Construction Worker on Site

Top Factors Contributing to Rising Construction Costs

Property owners and brokers have faced the biggest burden from this development.

Insuring property has become challenging in recent years. Property owners and brokers have been increasingly burdened with rising property insurance premiums, increased scrutiny from underwriters, and calls for better exposure data. As if this wasn’t enough, they also now need to keep pace with rising construction costs.

Recently, the CSD Pool has received a number of inquiries regarding the increasing cost of construction and the potential impact on the replacement costs for insured property. To provide some insight on the subject, the CSD Pool asked CBIZ Valuation Group, who administers CSD Pool’s Property Appraisal Program to provide an overview of some of the items currently impacting the cost of construction for their insured.

Increased demand for materials globally, a shortage of skilled construction labor, and U.S. tariffs restricting the supply of many materials needed for construction are on the verge of creating the perfect storm. This confluence of events is dramatically impacting construction costs in the US. Here is a summary of the items impacting construction price increases as we move through 2021.

Oil

Crude oil prices have skyrocketed more than 80% since October 2020, which is critical since oil is integral to the construction industry. From manufacturing construction materials, to transportation and job site equipment operation, oil plays a primary role in the success of construction projects. As Americans begin to resume pre-pandemic behavior such as travel, crude oil prices could continue to rise throughout 2021.

Steel

U.S. steel prices are almost 70% higher than the global market price, even with both China and Europe’s prices up by over 80% from their pandemic-induced lows. Even accounting for the 2018 steel tariff imposed by the U.S., it would still be cheaper to import steel than buy it from domestic mills. However, limited overseas supplies and shipping challenges are keeping U.S. imports at low levels, directly impacting the price of steel.

Copper

In the first quarter of 2021, copper prices hit a 10-year high in the U.S. The metal is used in many construction materials, including electrical wires and water pipes. Copper will be in even higher demand in the coming years with the global push toward green energy and electric transportation technology. To put this in context, currently the average U.S. home uses 439 lbs. of copper, and a conventional automobile uses between 18 and 49 lbs. A plug-in electric car uses 183 lbs. of copper, and a battery-operated electric bus uses 814 lbs. The anticipated increase in demand is almost certainly going to impact the cost of copper going forward.

Lumber 

The price of lumber, which is utilized in most U.S. home-building and commercial construction projects, is at an all-time high. It is more than twice the typical cost in 2021 compared to 2020. This is the result of increased residential construction and remodeling during the pandemic, reduced U.S. mill output, and the lumber tariff implemented on softwood lumber imports from Canada in 2017.

Labor

When unemployment topped out at just under 15% in 2020, unfilled construction jobs ranged between 220,000 and 330,000, which were at the same level prior to the pandemic. Skilled labor is difficult to find and contractors are paying a premium for it. The lack of skilled labor can also delay construction projects, which can also be costly.

Infrastructure Spending Plan

As we look forward, demand for all of the items mentioned above will almost surely be impacted further if President Biden’s $2 trillion infrastructure plan is enacted, creating additional demand for labor and materials. The wide-ranging American Jobs Plan looks to improve transportation infrastructure, eliminate and replace 100% of lead piping across the U.S., build the infrastructure for high-speed broadband coverage, modernize the U.S. electrical grid, and build and retrofit more than 2 million affordable and sustainable places to live.

© 2021 CBIZ, Inc.  All right reserved.  This article is reprinted with permission from CBIZ, Inc. (www.cbiz.com).  It is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax and accounting professional prior to taking any action based upon this information.

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