articles Ratings /ratings/en/research/articles/220414-construction-cost-inflation-weighs-on-u-s-public-infrastructure-investment-12344445 content esgSubNav
In This List

Construction Cost Inflation Weighs On U.S. Public Infrastructure Investment


U.S. Transportation Infrastructure Transit Update: End Of The Line Nears For Federal Assistance As Low Ridership Pressures Operators


U.S. Highway User Tax Bond Report Card: Strong Coverage Drives Rating Resiliency


Charter School Brief: Texas


History Of U.S. State Ratings

Construction Cost Inflation Weighs On U.S. Public Infrastructure Investment

Ever-Rising Construction Costs Could Force Tough Choices

Although the effects of construction cost inflation are apparent, the response of public project sponsors and longer-term impacts is not as clear-cut. Will sponsors eliminate or delay elements of larger capital improvement programs? Will higher levels of federal investment be sufficient to offset inflationary increases, holding public sponsors harmless? Or will project budgets be increased and backfilled with higher funding contributions (such as taxes, tolls, and other fees or charges), including more debt issuance? Depending on the extent and duration of current inflation in construction inputs, S&P Global Ratings anticipates public sponsors will use a variety of strategies to deliver much anticipated (and promised) infrastructure programs.

The drivers for construction cost inflation include pretty much everything--as measured by most indices and spurred by commodity price spikes and supply chain disruptions. Indeed, the run-up in construction cost inflation affecting public infrastructure project sponsors began in 2020 when factories in China and northern Italy were closed, followed by whole economies shutting down as the COVID-19 pandemic spread. Based on the current trajectory of price increases, relief is unlikely until 2023--and that's assuming the economic, geopolitical, health and safety, and supply chain disruptions abate. Current lockdowns across regions in China that are slowing the movement of goods for export to ports such as Shenzhen demonstrate the challenges of returning to the tightly choreographed logistics and shipping patterns of pre-pandemic supply chains. In addition, oil price increases associates with the conflict in Ukraine and U.S. embargo on Russian oil imports are not fully incorporated into price increases.

The impact of project cost inflation was less noticeable in 2021 because overall public spending on construction actually declined 4.2% from that seen in 2020. This was largely influenced by 2021's 6.3% decline in transportation construction spending, as some public issuers awaited reauthorization of the surface transportation spending bill (eventually signed into law in late 2021) before committing to new capital improvement programs in 2022.

On top of construction price increases, shortages across the basket of inputs result in unpredictability and delays to project schedules, further compounding overall program inflation. Pricing volatility also adds uncertainty as suppliers of materials and other inputs either delay providing firm price quotes until products ship or inflate cost estimates on the front end.

The most referenced signal of inflationary pressures is the PPI, which is a collection of indexes measuring the average change over time in selling prices received by U.S. producers of goods and services. PPI measures price changes from the perspective of the seller as compared with the Consumer Price Index (CPI), which measures price change from the purchaser's perspective. Differences between the two are often due to government subsidies, sales and excise taxes, and distribution costs. Chart 1 highlights the increase in PPI for building materials and supplies, which rose 24.9% between March 2021 and March 2022, and 58.6% between pre-pandemic January 2020 and March 2022.

Chart 1


A more complete measure of cost increases for many public and road works projects is the National Highway Construction Cost Index (NHCCI), which measures the percentage change in prices for 29 primary construction inputs, including labor, asphalt, steel, and roadway lighting, which reflect the full price including the transportation, installation, and some component of overhead costs and profit margin. Chart 2 illustrates an increase of 10.8% between third-quarter 2020 and third-quarter 2021 (most recent data available) and notably does not include recent oil price spikes, which are expected to further increase this metric.

Chart 2


Table 1 shows a year-over-year comparison of construction inputs. Again, the more recent increase in oil prices is expected to lead to higher prices for materials such as asphalt.

S&P Global Ratings anticipates that construction cost inflation will result in public sector project sponsors seeing higher bids from contractors, larger contingencies in new contracts along with wider cost escalation ranges for materials, plus a shift away from fixed-price contracts. Public project sponsors could also receive claims for equitable adjustment for compensation by contractors on existing projects or experience higher bids for follow-on work to recoup previous losses.

Table 1

Price Increases For Construction Inputs
Year-over-year % change in December PPI
2020 2021
Steel mill products 5.2 127.0
Diesel fuel (2.8) 55.0
Plastic construction products 5.4 34.0
Aluminum steel shapes (1.7) 30.0
Cooper and brass steel shapes 24.0 24.8
Paint and coatings 1.9 24.3
Gypsum products 3.6 21.0
Lumber and plywood 37.0 18.0
Trucking 2.2 18.0
Truck and offroad tires 0.3 11.0
Construction machinery/equipment 1.1 10.0
Source: Bureau of Labor Statistics, producer price increases; Associated General Contractors of America.

