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Is It Time To Build? What The Construction Cost Data Tells Us

Posted by Ed Pietroski on Tuesday, August 30, 2022

I’ve been curious about what effect COVID and supply chain issues have had on construction costs over the past two years. So when our clients asked if they should hold off on projects until prices go down or suppliers ramp up production, I didn’t know the answer. BUT, I knew we could analyze data and trends to base decisions on facts, not gut feel. And you know us engineers – we love data, so that’s what we did!

What is the ENR Construction Cost Index?
That’s the Engineering News-Record (ENR), a weekly magazine that touts itself as the “bible of the construction industry”, featuring what’s going on and what it means for us engineers and builders. Back in the 1920s, they developed a construction index which is the cost for set quantities of typical construction materials, like cement, lumber, and structural steel, plus the cost for 200 hours of standard labor, then tracks this cost index for 20 cities throughout the US, including Philadelphia and Pittsburgh here in PA. This ENR Construction Cost Index is calculated and published monthly helping us to budget construction work for our clients in the future, plus watch trends.

What does this graph show us?

So much! The blue line is the ENR Construction Cost Index (CCI), with the left axis showing an increase from about 10,700 to 13,000 over the past 5 years. You can see it continuously rises. Actually, when you look further back, over its entire history, it has gone up every year , except for a four-year stint almost 100 years ago during The Great Depression.

Then I calculated the year-over-year percent increase of the ENR Index, shown in red, with each bar representing the preceding 12 month period, and the % annual increase shown on the right axis. 5 years ago, we saw a 3% yearly rise, then it dropped a little before COVID hit the US in March 2020 and remained there for a few months. Since then, it peaked at an 8% annual increase, but appears to be settling or even dropping again. This shows us that while prices are increasing, it’s not an exorbitant amount – it’s not a crazy amount like 50% - that would make anyone shy away from projects.

What can we learn?

Lesson #1 - If you’re waiting for prices to go down, I’m sorry but it’s not going to happen. Some may be reluctant to start projects now due to pricing, but one thing I can tell you, and this includes experience in the late 70s with that runaway inflation: the prices won’t go back down. And unlike those crazy times, interest rates are still low.
Want proof? Check the last 90 years of the Construction Cost Index.
CCI 1929-2020
Lesson #2 - These projects take time, and costs go up over time, so get the engineering, design, and permitting done now. Those phases take many months for small projects, and up to 18 months for really big projects, and their cost is minimal compared to construction. Then see what funding you can get for construction and where interest rates are. You hear so much nowadays about “Shovel Ready” projects, meaning all of this upfront work is done, and funding often goes to these projects first. So get them ready now!
Lesson #3 - Interest rates may not be at their “all-time low”, but honestly, they are still really low. I remember getting a project funded many years ago at 12% financing, and we were happy with that rate! It’s easy to look back a few months ago and be dismayed that you missed the boat, but with a wider historical perspective, you can still be confident moving forward.

The bottom line is our infrastructure is deteriorating, and upgrades are desperately needed. Remember the ASCE Report Card a few years ago for Pennsylvania where Drinking Water received a D grade and Wastewater a D-? With all of the funding opportunities available right now, including millions of dollars that we’re able to secure in grants and loans from PennVest for our clients, this really IS the time to build. And I’m not just saying that - look at the graph!