Construction Ticks Up, But So Do Costs

NEW YORK CITY—The construction pipeline is filling up, with McGraw-Hill Construction’s Dodge Momentum Index for nonresidential projects in the planning stages showing its third consecutive monthly increase. And in the latest of a string of positive reports from the Associated General Contractors of America, the Arlington, VA-based trade association said its analysis of the latest Census Bureau figures showed overall spending was up for the third month in a row.

However, one reason for the increase in spending may be a rise in costs. Consulting firm Rider Levett Bucknall says US construction costs rose 1.15% in the first quarter of 2014, the largest three-month increase since 2008.

Rider Levett Bucknall’s research shows that overall construction costs have been relatively flat for the past six years and are now beginning to show signs of spiking. These increases result from a variety of factors including increased construction activity, easing of general contractor price compression and the availability of labor and sub-trades.

In a report issued earlier this week, the consulting firm reported that even amid a rebound in construction, some A/E/C firms have lingering concerns about employee shortages, rising employment and construction costs and the impact of recent federal budget cuts. Lack of skilled labor will create a strain on the construction industry in some regions, which may be exacerbated by large-scale projects draining resources from smaller ones. 

“Developers will need to devise different strategies to overcome rising costs to try to get ahead of them,” says Grant Owen, New York City-based SVP of Rider Levett Bucknall North America. “Strategies may range from introducing LEAN design and construction techniques, to adopting different procurement processes, to analyzing project scope, to using alternative construction materials and methodologies.”

The firm’s research indicates that the housing sector will continue to lead increases in new construction through the balance of this year. Additional sectors expected to see gains in new construction include educational and institutional buildings, commercial buildings, healthcare and manufacturing facilities.

McGraw-Hill’s momentum index rose to 128.7 in June, a 3.3% gain from the previous month and 22.6% year over year. The monthly increase in the index resulted from an 8.3% surge in commercial building plans. However, the institutional side of the market retreated in June, with new projects at the planning stage slipping 4% during the month.

AGC reported earlier this month that construction put in place totaled $956 billion in May, 0.1% above the upwardly revised April total and up 6.6% Y-O-Y. For the first five months of 2014, total spending rose 8.2% from the year-ago period.

“The May figures show that construction activity continues to expand, but with lots of variability by month and project type," said Ken Simonson, AGC’s chief economist. “These uneven patterns seem likely to continue for the rest of the year.”

Private residential construction spending in May was down 1.5% from April but up 7.5% Y-O-Y, according to AGC. That represents an 11% Y-O-Y percent increase in single-family spending, 31% for multifamily and a 2.4% in improvements to existing housing.

Private nonresidential spending rose 1.1% in May and 11 percent over 12 months. Public-sector spending rose more modestly: 1% for the month and 1.2% Y-O-Y.

Source: GlobeSt.com