Global Inflation Gains Momentum
In its thirteenth annual survey of international construction costs conducted exclusively for ENR, the London-based international project and cost management firm reports that construction inflation increased on average 5.2% in 23 nations in Europe, Asia and the Middle East. This is up from a 3% rate reported for the same group of countries in 2003 and 2.3% in 2002. In the U.S., G&T’s survey shows construction costs in New York City climbing from 2.4% in 2004 to 12% this year. In Western Europe, construction inflation rose from 2.5 to 3.7% during the same period.
Contractors in Australia and New Zealand also struggled with rising material costs in 2004. G&T reports that construction costs in New Zealand jumped 14% this year, after averaging annual increases of less than 2% for the previous seven years. In Australia, construction inflation rose from 4% in 2003 to 7% this year, according to G&T.
Some of the largest cost increases surveyed were in Eastern Europe, where construction inflation nearly doubled to 6% in 2004. These figures exclude Romania, which is coming back into line with inflation rates in other European countries after suffering cost increases of 34% in 2002 and 40% in 2001. G&T estimates that construction inflation in Romania will drop to 9% this year.
"Bucharest is booming," says Doug Nobel in the local G&T office. Prices are edging up but remain as much as 40% lower than in Western Europe, he says. Local contractors manage with prices some 20% lower than foreign rivals. But the gap is narrowing "only in the sense that international companies are becoming more competitive," he adds.
In South America, Argentina is back in the grips of double-digit inflation after seeing minimal cost increases between 1997 and 2001. This year, G&T expects construction costs in Argentina to increase 25%, following annual gains of 20% in 2003 and 68% in 2002.
Overall, G&T expects the international inflation rate for construction to begin to ease next year. The 17 countries providing forecasts for 2005 predict building costs will increase 5% next year. The same group of countries reported a 7% increase in 2004.
Struggling with Steel
Higher steel prices had less of an impact on contractors in Europe than in the U.S. because concrete is the material of choice for much of the region, and the share of steelwork in a project’s cost is still small, report a number of sources. But contractors in Europe still had to cope with the global phenomenon of higher prices.
"All the companies are struggling to get raw materials to make steel," says Roberto Tallota, with E.C. Harris in Milan. Estimating the cost hike this year at 50%, "the...
...price is still increasing," he says. He expects steel prices to stabilize early next year and to start falling in the second half.
In Sweden, rebar prices rose by some 40% and structural steel by 50%, says Anders Kivijärvi, head of Bygganalys A.B., Stockholm. Main contractors have been unable to pass on the hikes to their clients, but subcontractors are getting paid, he says.
In Poland, rebar also went up 40 to 50%, says Jan Holyst of G&T’s Warsaw office. Some construction companies on fixed prices were "caught in the cold" as owners held rigidly to contract, he adds.
Construction in Poland, which is Eastern Europe’s largest market, is "not as competitive as it was," says Holyst. As construction demand picks up after a long depression, "this year there has been a noticeable increase in prices," he adds.
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In Slovakia, Bratislava also is booming and helping to push up bid prices by around 10% this year, says Levente Varga, G&T’s man in the Slovak capital. In terms of costs, the most dramatic single event was this year’s hike of value added tax from 10 to 19%, he says. "For contractors, it was a huge, huge increase," he says. With end users unable to recover the tax, the residential market felt the hike most, he adds.
In the U.K., where structural steel is more widespread, the popularity of the material for building frames remains as strong as ever, says Paul Ridout, a London partner of G&T. Though the price hike was large, steel costs account for only a few percent of total building investment, he adds.
The U.K., "is benefiting from a return in business confidence with early signs of revival of the commercial building market," says Ridout. Public sector spending in the U.K. also is due to remain strong. As a result, "tender prices are just slightly on the up," he adds. The firm calculates that this year’s national average hike in bid tender prices has been 4.5% and is forecasting 4% for 2005.
In Germany, construction is in decline and "costs have gone down," says Uwe Falconburg, a manager at E.C. Harris’ Berlin office. The main construction elements, "like concrete, have basically been under the most pressure," he says. And price movements in East and West are "pretty much the same," he adds.
In Spain, construction prices are not creating "any surprises," says Cecilia Espinosa de los Monteros, managing director of Madrid-based cost consultant CEM Management S.A. While the retail and residential sectors are still active, commercial construction is now quiet. But since the Socialist Party won this year’s government elections, investment in public works has slowed.
| Parity Index Adjusts For Exchange Rate Swings |
| The Hanscomb/Means Parity Index was designed to clarify the international cost picture, which can be distorted by gyrations in currency exchange rates. The index is based on put-in-place rates for 26 basic items used in the construction of a manufacturing facility. The parity index value in the table shows the construction costs at each location relative to Chicago. A parity of 0.89 for Great Britain implies that £0.89 of construction is equivalent to $1.00 of work in Chicago. To calculate a relative index value, divide the parity value of the exchange rate and multiply by 100. In this study, the U.S. dollar is used as the exchange rate for Russia. For example, if a manufacturing facility costs $575 per sq meter in the U.S., what would be the approximate cost in Great Britain? Average parity is £0.89 = $1. So, 0.89 x $575 = £512 per sq m. Purchasing parity provides a useful means of comparison since exchange rates can fluctuate significantly, yet the actual in-country costs of goods remain unchanged. Using parities also avoids problems arising from thinking in terms of a fixed percentage difference between countries, which inevitably happens with indexes. |
Costs in France have risen fractionally over last year to about 4% overall, says Peter Lewis, in G&T’s Paris office. Demand for construction is hottest in the Paris region. Construction costs can be between 5 to 10% lower in areas outside of the capital, he says.
Italian prices also are increasing, says Roberto Tallota, with E.C. Harris in Milan. "There is very big demand from the infrastructure construction business." Apart from infrastructure, "There is a huge amount of real estate on the mar-ket at the moment that needs refurbishment," he adds.
Base rates for labor costs are legally fixed but can still be cheaper in the less developed south than in the north, says Tallota. "There’s a lot of unemployment in the south, so you can negotiate," he adds.
But with materials and equipment be- ing produced mainly in the north, prices still tend to be higher in the south because of transportation costs. That picture would change if the huge Messina Straits bridge is built. "The project would have a huge impact on the local economy," says Tallota.