Beyond commodity and equipment price increases that will fluctuate over time, the shortage of skilled labor and the corresponding increase in wages will likely be more enduring. This is partially attributable to a systemic shortage of new workers entering the construction trades, but is also the result of an executive order signed by President Biden that requires the use of project labor agreements (PLAs) on federal construction projects above $35 million. PLAs are negotiated collective bargaining agreements between employers and labor organizations that establish the terms of employment on a specific project. This order is estimated to affect $262 billion in federal contracting construction projects. In addition, federal contractors in new or extended contracts are required to pay a minimum of $15 per hour for direct federal procurement under another executive order signed in January 2022.

Cost Inflation Has A Ripple Effect On Public Project Sponsors

Construction project cost inflation resulting in higher overall program costs is not new to public works projects, which often require long lead times to build political consensus. Large public projects also require environmental approvals and studies before all known costs and funding sources are identified and received. There is also a degree of optimism bias in public projects that, in many high-profile examples, results in completed projects costing several times the original estimates and taking years longer to complete. And finally, there are examples of highly complex, multi-year, mega-transportation infrastructure projects where efforts to lock in costs and schedule are very difficult to say the least, including the California high-speed rail project ($100 billion), the Gateway tunnel project under the Hudson River ($12.6 billion), or the east side rail extension into New York City by the Metropolitan Transportation Authority ($11.1 billion) and Second Avenue subway line ($17 billion).

Despite being very familiar with cost inflation, public project sponsors still face difficult choices as expectations for substantial, long-term infrastructure investments have been elevated. The annual public infrastructure spend will begin to dramatically increase this year as money flows from the $1.9 trillion American Rescue Plan Act signed into law in March 2021--which included $350 billion in direct aid--as well as the approximately $1.1 trillion Bipartisan Infrastructure Law (BIL) with $550 billion in new spending above the baseline.

For example, transportation investment in the BIL translates into spending for many years to come. Formula funding levels are higher and there is a significant increase in available federal dollars in new and discretionary programs, giving authority to the U.S. Department of Transportation to advance the policy objectives of the current administration. All combined, the BIL will provide $454 billion over the five-year period from 2022 to 2026 for investment in roads, bridges, and transit, resulting in a 38% increase in federal investment in 2022.

Before the passage of the BIL, public sector agencies at all levels were spending $270 billion annually in an environment where labor and other inputs were experiencing shortages. Adding another approximately $100 billion a year ($550 billion in new spending over five years) would have been challenging, even before the pandemic fallout on commodity prices and related negative impacts. To preserve and maximize federal dollars, public project sponsors might direct their near-term spending to smaller projects that are further along in the development process.

Other transportation and enterprise-secured debt issuers might be less exposed to inflation than states or local governments because they have greater flexibility to pass on higher costs through toll-rate hikes. Some toll roads even have provisions for automatic rate increases tied to an inflationary index. However, in cases where rate-setting flexibility is limited, either politically or by policy, pressures could arise.

Charts 3 and 4 illustrate representative funding sources for highway and transit capital programs. Dedicated revenue sources (often fuel or sales tax revenues) are the most important funding component, ranging from 40% for highway projects to 60% for transit, with bond proceeds contributing 20%-27%. Historically, federal funding through formula and discretionary grant programs ranges from 10%-27% of large, multi-year programs for highways and transit. Other funding sources will vary from state to state, but can include transfers from a general fund, state or federal loans, or operating revenue from tolls or fares.

Chart 3


Chart 4


As construction input inflation increases or remains elevated, the purchasing power of federal investment--as well as other funding sources--is eroded. Because most federal formula funding requires a matching contribution from public sponsors at the project level (usually 90% federal and 10% local for highways, and 80% federal and 20% local for transit), federal dollars likely cannot be used to fully compensate for higher costs unless provisions allow for them to be applied for the local match (that is, 100% federal funding). The increased availability of discretionary money in the BIL could mitigate the need to tap other funding sources for some projects. And given strong revenue collections and significant support from federal stimulus over the past two years, we think states and local governments are well positioned to provide general fund support for some projects they view as key, at least in the short term. In addition, many states have leveraged their gas tax, which has proven to be a stable source of dedicated funding. However, the longer more elevated inflationary conditions persist, the more likely it is that public project sponsors will face the dilemma of reducing or delaying the promised overall program project scope or tapping other sources of program funding, including increased debt.

Related Research

This report does not constitute a rating action.

Primary Credit Analyst:Kurt E Forsgren, Boston + 1 (617) 530 8308;
Secondary Contacts:Geoffrey E Buswick, Boston + 1 (617) 530 8311;
Joseph J Pezzimenti, New York + 1 (212) 438 2038;

No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, (free of charge), and (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at

Register with S&P Global Ratings

Register now to access exclusive content, events, tools, and more.

Go Back