November 2021
Marc Poskin, CPE, LEED AP BD+C, VP of Estimating
Predicting cost escalation is difficult enough but especially now. As the pandemic lingers on, its effects on the economy and markets throughout the world make it nearly impossible to predict cost increases on future construction projects. But … having a construction manager on your team boosts confidence when sharing cost information with stakeholders.
A construction manager has the resources and experience to prepare accurate cost estimates on future projects. How? Construction Managers (CMs) have cost data, industry resources, connections to the subcontractor market, and bids from similar projects to help them more accurately assess the cost of your project. This information, in addition to an escalation factor, provides a comprehensive estimate for any project that your building team can rely on.
One especially important number is the escalation percentage (EP), usually applied to the direct construction costs (trade costs) within a construction cost estimate. This number inflates the direct cost total to account for labor and material increases to a future time – either when the project breaks ground or goes out for public bid. For those planning a year or more in advance for a project, this factor is significant.
Below is a summary of the industry’s most widely used construction cost indices averaged over a (3) year period looking at second quarter (Q2) 2017 thru (Q2) 2020. The chart below suggests an annual escalation factor of 3.5 – 4.0 % when averaged across all (5) organizations.
But look at the same data from (Q2) 2020 to (Q2) 2021.
Indices during this period are inconsistent when compared to each other as pandemic period cost reporting appears unreliable – revealing some confusion amongst the experts. Construction starts in 2020 came to a crashing halt as the pandemic settled in, then rebounded quickly in early 2021. As the industry tried to play catch-up, demand for construction labor and materials compounded. Demand for steel, insulation, lumber, and building equipment rose quickly, driving up prices through mid-2021. Supply-chain bottlenecks caused an increase in prices as multiple sectors competed for construction industry services. The current upward cost pressure is somewhat tempered by subcontractors trying to fill their backlog for 2022.
In summary, it’s difficult to use current cost indices to predict future escalation factors (especially now, working through a pandemic). My opinion for any work starting in Q2-2022 or later – follow the (3) year pre-pandemic escalation factor level of 3.0-4.0% from today’s adjusted market pricing. Most experts agree that costs will begin to moderate over the next 12-18 months as the industry supply-chain catches up and production levels return to normal pre-pandemic levels.
A graduate of the University of Illinois at Champaign-Urbana, Marc holds masters degrees in both architecture and civil engineering. He holds the accreditation of Certified Professional Estimator (CPE); an extensive cost estimating certification process achieved by only 26 people in Illinois. Additionally, Marc is a LEED Accredited Professional. For more than 15 years Marc has led ICI’s estimating team in the successful pursuit of a multitude of construction management and hard bid opportunities across all markets. His dedicated expertise, however, is in cost estimating and value analysis within the Illinois K-12 Education public school market. Throughout his career, Marc has worked with nearly 40 Illinois school districts on their short- and long-term preconstruction needs.