Engineering and construction costs continued to rise in July, according to IHS Markit (NYSE: INFO) and the Procurement Executives Group (PEG). The July 2021 headline IHS Markit PEG Engineering and Construction Cost Index increased 0.3 points from June, reaching an index level of 78.6. The materials and equipment sub-index fell 1.4 points from last month to 83.7, though the index remains firmly in expansion territory as it signaled the eighth consecutive month of price increases. The subcontractor labor index recorded 66.7, a 4.4 index point rise from the previous month, indicating a consensus for labor cost increases among respondents compared to June.
July marked the seventh straight month of price increases for all categories under the materials and equipment sub-index, though index-levels were not as high in several categories. Copper prices continued to increase in July, though the index fell in comparison to the May and June readings; the materials and equipment sub-index has recorded increasing copper prices for more than one year. Costs of ocean freight from both Europe and Asia to the United States increased for the eleventh month in a row. The sub-indices for electrical equipment and transformers remained high in July, with both sub-indices recording index levels of 72.2.
“In the short term, supply shortages continue to translate into price escalation for semiconductors and passive components. Printed circuit board assemblies are the most severely affected, but semiconductors, bare printed circuit boards, resistors, capacitors and connectors will all see price pressure,” said John Bauman, associate director, pricing and purchasing, IHS Markit. “Overall, we expect prices for these materials to rise by more than 10 percent over the second half of the year. In 2022 and 2023, capacity expansion will bring supply and demand closer to balance and lead to stabilizing prices. The expansion of electronics in industrial equipment and light vehicles will keep pressure on low-margin, commodity-type semiconductors as well.”
The sub-index for current subcontractor labor costs came in at 66.7 in July, a slight increase in number terms from June’s index figure of 62.3. According to survey responses, labor costs continued to expand in all regions of the United States and Canada.
The six-month headline expectations for future construction costs index totaled 63.2 in July, as respondents expect prices to increase through the remainder of 2021. Yet, most of these sub-indices are returning lower totals in comparison to April of this year, indicating those surveyed expect less input cost inflation than observed earlier in 2021. Carbon steel prices are even expected to decline over the next six months, as the sub-index recorded a point total of 45.0 in July; this occurrence is the first signal of expected price declines for carbon steel prices since the June 2020 survey, when the sub-index totaled 47.1. The six-month expectations index for sub-contractor labor recorded a reading of 67.1, as labor costs are expected to continue increasing in all regions of the United States and Canada.
Most survey respondents did not report any shortages for materials and equipment currently, other than the previously mentioned restrictions due to shipping. Respondents also note longer lead times for cement and lumber.
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