Construction costs in North America rose for the 22nd consecutive month in November as labor costs continued to increase, amid growing industry concern over the tight availability of skilled workers.
The Engineering and Construction Cost Index (ECCI) registered 53.2 percent in November, up from 52.6 percent in October, according to IHS Inc. and the Procurement Executives Group (PEG). The ECCI indicates that construction costs in North America have been on the rise for nearly two years since January 2012.
The index divides construction costs into two major categories: materials/equipment and subcontractor labor. With the materials/equipment portion of the index hovering near 50 since April, it was the labor segment that drove the increase for the month.
The current subcontractor labor index climbed to 58.5 percent, up from 56.4 percent last month, with the strongest gains in November concentrated in Western Canada as well as in the southern and western regions of the United States.
The shale gas boom in the United States is playing a major role in driving increased spending on construction and rising costs for associated labor in North America.
“Labor concerns have been reported in the U.S. Gulf Coast, where demand from new downstream energy projects is expected to increase,” said Laura Hodges, director of the pricing and purchasing service at IHS. “Some in the industry are even suggesting shortages of skilled laborers such as welders and pipefitters in 2014 because of increasing investment in such projects.”
For several years, materials costs were the major factor driving up expenses for North American construction firms, as China’s economic boom ate up the available global supply. However, as China’s growth has slowed, the focus has shifted from materials to labor.
North American construction companies now say their main concern is the continued increase in labor costs. With U.S. spending on construction on the rise and skilled workers aging, the availability of skilled laborers is likely to become tighter.
While costs for these skilled laborers are on the increase, the wage inflation is not likely to climb as high as it did in 2007, when a strong U.S. economy spurred double-digit annual pay increases for these skilled areas. This is largely because the strength of the U.S. economy is not as uniform as it was 2007 and employers are investing in training and mentoring programs to be prepared for this next wave of activity.
Looking at the material/equipment segment of the ECCI, November recorded the seventh consecutive month of falling prices for carbon steel pipe and a fourth month of declining freight rates between Asia and the United States. Copper-based wire and cable and fabricated structural steel also joined the ranks of falling prices in November and moved below the 50-percent threshold.