2021 Q3 TO Q4

CONSTRUCTION COSTS
AND PROJECTED MARKET
ESCALATION STUDY
Sponsored by cove.tool

1 2021 Q3 to Q4 Construction Costs and Projected Market Escalation Study

2021 Q3 to Q4 Construction Costs and Projected Market Escalation Study

About the Author

PATRICIA KUSUMADJAJA
Patricia is a Virtual Design and Construction
Director at cove.tool. She has over eight years
of experience working in the AEC industry,
namely in architectural cost estimating,
VDC, and project delivery. Patricia earned
her Bachelor of Architecture in 2015
from Kennesaw State University and her
CEP from the AACEi in 2020. She strives
to make a difference in the way owners,
construction and architectural professionals
view high-performance design, with the
hope that sustainability and environmental
consciousness becomes a non-negotiable
priority in all future building design and
construction.
www.cove.tools 2
 Table of Contents
SECTION 1 SUMMARY

1.1 Scope of Market Survey

1.2 Recent and Projected Market Escalation
1.3 Contractor Confidence
1.4 Building Performance

SECTION 2 RESEARCH FINDINGS

2.1 ENR Construction Indices

2.2 PPI for Construction
2.3 Materials
2.4 Labor

SECTION 3 SOURCES

3 2021 Q3 to Q4 Construction Costs and Projected Market Escalation Study

2021 Q3 to Q4 Construction Costs and Projected Market Escalation Study
Section 1 - Summary
1.1 SCOPE OF MARKET ANALYSIS
The goal of this effort is to determine the
current and projected future local construction
market conditions that may affect the upcoming
building construction project. The evaluation
of market conditions focused on the ability of
contractors and suppliers to support the project
within a competitive bidding environment. To
analyze the competitiveness of the national
construction market, factors were researched,
such as market escalation, limitations on supply
of key materials, interest in the contractor
community, and availability of construction
personnel.
Based on the opinions of those surveyed, and
the research of other sources, it is believed the
market conditions as outlined will cover a period
of 6 months from the date of this report.
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 1.2 RECENT AND PROJECTED
MARKET ESCALATION
Source: Cumming Insights, Q3
In the third quarter of 2021, Cumming
Construction Management Inc. (CCORP)
released their Construction Market Analysis
and reported that the US construction industry
“is much more active than expected. Overall
volume is expected to peak this year before
pre-pandemic trends resume next year. As
shown in the construction annual spending
chart below, residential construction continues
to dominate the market, particularly after more
than a year of remote work for many people.”
Healthcare and education sectors follow suit
and are expected to continue to remain busy.
The proposed federal infrastructure plan is also
expected to boost the market’s activity should
it pass.

The Bureau of Labor Statistics noted that the

Consumer Price Index (CPI) indicates that there
has been a 5.4% CPI increase over the last 12
months.

Source: The U.S. Energy Information Administration

Prices 2019 2020 Delta 2021 Delta

2019-2020 2020-2021
Brent Crude Oil $63.34 $41.69 -35.20% $71.38 71.22
(dollars per barrel)

Gasolineb $2.60 $2.18 -16.15% $2.97 36.27%

(dollars per gallon)

Dieselc $2.06 $2.56 -16.34% $3.24 26.56%

(dollars per gallon)

5 2021 Q3 to Q4 Construction Costs and Projected Market Escalation Study

2021 Q3 to Q4 Construction Costs and Projected Market Escalation Study
Most of this increase can be traced back to the All of which are subject to some level of change
rising cost of fuel. 2019-2020 saw a decrease (either lesser or greater) in the next several
in terms of fuel price according to the EIA, as months as the market adjusts to conditions post-
illustrated in the table above. In the last year COVID and the new Administration continues
(2020-2021), fuel prices increased exponentially to reassess world relationships.
by an average of 10.4% over 2019’s prices. It is
projected that fuel prices will remain volatile
in the next few months as winter approaches,
boosting demand while inventory remains low.

Based on literature research, field experience

and inputs from suppliers and construction
professionals, a 3.5% escalation rate for the
next 6 months is reasonable, with the possibility
that escalation could decrease to 3.0% by
Q1 of 2022 if some lessening in demand and
normalization in supply are realized. A few
contributing factors to the escalation rate are
material and labor dynamic market conditions,
as well as other miscellaneous factors, such as:

• Taxes, tariffs and import fees imposed on

goods
• Global and domestic demand for raw
materials
• Factory operations, which lead to an increase
or decline in manufacturing capacity
• Natural disasters that affected resource
and manufacturing availability (hurricanes,
freezes, floods, etc.)
• Wage rates
• Labor availability due to labor disruptions,
such as the pandemic and/or an increase or
reduction in labor demand due to a change in
numbers of active projects
• Subcontractor demand and subcontractor
availability
• Leads and delivery times for goods and raw
materials

