2019 International Construction Costs: Confronting the rising cost of construction in the U.S.

The latest edition of Arcadis’ annual International Construction Costs report details the relative cost of building in 100 of the world’s major cities — one of the largest comparisons of its type — and covers every major construction market. Where did the United States land in this year’s report? At the very top.

The three most expensive cities remained the same in this year’s construction costs index, but New York surpassed San Francisco for the number one spot (Hong Kong is in third place). Nine new U.S. cities were added to this year’s index, providing an opportunity to drill deeper into the cost differences across the nation.

New York and San Francisco face unique challenges in construction. New York’s high insurance costs coupled with strict building codes as well as significant access and logistics challenges factor into soaring construction costs in the Big Apple. Across the country, the technology sector has its grip on San Francisco, contributing to labor shortages and other market forces that drive up the cost of construction throughout the region. Local building and energy codes also impact San Francisco’s construction costs.

Beyond these two cities the U.S. presents a notable range of construction costs. There is a 15 percent range between the top five most expensive U.S. cities, and an overall differential of 40 percent between the lowest and highest. Yet while the costs may vary significantly, there are common factors affecting construction costs in all U.S. cities, whether in New York or Houston.

Uncertainty surrounding tariffs and financing

For some contractors, materials costs have become the top concern. In 2018, tariffs were imposed on steel, aluminum, lumber and a variety of Chinese imports, and prices were quickly matched, or even raised, by many U.S. suppliers. Contractors who had signed fixed-price contracts for projects before buying materials found themselves now shorted on the material costs. If the tariffs stay in place, even contractors who pre-ordered supplies will likely need to pass on the increased costs to their customers.

Most contractors do not have to arrange financing, but homebuyers, developers and municipal-bond issuers are all sensitive to interest rates. If rates rise more than is currently anticipated, planned projects may be paused. Single-family homebuilders are especially vulnerable to interest rate increases. However, multifamily construction in 2019 could see demand increase if single-family buyers are priced out of buying homes.

Labor shortages increasing rates

The current labor shortage has meant labor rates, if not already, will be increasing over the next 12 months. The U.S. construction industry has been consistently adding workforce, and employs around 7.2 million professionals, the highest levels since the Great Recession of 2008. All the while, U.S. construction industry unemployment levels have dropped to an 18-year low.

The impact of not filling job openings and not having the right skill set in the workforce can negatively impact engineering and construction companies in various ways, including not being able to respond to market needs, losing project bids, and failing to innovate.

The construction industry is responding to the shortage and added 225,000 more workers through November 2018 compared to 2017. However, 30 percent of the construction workforce is expected to retire over the next 10 years. While demand growth next year is expected to slow and the pipeline of younger workers is improving, the outflow of experienced workers will keep construction labor markets tight, leading to an acceleration in average industry wages from 3.1 percent growth in 2018 to 3.6 percent growth in 2019. (Source: Emily Crowley, IHS Markit)

Looking ahead

The U.S. construction market is expected to grow 2.6 percent this year and the tender price index is expected to increase 3-5 percent. Much of this market growth will likely be within the commercial sector, as technology companies have announced a large push to build data centers over the next five years.

While construction costs vary around the world, there is a shared need to put citizens at the heart of projects by focusing on data-enabled productivity and cost reduction.

David Hudd

Cost Consultancy Director 206 726 4722 Ask me a question
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