Middle East war continues to drive Engineering and Construction Costs in May

Engineering and construction costs continued to increase in May, according to the Engineering and Construction Cost Indicator from PEG and S&P Global Market Intelligence. The headline Engineering and Construction Cost Indicator, a leading indicator measuring wage and material inflation for the engineering, procurement and construction decreased slightly in May to 75.3 from 78.1 in April. Prices are still increasing in May. Specifically the sub-indicator for materials and equipment costs increased by 5.1 points to 85.3, while the sub-indicator for subcontractor labor costs decreased to 52.1 rising to 73.5 in April.

The materials and equipment indicator continued to grow faster in May, with increases reported in nine out of the twelve tracked components compared to April. The most significant gains were observed in copper-based wire and cable signaling the continued rising prices of electrical equipment. All electrical equipment components saw readings above 90, highlighted by Transformers and switchgear. Ready-Mix concrete saw an increase of 17 points, arriving at a reading of 75. By now, almost all components have considered the effects of the Middle East war and have stabilized at high levels. Even if the war ends now, it will take several months for prices and supply constraints to return to pre-conflict levels. Consequently, the duration of the war will continue to have effects during the second half of the year.

“Recent petrochemical and resin price increases reflect a market shaped as much by geopolitical risk as by fundamentals,” said Michael Dall, Head of Energy and Chemicals for Pricing & Purchasing at S&P Global Market Intelligence. “While widespread shortages have yet to emerge, disruption in the Middle East is driving continued volatility, longer lead times for some products and stronger demand for US exports. Pricing may be nearing its peak, but as long as the Strait of Hormuz remains effectively closed, upside risk will persist.”

The sub-indicator for current subcontractor pricing dropped to 52.1 from 73.5 in May following an increase in April. The indicator remains above the 50.0 threshold signaling persistent price increases across all surveyed categories. Regionally, the highest price inflation was observed in the US South, but the current state of the labor market remains tight. The I&E sector in these geographies registered the largest score while all others remained the same. Overall, the data continues to reveal a complicated market and growth trend in subcontractor pricing. Specialized services related to electrical equipment continue to be high in demand further driving prices upward though other sectors might not be as demanded.

The six-month headline expectation for future construction costs grew to 79.2 in May from 75.7 in April. The outlook for materials and equipment costs also increased 3.5 points to 80.1. There were increases in nine out of the twelve components, highlighted by gains in electrical equipment and copper-based wire. Expectations for shell and tube heat exchangers rebounded in May, signaling an acceleration in the 6-month outlook. In contrast, there was a 17.9-point decrease in fabricated structural steel.

The six-month expectations indicator for subcontractor labor costs increased again to 77.1 in May from 75.5 in April. The U.S. West, Western Canada and Eastern Canada led the gains in the six-month subcontractor pricing outlook, with their civil, mechanical and I&E categories each climbing 25.0 points to a 100.0 diffusion score, reflecting expectations of higher costs. The U.S. South posted the steepest declines, with its mechanical category falling 20.0 points to 50.0, and civil and I&E dropping 10.0 and 13.3 points respectively, though all regions remain at or above the 50.0 mark, signaling continued growth across all categories.

Respondents flagged shortages in electricians and construction management as key labor constraints in the current market. On the materials side, glycol was noted as being in short supply, while rising costs of PVC resins are driving up prices for finished products such as PVC conduits. Respondents also highlighted growing activity in the mining and energy sectors, with increasing demand expected to put further pressure on resources. Additionally, geopolitical tensions in the Middle East were cited as a contributing factor to broader inflation and price increases across the market.