Construction price escalation
Construction price inflation can be measured by the cost of the inputs that go into construction (Construction Cost Inflation) and the price of the output once it has been produced (Bid Price Inflation). Construction cost inflation calculates the movement in cost for direct inputs such as labor, materials and plant, while bid price inflation also considers soft costs such as development costs, profit margins and preliminary costs.
Bid prices inflation often reflects the market conditions and level of competition at the time. During hot market conditions when there is an abundance of projects underway, bid price inflation typically rises as profit margins can be increased and prices do not need to be as competitive. Conversely, when the market is cooler, bid price inflation lowers due to more competitive pricing, which can sometimes also reduce the impacts of any input price inflation that may occur.
The table below shows Turner & Townsend’s forecast for Construction Cost Inflation and Bid Price Inflation in Las Vegas through to 2028.
Source: Turner & Townsend, Jan 2025
Growth in national construction pricing has eased significantly since the peaks observed in 2021 and 2022. In 2024, non-residential construction costs were estimated to have increased by just 1.3 percent, according to the US Bureau of Labor Statistics Producer Price Index. In the west, non-residential construction prices experienced slightly higher growth at 3.2 percent, driven by various hot spots across the region.
Aside from labor costs, input prices experienced marginal growth, increasing by just 0.4 percent in the year to December 2024. While this is a national reading, the same trend was observed across most markets, including Las Vegas, where easing construction demand has slowed building activity due to tighter lending conditions and challenging economic conditions.
In the year to September 2024, construction output in Nevada declined by 4.0 percent, while residential permits fell by 9.3 percent in the year to December. This decline in construction demand has eased price pressures across the market and has increased competition among contractors. Bid price inflation was projected to be between 2.0-3.0 percent in Las Vegas in 2024, sitting slightly below the average for the western region.
Despite the easing in price growth over the previous year, the outlook for 2025 is more uncertain with increased volatility in prices to be expected. There are several factors that we expect will drive stronger price growth in the next 12 months and beyond. These are:
- The introduction of trade tariffs on imports into the US. The timing and roll-out of these will undoubtedly have inflationary effects for any inputs that are imported into the US.
- Growing levels of construction activity in the region. Strong population growth and supportive government policies are projected to drive a wave of construction activity across healthcare, hospitality, mixed-use developments and major infrastructure projects in the coming years, which will place pressure on the local supply chain.
- Ongoing shortage of construction labor and skilled construction professionals. The gap between construction labor demand and supply is large and is expected to widen in the coming years as activity levels increase. Construction labor costs are likely to be one of the key drivers of stronger construction price inflation in the outlook.
Based on the above factors, we anticipate stronger input price growth and bid price inflation in the coming years. Material costs are likely to see gradual impacts of import tariffs, while labor shortages are expected to drive up construction labor costs. In addition to these higher input prices, hotter market conditions will likely see profit margins rise, resulted in generally higher bid price inflation in the region. Therefore, we are projecting bid price inflation to sit at around 3.5 percent in 2025 and 2026, before stabilizing in 2027 and 2028 at around 3.0 percent, based on growing levels of activity in the market.
