Rising Building Costs
Construction is booming in all corners of the globe, creating
demand and putting pressure on costs. The average building
inflation for 20 countries in Europe, Asia, the Middle East,
Latin America and North America increased to 6.1% during 2006,
from 5.3% the previous year. But the average masks a broad
spread of inflation that ranges from less than 3% in 11
countries to double-digit increases in four.
One of the largest increases in inflation was in New York, where
costs jumped 11.5% in 2006, after an 8.3% increase in 2005. Some
countries that appeared to be getting inflation under control are
back in hyper-inflation. Argentina, which reined in inflation from
69% in 2002 to 10% in 2005, was hit with a 24% increase in costs in
2006. Costs in Poland rose by 20% in 2006 after falling to
single-digits in 2004 and 2005.
Not all countries have succumbed to inflation. In Italy, costs rose
just 1.6%, after annual gains of 4.1% in 2005 and 5.2% in 2004. New
Zealand recorded a 1.4% increase – well below 3.5% in 2005 and 14.4%
in 2004. South Africa also contained inflation – costs rose by 6.8%
in 2006, down from 14.3% in 2005 and 18% in 2004.
“The escalation we saw between 2004 and 2006 was a global
phenomenon,” says Jim Scotti, vice president and chief procurement
office for Texas-based contractor Fluor Corporation. “We’re in a
suppliers’ market and no part of the world is exempt from this.”
Delivery times and scheduling are becoming bigger problems than
pricing, says Scotti. “Equipment is going to be the biggest
surprise. We’ve seen projects go back to the drawing board from a
cost and scheduling standpoint, and if everybody’s programmes go
ahead as planned, the market for big compressor and pressure vessels
will be tight.” He notes that delivery times for large heavy-wall
vessels have doubled in the past year, and predicts it will be
longer in 2007.
Hong Kong has gone from falling prices earlier in the decade to
double-digit cost increases this year, says Brian Livingston,
international partner at Gardiner & Theobald. “Cost escalation in
Hong Kong will be about 10% this year, which is high by their
standards. Hong Kong has been clobbered by the building boom in
Macau.” Mechanical and electrical costs alone on projects are
increasing by 15-20%.
“Many commodities are linked to global pricing. Booming economies
such as India, China and the UAE and a renewed interest in
infrastructure in Australia and New Zealand are pushing up prices
for materials in India,” says Manoj Kanti Ghosh, senior vice
president of Feedback Ventures – a New Delhi-based affiliate of G&T.
“The cost of trained manpower in India has gone up significantly in
the past two years.”
Construction in Dubai remains frantic says Jeff Higgins, of G&T in
the UAE, and “costs are going up substantially.” The concern is not
so much raw materials but the scarcity of contracting resources.
Only three bidders emerged for a recent $270m (£139m) real estate
job. New contractors are entering the market, says Higgins, but it’s
not helping costs. Increasing difficulty in recruiting workers from
India is also fuelling labour cost inflation.
South Africa’s construction is very buoyant, says Calvin Setzkorn, a
partner in Schoombie Hartmann Preller, Pretoria. Concrete supplies
are not keeping up with demand and steel prices have increased 12%
in the past three months, says Setzkorn, but he expects steel prices
to fall back 8% in 2007. Contractors depend heavily on migrants for
skilled workers, he notes.
Construction hot-spot Moscow, is Eastern Europe’s Dubai, says
Livingston. “The main problem is availability of good contractors.
Turkish contractors are well-established but western firms aren’t
willing to come.” Another challenge is the rouble, which has fallen
more than 20% against international currencies in three years, he
Poland’s construction market also is “very hot”, says Jan Holyst in
G&T’s Warsaw office. “Bid prices are sky-high and going up.
Contractors won’t give a fixed-price contract or leave a tender open
for more than 90 days.”
Materials prices in Poland have escalated . “Cement prices have
rocketed and steel and rebar have gone up incredibly and are still
going up,” says Holyst. At the same time, labour migration to
Western Europe fuelled wage inflation of up to 35% in the past year,
he says. “The only thing that can keep skilled workers here is a
substantial pay increase.”
Romania, which joined the EU in January 2007, is attracting a lot of
investment, says Gavin Moore, G&T’s country manager in Bucharest.
Projects launched in the past 18 months are set to start on site in
2007, putting pressure on capacity to deliver. Finding contractors
will be difficult but labour may be the bigger problem – with
emigration, labour prices are increasing.
France also has an extremely positive market, says Chris Gilmore in
G&T’s Paris office. At about 4.7%, construction inflation is double
the general rate in the economy partly because competition between
contractors is easing. “Contractors are now pricing without
discounts,” he says. “Over the last two years there has been a
little margin recovery.”
For mid-size German contractors, order books are nearly full and
prices are starting to rise, says David Lees, country manager for
G&T in Berlin. The unit price of smaller buildings has risen 5-10%
UK construction is getting busier from already higher levels, says
Nick Rowe, a G&T partner in London. The UK is seeing the flip side
of shifting European labour markets. “Migration from Eastern Europe
is slowing labour cost hikes,” says Rowe. “But, at the same time,
professionals’ salaries are rising.” Steel prices are still rising,
but nothing like two years ago, he says. But copper price hikes of
70% in the past year are being felt in bids for electrical and