Escalation forecast
What do current market conditions mean for our escalation forecasts?
The data in the prior input cost section of this report are linked to costs borne by contractors and subcontractors to procure labour, material and machinery and equipment – the building blocks for construction. When we reference escalation in this document, we’re concerned with bid prices. This measures the trend of contractors’ pricing level in accepted bids, i.e., cost to the client.
Unlike input cost indices, bid prices include market conditions and margin pressures amongst other things. Commercial tension can be applied against undesirable projects, increased risk allowances allocated for perilous projects, and contractors may adjust pricing practices in fallow or buoyant periods.
At a national level, Turner & Townsend’s construction escalation indices (which are a blended average of residential and non-residential project data) hit highs of 10.7 and 14.2 percent in 2021 and 2022 respectively following a small increase of 3.6 percent during the pandemic. In the years after, rampant demand growth, heightened volatility and extensive supply chain strains contributed to elevated escalation.
Bid prices may have peaked, however, and escalation should ease in the coming years with our central forecast depicting growth of 6.3, 2.5 and 3.5 percent on average in 2023, 2024 and 2025 respectively.
Source: Turner & Townsend
Figures are representative for Canada as a whole and escalation may vary by project size, value, procurement route and province. Projects do need to be assessed on an individual basis and may not always align to our published figures. For further assistance on cost assurance and escalation analysis in your area, please contact your local Turner & Townsend representative.
Workloads are thinning out across Canada. Not every location is experiencing the same level of change, yet many provinces and sectors are subdued compared to previous years. Leading indicators depict constrained levels of activity as 2024 gets underway, too. This may lead to more competitive pricing in certain sectors and locations as contractors look to lock in future work as backlogs recede.
Input cost pressures and general availability constraints are also not as pertinent as before, helping to recalibrate bid prices from recent highs as program slippage and lead-in times improve. However, margin retention strategies are in place to recoup abnormal losses during the pandemic and in the early stages of the conflict in Ukraine when material costs escalated rapidly.
Meanwhile, labour costs continue to grow. Historical shortages, coupled with broader social economic change such as early retirement and people leaving the labour force entirely, have left the Canadian construction market short on workers. This may well keep bid price escalation elevated in the short term, even as workloads soften and materials costs allay and upside and downside risks remain.
Recessionary risks pose significant scope for further disinflation, and potentially deflation, in construction pricing while rising geopolitical instability may disrupt supply chains and accelerate escalation growth. Both outcomes could have a material impact on the projections listed in this report and it is advised that the construction market is monitored on a regular basis to revise estimates and recalibrate forecasts.
Source: Turner & Townsend
© 2024 Turner & Townsend