The Pulse on Construction Costs | February 2015
Sponsored by IHS and the Procurement Executives Group (PEG)
Current construction costs fell again in February according to the IHS Procurement Executives Group (PEG) Engineering and Construction Cost Index (ECCI). The headline current IHS PEG Engineering and Construction Cost Index (ECCI) fell to 42.4 percent in February, down from 48.8 percent in January, and the softest reading on record.
The current materials/equipment price index registered 39.6 percent this month, a fresh record low, and down from 47.2 percent in January. Eleven of twelve individual components registered falling prices in February, led by copper-based wire and cable, carbon steel pipe, electrical equipment and fabricated structural steel. Notably, the softness in raw commodity prices is appearing to pass through the stages of processing, with turbines, heat exchangers, pumps and compressors all posting lower prices this month.
The current subcontractor labor index eased to 49.0 in February, down from 52.4 percent last month and the softest reading since January 2012. Nearly all regions registered flat labor costs, with Western Canada as the only exception posting a slight easing. February marked the first time since August 2014 that the US South did not register higher month on month labor costs. Nevertheless, tightness in skilled labor markets was again reported in the Gulf Coast.
The six month headline expectations index registered 48.7 in February, slightly higher than the 48.3 reading in January. Despite the small increase, for just a second time in survey history, the forward looking index is by definition implying falling prices over the six month horizon. The materials/equipment index sank to a fresh low with seven of twelve individual components showed falling price expectations. Pumps, compressors and turbines are the only subcomponents above the neutral mark. Meanwhile, expectations for subcontractor labor firmed slightly, increasing to 56.9 in February from 54.1 last month. The regional detail continues to convey strong expectations across the US South.
In the survey comments, the world's largest engineering, procurement and construction firms are being forced to reassess previously bullish sentiment regarding investments in hydrocarbon projects over 2015-2016. The rout in crude oil markets is having a chilling effect on capital expenditure plans, with budgets being scaled back, exploration slowing and aggressive contract negotiations. However, there remains some optimism that lower feedstocks will spur further proposal activity in petrochemical projects.
Surveys are sent out to members of the Procurement Executive Group (PEG) on the first Monday of each month and are open for a two week window. Results are released the last Friday of each month. See full list of member companies.
Each survey response is weighted equally for every USD 2 billion in spending in North America. Respondents are asked whether prices (either actual paid transactions or company-informed transactions) this month for individual materials, equipment, and regional subcontractor rates, were higher, lower or the same as the prior month. The breakdown of subcategories can be found in Chart 1.
Respondents are then asked for their six month pricing expectations among these same subcategories. The results are compiled into diffusion indexes, whereby a reading greater than 50 represents upward pricing strength and a reading below 50 represents downward pricing strength. Individual responses are considered raw data, are not revised and are not seasonally adjusted. The headline index is formed by creating a weighted composite between materials/equipment (70%) and subcontractor rates (30%).
The IHS PEG Engineering and Construction Cost Index (ECCI) is a diffusion index based on data independently obtained and compiled by IHS from procurement executives from leading engineering, procurement, and construction firms. The headline index tracks industry specific trends and variations, identifying market turning points for key projects, and is intended to act as a leading indicator for wage and material inflation specific to this industry. Each survey response is weighted equally for every $2 billion in spending in North America. Respondents are asked whether prices (either actual paid transactions or company-informed transactions) this month for individual materials, equipment, and regional subcontractor rates, were higher, lower or the same as the prior month. Respondents are then asked for their 6 month pricing expectations among these same subcategories. The results are compiled into diffusion indexes, whereby a reading greater than 50 represents upward pricing strength and a reading below 50 represents downward pricing strength.
About IHS (www.ihs.com)
IHS (NYSE: IHS) is a global information company with world-class experts in the pivotal areas shaping today’s business landscape: energy, economics, geopolitical risk, sustainability and supply chain management. We employ more than 8,000 people in more than 31 countries around the world. Businesses and governments around the globe rely on the comprehensive content, expert independent analysis and flexible delivery methods of IHS to make high-impact decisions and develop strategies with speed and confidence. IHS has been in business since 1959 and became a publicly traded company on the New York Stock Exchange in 2005.
About PEG (www.peg-eci.org)
The Procurement Executives Group (PEG) provides a forum to identify and address procurement related issues which will improve the effectiveness of the engineering and construction industry. Established in 1994, the Procurement Executives Group has been recognized as an industry authority on procurement, materials management, and subcontracting topics. PEG is actively involved in supporting research efforts related to these topics.