Perspectives



Trends in Highway and Rail Transit Construction Costs

Construction activity in the US continued upon its recovery started in 2012. Annualized 2013 Q1 activity is estimated at 11 percent above the low total annual activity level in 2011 (Box 1). The industry is finally showing signs of confidence and appears to be recognizing the strength of the economic fundamentals and feeling continually more optimistic. While not poised for a steep recovery, market confidence is generally looking up.

In 2013 Q1, the ENR construction market confidence index was at its highest level since the recession (approximately twice the 2009 Q2 value). Of the respondents to the ENR survey, 87 percent see the current market as stable or growing. Of designers, 32 percent saw the market improving and 57 percent saw the market as stable. Given the designer’s early role in the project lifecycle, this points to strong signs in the market.

Construction demand is likely to follow the general economic recovery, which is showing signs of gradually improving growth. Because construction activity will likely grow at a steadily improving pace, producers of construction materials have sufficient time to ramp up supply. This should help prevent severe shortages of materials which drive inflated construction costs.

Highway Construction Cost Trends

Parsons Brinckerhoff’s Highway Construction Cost Index (PB HCCI) has decreased three index points, or one percent year-to-date in 2013 (as of April). As seen in Box 2, year-over-year the overall index is five percent lower than the April 2012 value. The index has now declined back to levels seen in April 2011. This decrease is despite the marginal cost increase observed in April 2013, a one percent increase from the previous month (March). Year-to-date, construction labor, steel mill products, and asphalt prices have declined by four percent, one percent, and four percent, respectively; prices for machinery/equipment (one percent), aggregate (two percent), and concrete (two percent) have increased.

Box 2 illustrates the monthly variations in PB HCCI for 2008 through 2013. Other than in 2008 (where there was a significant drop in construction prices, primarily driven by demand and oil prices), there appears to be no seasonal trends to overall construction prices.

PB HCCI is comprised of the following six cost components: construction labor, construction equipment, steel, aggregate, concrete, and asphalt and asphalt binder. The resulting index represents average highway construction costs for the US as a whole.

Cost inflation for specific regions, capital programs, and projects will vary from this index depending on project types and work mix, as well as the regional or local construction market (including local contractor and material supplier markets) and contractor margins (which are lower during construction downturns).

Rail Transit Construction Cost Trends

Parsons Brinckerhoff’s Transit Construction Cost Index (PB TCCI) has observed only a marginal increase, approximately 0.4 index points (or 0.2 percent) for the year 2013 (i.e., year-to-date, as of April). During this period, steel prices decreased by 0.7 percent, concrete grew 2.3 percent, labor costs decreased 1.5 percent, equipment costs grew 1.0 percent, and other component prices increased by 1.8 percent. As seen in Box 3, the April 2013 PB TCCI value, when compared with April 2012, remained unchanged.

PB TCCI is comprised of the following cost components: steel mill products, ready-mixed concrete, machinery and equipment, construction labor, and other materials. Because vehicle acquisition is not a part of all transit capital projects and is not a true construction cost, costs for rolling stock have been excluded from the index. The resulting indices represent average transit construction costs for the US as a whole.

Cost inflation for specific regions, capital programs, and projects will vary from this index depending on project types and work mix, as well as the regional or local construction market (including local contractor and material supplier markets) and contractor margins (which are lower during construction downturns).

Market Trends for Key Components

Steel

Historically, the global demand for steel scrap and the growth of the US automobile industry has had a significant effect on domestic scrap prices, thereby increasing overall steel prices. Given the drop in global demand (especially the BRIC countries), in 2012 steel prices declined 8.2 percent. This decline follows greater than 12 percent growth in the two preceding years (i.e., 2010 and 2011). In 2013 these declines have slowed with steel prices falling 0.8 percent year-to-date.

Concrete

With the exception of the construction boom period of 2005 and 2006, historically, concrete prices have remained stable. That being said, in the first part of 2013 there has been a greater than normal rise in prices, with an increase of 2.3 percent year-to-date. This follows a 1.2 percent decline in 2010, a 0.5 percent increase in 2011, and 2.6 percent growth in 2012.

Construction Equipment

Though construction equipment prices are generally stable, prices increased 8.1 percent over the past two years (December 2010 to December 2012). This increase is primarily due to the implementation of new US Environmental Protection Agency emission regulations for construction equipment, called Tier IV. These standards apply to all new equipment. The impact of Tier IV standards appears to be tapering off as year-to-date equipment prices have grown only one percent compared to 1.8 percent over the same months last year.

Asphalt Binder

Asphalt binder is a byproduct of petroleum refineries and is used to hold loose aggregate together in asphalt pavement. As a result, the observed volatility in asphalt prices is highly correlated to crude oil prices, which are dependent on global markets and geopolitical events. Year-to-date, the price of asphalt has fallen 4.0 percent. This follows a 2.5 percent decrease in 2012 and a 32.1 percent price increase in 2011.

Aggregates

Being a heavy natural commodity, aggregates tend to be sourced from within 50 miles of a project. While alternatives do exist, transportation costs for materials outside of a 50-mile radius can raise the material costs by as much as two-thirds, making these options most often uneconomical. At a national level, the price of aggregates has remained relatively stable. Year-to-date, the price of aggregates has increased 1.6 percent. This follows a 1.7 percent increase in 2010, a 1.3 percent increase in 2011, and a 2.4 percent increase in 2012.

 

Notes:

1. Data source for Boxes 4 through 8: US Bureau of Labor Statistics

 

Image Header Source: Hugh Nelson (Creative Commons)