Perspectives



Trends in Highway and Rail Transit Construction Costs

The US construction market continues to show growth in both activity and confidence. This growth, however, continues at a relatively slow pace. Demand for construction is continuing to increase in many sectors, but the industry remains cautious. Private sector construction continues to be the driver for increases in construction activity.

As shown in Box 1, total construction spending through December 2013 was up 16 percent over its lowest point in March 2011. Over this same time period private sector spending was up 32 percent, but public spending was down 11 percent. Public sector spending has decreased post American Recovery and Reinvestment Act (ARRA) funding for transportation and other construction projects.



Prior to the recession, private spending on construction was dominated by the residential sector. During the recession, non-residential construction experienced a downturn which was far less severe than the residential market. Residential construction has been showing signs of recovery and, as of December 2013, was up 42 percent over March 2011 levels. Even with this growth, the December 2013 level is 56 percent below the point of highest activity level in March 2006. There remains no expectation that the residential sector will reach the 2006 peak level in the near future.

Despite the continued recovery of the construction market, construction cost escalation remains low. Construction materials prices have remained stable, and in some cases decreased, over the last two years (materials trends are outlined later in this article). This is largely due to slowed international growth as well as US construction activity that remains well below pre-recession levels. Additionally, bid competition remains high, especially for smaller projects. All of these factors contribute to low construction escalation.

Highway Construction Cost Trends

Parsons Brinckerhoff’s Highway Construction Cost Index (PB HCCI) has increased 1.2 index points, or 0.7 percent year-to-date in 2014 (as of late February). As seen in Box 2, year-over-year the overall index is 1.7 percent higher than the February 2013 value. Year-to-date, construction labor (-2.9 percent) prices have declined, while prices for steel mill products (1.9 percent), asphalt (1.3 percent), machinery/equipment (0.9 percent), aggregate (2.1 percent), and concrete (2.5 percent) have increased.

Box 2 illustrates the monthly variations in PB HCCI for 2009 through February 2014. Since the construction downturn in 2007 and 2008, there appears to be no seasonal trends to overall construction prices.

Source: US Army Corps of Engineers (Creative Commons)

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).

Rail Transit Construction Cost Trends

Parsons Brinckerhoff’s Transit Construction Cost Index (PB TCCI) has decreased 0.2 index points (or 0.1 percent) year-to-date in 2014 (as of late February). As seen in Box 3, year-over-year the overall index is 0.7 percent higher than the February 2013 value. Year-to-date, construction labor (-2.6 percent) prices have declined, while prices for steel mill products (1.9 percent), machinery/equipment (0.9 percent), concrete (2.5 percent), and other component prices (1.3 percent) have increased.





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 the early part of 2014 these declines have slowed with steel prices actually increasing 1.9 percent year-to-date.

Concrete

With the exception of the construction boom period that was experienced in 2005 and 2006, historically, concrete prices have remained stable. In the first part of 2014 there has been a rise in prices, with an increase of 2.5 percent year-to-date. This follows a 1.2 percent decline in 2010, a 0.5 percent increase in 2011, 2.6 percent growth in 2012, and 2.5 percent growth in 2013.

Construction Equipment

Though construction equipment prices are generally stable, prices increased 9.5 percent over the past three years (December 2010 to December 2013).

This increase is primarily due to the implementation of new US Environmental Protection Agency (EPA) 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 0.9 percent.

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 risen 1.3 percent. This follows a 3.4 percent decrease in 2013, 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 2.1 percent.

Note:

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

Image Header Source: Kyle May (Creative Commons)