Perspectives



Trends in Highway and Rail Transit Construction Costs

The US construction market continues along much of the same trend it has for most of 2014. Growth is slowly increasing and prices are starting to follow. Total construction activity as of August 2014 (the latest available data as of writing this Perspective) was 18 percent higher than the recession low in February 2011.

The recovery in construction remains driven by the private construction market. Public construction spending has been stable. The only recent fluctuations in total activity have been as a result of gains in the private market. Energy-related construction has been one of the biggest drivers of private sector construction growth. The power market is approximately 13 percent of all US construction activity and has activity 28 percent higher in the first half of 2014 than the same period in 2013 (US Census Bureau; based on the latest available figures from August 2014). There have also been notable construction activity gains in the residential and manufacturing sectors, but not as significant as the power sector.

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 Perspective). 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 lower construction escalation than seen prior to the Great Recession.

Highway construction prices saw a period of general decline in 2012 and 2013 (with some volatility). But, 2014 has seen increasing prices, as evidenced by Parsons Brinckerhoff’s Highway Construction Cost Index (PB HCCI). The increase is due primarily to fluctuations in the price of asphalt. Transit construction prices, tracked by Parsons Brinckerhoff’s Transit Construction Cost Index (PB TCCI), have seen more steady gains throughout 2013 and 2014. This was, in part, due to the heavier weight of labor in transit construction activities. Labor for major horizontal construction in the US generally follows union wage rates because of prevailing wage requirements (David-Bacon, etc.). These projects are often publicly funded and therefore often subject to such restrictions.

Highway Construction Cost Trends

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.

The PB HCCI has increased 11.1 index points, or 6.7 percent year-to-date in 2014 (as of September). As seen in Box 2, year-over-year the overall index is 4.5 percent higher than the September 2013 value. Year-to-date, prices for construction labor (7.5 percent), steel mill products (2.5 percent), asphalt (18.2 percent), machinery/equipment (1.5 percent), aggregate (3.5 percent), and concrete (3.7 percent) have all increased.

Box 2 also illustrates the monthly variations in PB HCCI for 2010 through September 2014. As demonstrated, seasonal fluctuations (i.e., higher prices in warmer months) remain a consistent trend.

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

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).

The PB TCCI has increased 4.6 index points (or 3.2 percent) year-to-date in 2014 (as of September). As seen in Box 3, year-over-year the overall index is 2.3 percent higher than the September 2013 value. Year-to-date, prices for construction labor (4.0 percent), steel mill products (2.5 percent), machinery/equipment (1.5 percent), concrete (3.7 percent), and other component prices (2.3 percent) have increased.

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 2.5 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. Year-to-date in 2014, concrete prices have grown 3.7 percent

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 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 1.5 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 18.2 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 3.5 percent. This follows a 1.7 percent increase in 2010, a 1.3 percent increase in 2011, a 2.4 percent increase in 2012, and a 2.5 percent increase in 2013.

Notes:

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

Image Header Source: Kyle May (Creative Commons)