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 1.3 CONTRACTOR CONFIDENCE

For Q3 of 2021, ENR reported an Industry We conducted a survey with contractors,

Confidence Index of 65, down three points
from the previous quarter. While contractors,
executives and owners remain confident, that
confidence has slightly cooled due to supply
chain disruptions, labor shortage, and more.
Anirban Basu, CEO of Sage Policy Group, an
economic consulting group, noted that “Many
people are now suggesting these supply chain
disruptions will last into 2023.” Additionally,
while firms are seeing an increase in activity,
the levels of activities are unequal across
markets. Commercial offices, entertainment,
theme parks, hospitality, and retail “remain
at less than half of their pre-pandemic levels”
according to Basu.
building elements manufacturers, and
installers to investigate their perspective and
outlooks based on every day, boots-on-the-
ground experiences. All contractors who we
interviewed concur that subcontractors are
staying busy, that there is a material shortage,
and feel that although it is difficult to predict,
the market is more likely to remain busy for the
next two years.

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2021 Q3 to Q4 Construction Costs and Projected Market Escalation Study

Questions Turner Skansa New South Gilbane

Is your current Yes, only slightly Many factors impact Pricing of future No - prices are mostly locked in
workload affecting pricing, current projects yes, in the but increasing prices for future
your pricing of workload is generally next 12-24 months projects
projects? increasing pricing
Are subcontractors Yes Yes Yes Yes, very
generally staying
busy?
Are there any labor Yes, generally across Yes, but hasn’t been Yes, mostly on-site Yes - all trades but particularly
shortages? If so, what all trades but it critical enough to positions such as low-mid skill level such as brick
trades? hasn’t been as bad delay projects concrete pourers, layers, concrete, and general
as it sounds in the etc. construction sub trades
news
Are there any material Yes, steel Yes, resins in paint Yes, also backlog Yes - all across. Steel has been
shortages such as and ABS pipe on equipment very expensive in particular and
concrete, steel, rentals and is probably more volatile than
plywood & etc.? acquisition lumber
Has your pricing Yes, varies Current pricing for Yes, around 15% in Yes. Depending on the week and
been affected by any depending on what future projects has the last 18 months material, anywhere from 4% -
material shortage and the material is. Glass generally increased 40%
by what %? has been expensive with differences
and so is lumber trade to trade
How do you see the Busier than normal Busier than normal Busier than normal Busier than normal
current market in
your area? Busier than
normal? Average or
slower than normal?
How do you see the Strong but we are Two years anticipate Continuing to be Hard to predict. There is
current market for also anticipating a will be different as busy but slower strong interest for owners and
next two years? tapering supply and demand developers to build to take
settles. advantage of low interest rates,
but difficult to justify the cost of
construction

Has there been any About the same Yes, sustainability No, first cost Multi-family residential has
increase/decrease has grown as a key is typically the seen a major jump. Sustainable
in the pursuance of factor, don’t have deterring factor buildings are more sought after in
sustainable buildings a %. The social/ and now more so cities such as LA and NY where
in the last year? If so, political atmosphere particularly with demand for sustainable, high-
by what % and why has changed enough office buildings performance buildings are higher.
do you think this is? that folks want to Many owners would like to but
at least crunch the very concerned over first costs
numbers if not more. and ROI

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 1.4 BUILDING PERFORMANCE
AND COST
When it comes to building performance and
choosing to invest in sustainable building
strategies, contractor executives report that
the current social/political atmosphere has
encouraged owners to seriously consider and
further investigate sustainability as a priority.
Still, the common misconception of the initial
premium investment and return on sustainable
buildings deter many owners from choosing to
prioritize sustainability.
Research shows that green buildings do not
necessarily need to cost more than their
conventional alternatives. A study conducted
by the World Green Building Council (WGBC)
noted that “[the misconception of higher costs]
may be due to an inability to forget historical
data, or a lack of awareness that costs are
coming down … Another factor could be that
showpiece or demonstration buildings for
sustainability may have additional costly ‘finish’
upgrades which are not directly related to green
cost, and these are the buildings that are often
featured in industry publications. They often
also feature highly visible green technologies,
such as photovoltaics and large building-
integrated wind turbines, are used to reinforce
a green image but that may not be financially
viable, especially if these are not coupled
with a robust overall environmental strategy.”
Recent pricing releases by manufacturers of
sustainable products also show the decrease of
costs directly related to certain green building
strategies.
9 2021 Q3 to Q4 Construction Costs and Projected Market Escalation Study
As an example, the National Renewable Energy
Laboratory (NREL) reported that the last decade
has seen a sharp decline in photovoltaic (PV)
cost; a 64% decline for residential-scale, 69%
in commercial-scale and 82% for utility-scale.
NREL Senior Financial Analyst, David Feldman
said, “A significant portion of the cost declines
over the past decade can be attributed to an
85% cost decline in module price. A decade ago,
the module alone cost around $2.50 per watt,
and now an entire utility-scale PV system costs
around $1 per watt . . . With similar reductions
in hardware costs for storage systems, PV and
storage have become vastly more affordable
energy resources across the nation.”
Moreover, when green strategies, program
management and cost management are
integrated earlier in the design and development
process, achieving a cost-effective, high-
performance building is feasible. The Integrated
Project Delivery (IPD) method has garnered
traction in recent years and has been proven
successful for managing and developing a cost-
effective, high-performance project.
2021 Q3 to Q4 Construction Costs and Projected Market Escalation Study

