Perspectives



Trends in Highway and Rail Transit Construction Costs

Total construction starts in the US (which includes residential, commercial, institutional, public works, and electric utilities) edged up two percent in 2010 and 2011, followed by more robust 10 percent and five percent growth in 2012 and 2013, respectively. Single-family housing was the main driver for the robust growth observed in the last couple of years. McGraw Hill Construction forecasts total construction starts in the US to grow nine percent in 2014. The underlying factors contributing to the healthy growth forecast for 2014 include:

  • Single family housing is expected to grow 26 percent, matching its observed growth in 2012 and 2013;
  • Multifamily housing is expected to grow 11 percent, where the growth has declined from the observed growth in the last four years;
  • Commercial building construction is expected to grow 17 percent, which is slightly higher than the past few years;
  • Institutional building construction is expected to see two-percent growth, which is a turnaround from the negative growth observed over the past five years;
  • Public works construction is expected to decline five percent, which is significant after the observed three percent growth in 2013; and
  • Electric utility construction is expected to continue the downward trend observed in 2013, where in 2014 a 33-percent decline is forecasted.

 

Highway Construction Cost Trends

Parsons Brinckerhoff’s Highway Construction Cost Index (PB HCCI) is comprised of the following six cost components: construction labor, construction equipment, steel, asphalt and asphalt binder, aggregate, and concrete. 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).

PB HCCI has increased 3.0 index points, or 1.8 percent year-to-date in 2013 (as of October). As seen in Box 1, year-over-year the overall index is 0.7 percent lower than the October 2012 value. Year-to-date, steel mill products (-2.0 percent) prices have declined, while prices for construction labor (4.1 percent), asphalt (3.2 percent), machinery/equipment (1.4 percent), aggregate (3.3 percent), and concrete (2.3 percent) have increased.

Box 1 illustrates the monthly variations in PB HCCI for 2008 through 2013. Other than in 2008 (where there was a significant increase in construction prices, primarily driven by demand and oil prices), there appears to be no seasonal trends to overall construction prices.

 

Rail Transit Construction Cost Trends

Parsons Brinckerhoff’s Transit Construction Cost Index (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).

PB TCCI shows an increase of approximately 4.2 index points (or 2.9 percent) for 2013 (year-to-date, as of October). During this period, steel prices decreased by 2.0 percent, while concrete (2.3 percent), labor costs (5.2 percent), equipment costs (1.4 percent), and other component prices (1.7 percent) increased. As seen in Box 2, the October 2013 PB TCCI value increased 1.9 percent from October 2012.

The PB TCCI and PB HCCI have shown noticeably different trends in costs in both 2013 year-to-date (2.9 percent PB TCCI increase versus 1.8 percent PB HCCI increase) and, in particular, over the last 12 months (1.9 percent PB TCCI increase versus 0.7 percent PB HCCI decrease). The difference between the changes in each respective index over the given timeframes is explained by various factors. First, each cost component is weighted to derive the final index number, with the assigned weights differing between the two indices. The larger disparity between the indices in the past 12 months is further explained by differences in two specific cost categories: asphalt and construction labor. Asphalt is included in the PB HCCI but excluded from the transit index, and has decreased 5.6 percent since October 2012. For the construction labor component, the two indices use different inputs. The PB TCCI uses average hourly earnings for employees in the heavy and civil engineering industry, while the PB HCCI uses the earnings from the more specific highway, street, and bridge construction industry. In the last 12 months, the PB TCCI construction labor costs have increased 3.0 percent, while the PB HCCI costs have seen a decrease of 0.1 percent.

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 in the BRIC (Brazil, Russia, India China, and South Africa) countries, steel prices declined 8.2 percent in 2012. This decline follows the greater than 12-percent growth in the two preceding years (2010 and 2011). In 2013 these declines have slowed, with steel prices falling 2.0 percent year-to-date.

Concrete

With the exception of the construction boom period in 2005 and 2006, historically, concrete prices have remained stable. That being said, in the beginning of 2013 there was 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 (from 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 1.4 percent compared to 2.7 percent over the same months last year.

Asphalt Binder

Asphalt binder, used to hold loose aggregate together in asphalt pavement, is a byproduct of petroleum refineries. 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 risen 3.2 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 3.3 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.

 

Note:

  1. Data source for Boxes 3 through 7: US Bureau of Labor Statistics

 

Image Header Source: Gordon Werner (Creative Commons)