»May 22 Posted by Marc

Construction Cost Escalation: Trends and Predictions

Many building owners, developers, and public entities want to know what their project might cost in the future. Cost escalation is the study of providing an educated percentage to be added to the base cost of a project estimated at today’s market value to know what its future value might be.

One of the most widely used indices comes from R.S. Means, a national construction cost data supplier and publisher of many well-known construction industry journals. They have a nationally recognized cost index with a base of 100 beginning in the Year 1993.

The current R.S. Means indices reported in the last three years (2009-2012) show a trend of substantially lower annual percent change in construction costs than was tracking the six years prior. 

 

 

Year(s)         Average Annual % Change in Construction Costs

2002-2008     5.14%

2009-2012     1.08%

As a result of slowing economic conditions over the last few years, substantially lower profit margins, more competitive material pricing, and smaller annual labor increases have contributed to this decline in cost escalation within the commercial construction markets.

Although, increased market activity in the first quarter of 2013 has prompted the need for this escalation value to be increased. While the past three years I would have recommended only a minimal annual cost escalation value of 1.0-1.5%, I would most likely increase this range to 2.0 – 2.5% for projects looking into 2014 and 2015. Still, this is nothing like the ranges seen in 2002-2008.