Section 2 - Research Findings

2.1 ENR CONSTRUCTION INDICIES

Construction Costs
The Construction 1913=100 Index Value Month Year
(+) 8.0% Cost Index’s CONSTRUCTION 12464.94 0.0% (+)8.0%
October annual escalation COMMON
2021 rate rose to 8% 12355.78 0.0% (+)1.3%
LABOR
this month
WAGE, $/HR 46.80 0.0% (+)1.3%
(Source: https://www.enr.com)

Building Costs
1913=100 Index Value Month Year
The Building Cost
(+) 14.2% BUILDING 7244.90 (+)0.4% (+)14.2%
Index’s annual
October SKILLED
inflation rate 10978.76 0.9% (+)2.6%
2021 LABOR
rose to 14.2%
WAGE, $/HR 60.58 0.9% (+)2.6%
(Source: https://www.enr.com)

Material Costs
1913=100 Index Value Month Year
The MCI MATERIAL 4935.01 (+)0.0% (+)35.2%
(+) 0.0%
remained steady
October
this month, with CEMENT $/TON 150.10 (-)0.3% (+)1.5%
2021
minimal change STEEL $/CWT 73.42 (+)2.7% (+)31.5%
LUMBER $/MBF 1010.64 (-)4.1% (+)49.5%
(Source: https://www.enr.com)

The Construction indices above indicate that while construction costs continue to increase overall,
material prices are seeing minimal changes. Lumber experienced a decrease of 4.1% while steel cost
sees a slight increase of 2.3%. This indicates that the driver of continuing construction cost increase is
the shortage of skilled and unskilled labor.
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 2.2 PPI FOR CONSTRUCTION
According to Bureau of Labor Statistics (BLS)
data, the Producer Price Index (PPI) for final
demand in general decreased 0.5% from August
to September, seasonally adjusted.
Source: Bureau of Labor Statistics
point at 232.9, the increase remains relatively
steady at 1.3%. In contrast, the October 2021
data point at 278.1 shows a significant jump of
19.4% over the last 12 months.
Although project costs are typically made up of
materials (60%) and labor (40%), it can initially
appear that the rising cost of material goods (a
nearly 5.5% annual increase in the past 24 months)
bears most of the responsibility of cost. However,
recent reports indicate that labor shortage and
wage increases are the primary driving forces
behind the increase of construction cost.
11 2021 Q3 to Q4 Construction Costs and Projected Market Escalation Study
These graph and data points indicate that the
construction market has seen a significant
increase in the last year. By looking at the October
2019 data point at 229.9 and October 2020 data
The larger annual increase (2020-2021) of
approximately 20% is exacerbated by the
comparative data points and the impact of
COVID-19. Hence, the comparison to 2019 is
a more realistic assessment of the market. As
noted by Investopedia’s Associate Editorial
Director, Ben Woolsey: “To keep the recent
increases in perspective, however, it’s important
to note that the year over year increase, while
significant, is using a time at the height of the
pandemic last year as a point of comparison.
Since spending was at an unusually low point in
[May of]2020 the magnitude of the percentage
increase in [May 2021] was magnified.”
2021 Q3 to Q4 Construction Costs and Projected Market Escalation Study

2.3 MATERIALS

ENR releases the following material price indices

on a monthly basis. The materials shown below
are materials that are considered ‘key drivers of
construction cost.

The COVID-19 pandemic has also posed
significant challenges to supply chain and
manufacturing, which in turn impacted material
prices. Many plants and factories were deemed
“unessential” at the beginning of the pandemic
and were forced to temporarily shut down while
company leaders brainstormed ways to return
to work safely. Environmental disasters, such
as the freezing temperatures that befell Texas
in February 2021 also unexpectedly halted
production of concrete and plastic, among many
other raw materials (AGC).

