Dive Brief:

• A variety of pandemic-related forces have caused construction costs to decline slightly for the first time in a decade, which could lead contractors to feel a pinch in profits.
• The Turner Building Cost Index, which measures costs in the U.S. nonresidential building construction market, fell to a value of 1177 in the second quarter of 2020, a 1.01% quarterly reduction from the first quarter. This is the first time the index from Turner Construction Co. has reduced in value since 2010.
• “Trade contractor competition has increased in many areas as they work to secure backlog due to uncertainty they have about future opportunities," said Attilio Rivetti, the Turner vice president responsible for compiling the Cost Index in a press statement.

Dive Insight:

Associated Builders and Contractors' Chief Economist Anirban Basu echoed Rivetti's sentiments about competition, saying that as a result of the COVID-19 pandemic, "the average construction firm leader is more concerned about demand for their services than any other consideration, including skilled worker shortages."

This means that there are more companies than usual bidding on each available project, which tends to drive construction prices lower. This trend is consistent with the results of ABC’s recent Construction Confidence Index, Basu said, which reported that although construction firm executives expect sales to increase over the next six months, they also expect profit margins to become slimmer.  

The dip in construction costs is also partly attributable to a decline in the price of some materials, especially energy. In addition, June construction input costs are down 3.4% compared to the same time last year, although prices have recently stabilized, Basu said.

Nearly two in five contractors expect profit margins to shrink over the next six months, with nearly 9% expecting a sharp hit to margins, according to ABC. A year ago, fewer than 1% of contractors expected a sharp contraction in margins and a majority expected margins to keep rising. But now, according to the latest survey, fewer than one in three contractors expect margins to rise over the next six months, Basu said.

Turner has compiled the construction cost forecast for more than 80 years. It takes several nationwide factors into account, including labor rates, productivity, material prices and the competitive condition of the marketplace. This index does not necessarily conform to other published indices because others do not generally take all of these factors into account, according to Turner.