Construction input cost analysis
Material prices down, but labor and machinery and equipment costs remain elevated
Materials
Construction materials and component costs continue to settle, reducing by 0.5 percent on the quarter in Q4 2023. Quarter on year data also eased to 0.5 percent in the same period.
Source: Bureau of Labor Statistics
A global cool down in economic activity and reductions in volatility, although relative to the highs induced by the disruption of the COVID-19 pandemic and conflict in Ukraine, have helped push costs down.
However, while volatility has reduced, it has not gone away completely. Geopolitical concerns remain, which can alter the direction of travel on costs at short notice. The tension in the Red Sea has risen and poses a threat to numerous shipping routes, in addition to the ongoing drought throughout the Panama Canal.
This is having an immediate effect on shipping costs. According to Freightos Baltic Index (FBX), global container freight costs spiked at US$3,411 as of January 26 2024. This is a direct correlation of extended shipping routes around Africa and South America. US construction materials costs have also increased in the last two months.
With the threat of growing instability, construction companies are becoming agile during their procurement processes, taking measures such as sourcing from local suppliers, or maintaining an approved list of alternates throughout the procurement life cycle. This should help to keep cost pressures under control if further volatility materializes.
Labor
Construction continues to be affected by legacy sector constraints - a lack of new entrants into the workforce, consistent industry leavers and low capacity and availability all contributing to rising costs for skilled labor.
Job openings in construction recorded 449,000 in December 2024, 58.7 percent higher than at the start of 2023. Although the sector's unemployment rate jumped up by 6.9 percent as of January 2024, this has not been seasonally adjusted. Winter months usually see similar spikes due to seasonal effects and weather that restricts labor activity, as well as a historically low unemployment rate remains low.
Construction employment increased by 11,000 people in January 2024, following December 2023’s increase of 24,000 people. Yet despite the steady uptick in employment, the rate of growth in the construction workforce falls well below the change in construction spending. The 13.9 percent spending increase between the 12 months to December 2023 overshadows the 3.1 percent rise in employment, indicating that the supply of workers is not able to keep up with demand.
These challenges have inevitably led to minimal flexibility in the market, fostering elevated remuneration to attract a proficient workforce. Labor costs continue to trend upwards, with most metrics tracking renumeration in construction increasing. Average weekly earnings grew the most, rising by 1.4 and 6.2 percent on the quarter and year in Q4 2023. The interplay of societal shifts therefore requires a strategic and adaptive approach to address talent shortages in the construction sector.
Source: Bureau of Labor Statistics
Machinery and equipment
Construction machinery and equipment costs continue to increase but at a slower pace than previously. The reduction is marginal, however, and as of Q4 2023, costs grew by 0.2 and 7.6 percent on the quarter and year. Most major items showed a quarter on year increase, with cranes, forklifts and generation growing costs by 8.3, 6.3 and 4.9 percent on the year, respectively. Excavator costs continue to grow, recording a notable increase of 15.0 percent on the year as non-residential workloads remain buoyant and infrastructure activity grows.
While machinery and equipment costs remain relatively high, operating costs have fallen. Diesel costs fell by 13.4 and 18.7 percent on the quarter and year as of Q4 2023. This depreciation can be linked to a high base level and rapid escalation in 2021 and 2022. Some stability has crept back into the global energy market and a relatively warm winter has allowed prices to soften. Geopolitical tensions may see oil supplies disrupted and fuel costs rise as a result.
Source: Bureau of Labor Statistics
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