As utilities begin annual review and/or engage in ongoing refinement of their Capital Improvements Plan (CIP), it is helpful to understand how capital costs have fluctuated to get a sense of how they may change in the future. For this purpose, references such as the construction cost index (CCI) compiled by various national and regional sources can he helpful. The CCI is a business cycle indicator that shows trends in the costs incurred by contractors in the construction of buildings. The Engineering News-Record (ENR) CCI index and the Marshall & Swift Research Results are useful resources when comparing national and regional construction cost changes.
ENR publishes a CCI that is widely used in the construction industry to analyze monthly and yearly construction cost changes across the U.S. The CCI index is comprised of 200 hours of common labor at the 20-city average common labor wage, plus 25 cwt (hundredweight) of standard structural-steel shapes at the mill price prior to 1996 and the fabricated 20-city price from 1996, plus 1.128 tons of Portland cement at the 20-city price, plus 1,088 board of 2×4 lumber at the 20-city price.
It is difficult to predict how prices are going to change, particularly in areas of the country where the labor market is highly competitive, such as the Bakken region in western North Dakota and eastern Montana. Marshall & Swift, a leading provider of building cost data, recently completed a study of the Williston region where quarterly construction cost changes were analyzed. The quarterly update reports pricing changes in material, labor, and equipment. Additional variables that affect contractor prices and unique economic influences are continuously evaluated. The figure below illustrates construction cost percent increases from the first quarter of 2013 to the first quarter of 2014 for the U.S, the City of Minneapolis, and the City of Williston.
As a benchmark for comparison, national and local CCIs were compared to the national Consumer Price Index (CPI). The CPI is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. The CPI is one of the most frequently used statistics for identifying periods of inflation or deflation.
Nationally, and in most regional areas, one can expect the CCI to continue to outpace the CPI as changing economic conditions are driving increases throughout construction related industries. However, in areas such as the Bakken, where rapid growth and expansion are driving a unique economic environment, one should continue to expect both the regional CCI and CPI to be significantly higher than other national and regional benchmarks.
Project construction costs will always be a function of regional economic conditions, and it is important to recognize that unique areas (such as the Bakken region) will be even more susceptible to rapid changes in construction prices resulting from specific local economic factors. Construction costs for any individual project will be a function of innumerable project specific conditions, but utility officials should review CCI and CPI information routinely to continue monitoring variations in construction costs and responsibly planning for future capital improvements.