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 2.4 LABOR
While materials traditionally bear the
reputation for being the major cause of
construction cost, data shows that in 2021,
labor may potentially reclaim that designation.
The national construction industry remained
busy throughout 2020 and so far into 2021,
with spending on new projects amounting at
$1,584.1 billion as of August 2021, an 8.9%
increase from the same period of 2020.
The lack of enough skilled workers and a
narrow talent pipeline has added extra hurdles,
time, and costs to many current projects. The
construction market is not the most attractive
market to young graduates, and a significant
portion of the construction workforce are
entering retirement age. The COVID-19
pandemic has also added to this problem –
taking out many qualified workers out of the
labor force. Women and single parents, in
particular, have left the workforce in great
numbers due to a lack of childcare. Deportation
13 2021 Q3 to Q4 Construction Costs and Projected Market Escalation Study
efforts, particularly executed by the previous
administration, have also contributed to much
of the on-site construction worker shortage.
The Bureau of Labor Statistics reported that by
the end of September, construction employment
increased by 22,000 jobs. However, hiring rate
remained stagnant as construction employment
is still 201,000 jobs below its September 2020
level.
To attract more workers, many companies
are increasing wages and offering monetary
bonuses, as well as added benefits. The BLS
noted that for total construction, hourly earnings
averaged to $32.59 in April, 8.0% higher than
the average for the non-farm private sector.
This premium, however, is a 2.2% decrease from
the 10.2% from April 2019. This implies that
“financial attractiveness of construction may be
diminishing as other sectors that are expanding
faster raise pay to attract more workers.”
2021 Q3 to Q4 Construction Costs and Projected Market Escalation Study

Section 3 - Sources
1. “2.0 The Economic Benefits of Sustainable Design - Energy.” Office of ENERGY EFFICIENCY & RENEWABLE
ENERGY, https://www1.eere.energy.gov/femp/pdfs/buscase_section2.pdf.

2. Ardani, Kristen, et al. “Cost-Reduction Roadmap for Residential Solar Photovoltaics (PV), 2017–2030.” National
Renewable Energy Laboratory (NREL), National Renewable Energy Laboratory (NREL), https://www.nrel.gov/docs/
fy18osti/70748.pdf

3. Associated General Contractors of America. “Construction Inflation Alert 2021.” May 2021.

4. The Beige Book, The Federal Reserve, 2021, pp. 2-K-2. May 2021.

5. “The Business Case for Green Building.” World Green Building Council, World Green Building Council, Apr. 2013,
https://www.worldgbc.org/sites/default/files/Business_Case_For_Green_Building_Report_WEB_2013-04-11-2.pdf.

6. Construction Economics Index. Engineering News Report. https://www.enr.com/topics/604-construction-economics

7. Cumming Construction Management, Inc. “Cumming Insights.” May 2021.

8. “THE EMPLOYMENT SITUATION – OCTOBER 8, 2021.” U.S. Bureau of Labor Statistics, USDL, no. 21, ser. 0980, 4
June 2021. 0980, www.bls.gov/news.release/empsit.nr0.htm.

9. Famiglietti, Matthew, and Carlos Garriga. “Putting Recent Inflation in Historical Context.” Economic Research - Federal
Reserve Bank of St. Louis, research.stlouisfed.org/publications/economic-synopses/2021/06/03/putting-recent-
inflation-in-historical-context.

10. Lambert, Lance. “Southern loggers are pushing wood production to a 13-year high. So why is the price of lumber
up 288%?”. June 11, 2021. https://www.msn.com/en-us/money/markets/southern-loggers-are-pushing-wood-
production-to-a-13-year-high-so-why-is-the-price-of-lumber-up-288/ar-AAKVfLS?ocid=msedgntp.

11. “Market Conditions Report United States Q2-2021.” DPR Construction, June 2021.

12. “MONTHLY CONSTRUCTION SPENDING, AUGUST 2021.” United States Census Bureau, October 3, 2021, https://
www.census.gov/construction/c30/pdf/release.pdf

13. “PRODUCER PRICE INDEXES – SEPTEMBER 2021.” U.S. Bureau of Labor Statistics, https://www.bls.gov/news.
release/ppi.nr0.htm.

14. Toussaint, Kristin. “The Price of Solar Electricity Has Dropped 89% in 10 Years.” Fast Company, Fast Company, 8 Dec.
2020, https://www.fastcompany.com/90583426/the-price-of-solar-electricity-has-dropped-89-in-10-years.

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 covetool

12 15 2021 Q3 to Q4 Construction Costs and Projected Market Escalation Study