US construction costs rose 5.7% in 2018

Dive Brief:

Construction costs in the U.S. rose 5.7% in 2018, according to Rider Levett Bucknall’s First Quarter 2019 North American Quarterly Construction Cost Report.
Of the 12 U.S. metros in RLB’s report, those experiencing the biggest cost increases were Chicago (7.6%); Portland, Oregon (7.1%); San Francisco (6.7%); Phoenix (6.7%); Washington, D.C. (6.5%); and Seattle (6.4%). Las Vegas (5.4%); Honolulu (4.8%); New York (4.5%); Boston (4.4%); Los Angeles (4.4%); and Denver (4%) each had cost increases lower than the national average.
RLB said the cost increases included labor, materials, taxes, overhead and profit. In a construction boom period, the company said, overall cost increases are faster than that of labor and materials because the overhead and profit pieces increase in response to the higher demand. Conversely, in slumps, total costs would decrease faster than the rate of labor and materials.

Dive Insight:

Even though San Francisco didn’t have the biggest increase during 2018, according to Turner & Townsend’s 2019 International Construction Market Survey, it was the most expensive place to build last year. Construction costs at the end of 2018 were an average of $416 per square foot, representing a 5% increase from 2017. Turner & Townsend projected that the cost of building in San Francisco would increase another 6% this year.

RLB’s and Turner & Townsend’s numbers don’t align exactly, but the trend is clear — construction costs are on the rise. For infrastructure projects, which typically take longer to plan and budget than, for example, a hotel or some other private commercial development, the larger price tags sometime translate to delays or even cancellations.

The Maine DOT has slashed tens of millions of dollars' worth of projects from its 2019 infrastructure plan, according to the Portland Press Herald, because contractors have been submitting bids much higher than the DOT estimated. The agency even added 10% to its own projections to make up for cost increases, but that add-on turned out to be too low. The DOT has had to reject at least three bids because they were too high, including one for new signals and sidewalks in Portland that came in at $1.1 million, which was double than expected.

And transportation agencies have been trying to figure out how best to deal with these gaps in funding for some time. In late 2017, the Metropolitan Council, the agency in charge of the $2 billion Southwest Light-Rail project, rejected the first round of bids because all four of them came in much higher than it expected. Tutor Perini, through its subsidiary Lunda Construction, ended up winning the project in May of 2018 with a bid of $800 million.