Increasing Building Activity, Aging Workforce Drive Construction Labor Shortages and Rising Costs

Construction costs increased for the 20th straight month in June, according to IHS Markit and the Procurement Executives Group (PEG). The current headline IHS Markit PEG Engineering and Construction Cost Index registered 66.6, 2.8 points higher than in May. Both materials/equipment and labor sub-indexes came in above 50, indicating rising prices.

Price increases for materials and equipment were more widespread in June; the index posted a gain of 1.7 points, reaching 69.1. Prices were up in six of the 12 categories. The indexes fell for two of the three steel categories – fabricated structural steel and carbon steel pipe – but the indexes remain elevated, indicating that steel price increases continue to be widely felt. The biggest gains were in the indexes for copper-based wire and cable, electrical equipment and ocean freight.

“The construction and engineering industry continues to struggle with labor shortages. Construction wages grew an average of 3.7% compared to 2017 during the first half of the year,” said Emily Crowley, principal economist - pricing and purchasing, IHS Markit. “Construction activity is growing across all regions of the country. Low unemployment, an aging construction labor force and difficulty finding experienced workers will continue to contribute to above average wage growth in the industry.”

The current subcontractor labor index expanded at a faster rate this month compared to last; the index increased 5.2 points to 60.7, marking the eleventh straight month of increasing prices. Labor costs continued to increase in all U.S. regions, with the West experiencing the biggest rise in the index. After moving into neutral territory in May, the labor cost index for Western Canada returned to the positive threshold. The index for Eastern Canada remained at the neutral threshold for a second consecutive month.

The six-month headline expectations for construction costs increased for the 22nd consecutive month; the index moved down 0.2 points to 74.7. The materials/equipment index slid 0.2 points lower to 76.9. Expectations for future price increases remain upbeat, but movements in the component indexes were mixed. Price expectations for sub-contractor labor also slid 0.2 points lower, coming in at 69.6. Labor costs are expected to rise in all regions of the U.S. and Canada.

In the survey comments, respondents indicated an expectation of a shortage of electrical engineers, welders, and quality inspectors in 2018. They also continued to highlight concerns about rising prices stemming from developments in U.S. trade policy.

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