Engineering and construction costs continue to increase in May as materials prices remain elevated

Engineering and construction costs increased again 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 sector saw a modest decline to 71.9 this month, but remains elevated. The sub-indicator for materials and equipment costs decreased 3.7-points to 72.0 while the sub-indicator for subcontractor labor costs fell to 71.4 in May from 82.4 in April.

The materials and equipment indicator saw a minor decline in May after surging in April. Seven of the 12 components declined compared to last month. The largest declines were for shell and tube heat exchangers and gas and steam turbines which each fell 25.7-points to 64.3 this month. Similarly, pumps and compressors, transformers and electrical equipment all fell in May indicating less tightness for the machinery and equipment categories. Also declining this month were fabricated structural steel and ready-mix concrete. Despite widespread declines, all seven of these categories remain in elevated with readings between 62.5 and 88.9 in May. Readings for carbon steel pipe, alloy steel pipe and copper-based wire and cable each saw modest increases this month of between 5.6- to 10.7-points. Also increasing this month were the categories for ocean freight from Asia and Europe to the U.S., which increased 12.5- and 10.4-points respectively. Despite these moderate increases, these remain the only two categories in contractionary territory with readings of 37.5 and 43.8 respectively in May.

“We can expect containerized fright rates—especially from mainland China—to lift in the second half of the year, coinciding with the Q3 peak season and frontloading shipments before July and August deadlines while tariff rates are lower,” said Keyla Goodno, Economist, S&P Global Market Intelligence. “However, freight rates are unlikely to surpass summer 2024 levels as rates have begun rising from a lower point compared to last year's second quarter. Consequently, port congestion and temporary capacity constraints will primarily drive rising rates in the interim, however, long-term growth is limited by weak underlying demand, leading to excess ocean capacity that will help stabilize prices.”

The sub-indicator for current subcontractor labor costs saw a fairly significant decrease, falling to 71.4 after a reading of 82.4 last month. Declines were focused in the U.S. South region and both Eastern and Western Canada. All labor categories in these three regions fell this month. Both regions of Canada saw rather modest declines of around 10-points. Meanwhile, all categories in the U.S. South fell between 20.0- to 25.0- points. All contractor categories in the other U.S. regions were unchanged in May.

The six-month headline expectations for future construction costs indicator saw a solid increase to 85.5 in May. The six-month expectations indicator for materials and equipment came in at 83.0, 6.1-points higher than last month’s figure. Seven of 12 categories saw increases, though most were fairly minor. The largest increases came for the ocean freight categories from Asia and Europe to the U.S., which increased 25.0- and 22.9-points respectively. Electrical equipment also saw a sizable 14.4-point increase in May. Meanwhile, ready-mix concrete saw the only large decline, falling 14.6-points. Copper-based wire and cable, shell and tube heat exchangers and gas and steam turbines each saw minor declines while carbon steel pipe remained unchanged. Excluding ready-mix concrete with its larger decline to a reading of 68.8 this month, all other categories remain highly elevated with all readings at or above 75.0.

Meanwhile, the six-month expectations indicator for sub-contractor labor saw a very strong increase of 23.6-points this month. Almost all regions and labor categories saw sizable increases, with the exceptions of the civil and instrumentation and electrical contractors in Eastern Canada which saw modest declines. After a more modest reading last month, expectations for sub-contractor labor costs rose to 91.3 in May, the second highest reading in over two years.

Respondents report expected shortages for welders, electricians and other skilled trades as well as electrical equipment components like switchgear and circuit breakers. They also noted high demand for shipping containers and congestion in ports. Additional market comments suggested tariffs are front of mind again this month and many projects are slowing down or pausing entirely.