose; costs were flat in the Midwest and South. Even areas affected by the downturn in energy markets are feeling the effects of tightening labor market. Similarly in Canada, labor costs rose in the Eastern regions, but they remained soft in the West.
The six-month headline expectations index recorded increasing prices, according to the report. The index moved up further from 55.4 in October to a strong 65.1 in November. The materials/equipment index rose from 56.5 to 66.4 this month, affirming widespread expectations of higher future prices. Every component showed rising prices; there were no expectations for softer construction materials prices.
Similar to the materials index, sub-contractor labor price expectations came in higher in November. The sub-index moved up from 53.0 this month to 61.9; labor costs are expected to rise in every region.
In the survey comments, respondents have noted no shortages in supply of construction materials. Proposal activity has registered an uptick in recent months, and participants are showing some optimism for 2017.
To learn more about the new IHS PEG Engineering and Construction Cost Index or to obtain the latest published insight, visit the IHS Markit Web site.
