2023 Construction Costs Outlook Remains Volatile

How CRE leaders can manage the risk associated with rising costs amidst uncertainty.
By Rose Williams
January 17, 2023

Inflation. Labor scarcity. A broken supply chain. These persisting conditions won't magically disappear with the new year. Yet 2023 does mark new opportunity for construction leaders to improve project outcomes—with deeper insight on price changes.

According to recent construction market analysis by Unispace, accurate price forecasting is the executives’ holy grail in a market where pricing is increasing rapidly. After all, the United States is currently one of the world’s most expensive countries in which to build.

In this era of volatility, the best tool for minimizing project risk and managing cost increases is the ability to assess the impact of construction and material lead times on your projects from the outset.

The first step? Find out what’s behind today’s construction cost hikes.

Three cost centers to watch in 2023

Even the most experienced project leaders had budget overages in 2022. To regain accuracy and control moving forward, industry leaders must understand the top three reasons prices will continue to differ from what we could reasonably have expected—and budgeted for—in the past.

  1. Transportation costs. Costs like driver wages and insurance coverage go up every year, but the continual effects of the pandemic have created an anything but business-as-usual scenario for the logistics industry.

    Fuel prices are a primary contributor to rising costs, given the Producer Price Index (PPI) for diesel fuel more than tripled between April 2020 and February 2022. The Russian invasion of Ukraine is also adding pressure on the supply chain, triggering higher prices and increased transport timelines. And logjams continue to stymy ocean capacity, adding to freighter costs and forcing logistics buyers to rethink contracts and inventory management.

    All said, the logistics sector is experiencing the highest ever constant peak in increased cost. While analysts have seen some easing on month-to-month pricing in Q2 2022, it will be vital in the coming year to keep close tabs on this still unreliable sector.
  2. Labor and material costs. The dearth of skilled labor was already plaguing the construction industry a few years ago and, when COVID-19 hit, the sector lost 1.1 million employees in a matter of months. Construction firms have since been refilling their ranks but at a premium.

    To bring back their workers—not to mention attract and retain new ones—companies have ramped up wages, with average construction hourly earnings jumping 6.2% from March 2021 to February 2022. Expect this trend to continue in the coming months, as firms work to keep up in the escalating war for talent.

    These rising labor costs also play a part in rising materials costs. According to the National Association of Home Builders, building material prices have risen 35.6% since the start of the pandemic and are currently up 19.2% year-over-year. Some of the most dramatic examples of construction commodity increases include no.2 diesel fuel (+444%), particleboard and fiberboard (+149%), and plywood (+80%).
  3. Import taxes and duties. Regardless of political intentions, economic policies like the U.S. 25% steel tariff have a direct impact on business costs and the way markets flow. For example, in 2021 the U.S. Commerce Department doubled the rate of import duties on Canadian softwood in hopes of sparking demand for domestic wood.

In general, as you plan for 2023, bear in mind that importing supplies and equipment internationally versus sourcing domestically in the United States will mean additional tariffs–so choose materials accordingly.

How to navigate rising construction costs in 2023

While some costs may stabilize over the next year, others will continue to rise amid lingering uncertainty over transportation, labor and materials and policy-related costs. A preconstruction partner team with a deep research bench can help you navigate that volatility and determine future capital needs.

In this budget-busting world, knowledge really is power. By leveraging expert, real-time construction market analysis, you can gain the insight into cost and timing it takes to make the best decisions for your business.

by Rose Williams

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