Construction cost now rising after a 7% decline

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by Jim Haughey
RCD Chief Economist

The GDP price data through the first quarter show a 1% rise in residential construction costs over two quarters and a 0.3% rise in nonresidential and heavy construction costs in the first quarter.

Partial material price and wage data for the second quarter suggest that construction costs continued to rise slowly during the spring. First quarter construction costs were down 6.3% from the 2007 peak for residential construction and 6.2% for nonresidential and heavy construction.

The drop in contractors’ margins can not be measured directly. In the residential market, both materials prices and hourly wages rose 5.9% while total building cost dropped 6.2%. Nominally, this rise in labor and materials cost contributes 4-4.5% to the overall cost of construction.

In turn, this implies that builders’ margins fell 10-10.5% of the total cost of the building which would drop margins to the zero range. While this happened in some cases, overall margins likely remained positive although very depressed. This calculation ignores cost reductions from material substitutions and improved labor productivity.

Current projections of materials and labor cost as well as building sales prices suggest that contractor margins suggest that margins could be slightly lower in the spring and summer but improving by yearend although still depressed. Next year, more rapid gains in building prices will permit margins to improve faster but not fully back to the normal range.

Click Here to view RCD’s Construction Industry Trends report.

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