Stronger Materials and Equipment Prices Boost Engineering & Construction Costs

U.S. construction cost increases were widespread in July, according to IHS Markit and the Procurement Executives Group (PEG). The current headline IHS Markit PEG Engineering and Construction Cost Index registered 63.2 in July, a bounce back from June’s reading of 55.7, recording the 33rd consecutive month of increases. Both the materials and equipment, and subcontractor labor indexes showed continued price increases, with readings of 62.4 and 65.1, respectively.

Survey respondents reported increasing prices for 11 out of the 12 components within the materials and equipment sub-index. The largest increase from last month was in copper wire and cable – a clear recovery for this material, which had one of the lowest readings in June. But it wasn’t alone: almost every component recovered from May’s depressed index figures. Carbon steel pipe stayed in the neutral territory, despite an increase from last month’s index figure.

One of the largest increases in the materials and equipment sub-index was in ocean freight from Asia to U.S., as the new IMO regulations impact carrier costs.

"Fuel costs for ocean freight carriers will rise significantly later this year in the lead-up to the new IMO marine sulfur emissions regulations taking effect on January 1, 2020,” said Kayla Bruun, senior economist, IHS Markit. “Most carriers will need to switch to a new and much more expensive fuel in order to comply and shippers will bear some of this cost.”

That said, excess capacity and a weakened outlook for shipping demand, along with softer oil prices, may help mitigate the impact.

The sub-index for current subcontractor labor costs reported rising labor costs in all regions of the United States and in both Eastern and Western Canada.

The six-month headline expectations for future construction costs index reflected increasing prices for the 35th consecutive month, with the index rising back up to 72.5 in July from 64.8 in June. The six-month materials and equipment expectations index registered 71.1 this month, up from 65.4 last month. All materials registered increasing prices. Expectations for subcontractor labor came in at 76.0 in July, up from 63.2 in June, with labor costs expected to rise in all regions of the U.S. and Western Canada.

In the survey comments, respondents indicated a tight labor market for all skilled trade workers.

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