Cost Management Report

「Competitive conditions persist Rising materials prices to push up construction costs」

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This report has been prepared by the Cost Management Group of the Engineering Division of Nikken Sekkei Ltd for information purposes. The information in this report is current at the time of publication and its completeness cannot be guaranteed. The contents are subject to change without notice. Unauthorized reproduction of this report is prohibited.

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Competitive conditions persist Rising materials prices to push up construction costs

Orders received, work on hand steady

In the first half of FY2021, orders received by major construction companies* were at the same level as in FY2019, while the amount of construction work on hand remained at a high level, suggesting that the volume of construction work remained firm (Fig. 1).

*Obayashi Corporation, Kajima Corporation, Shimizu Corporation and Taisei Corporation. Takenaka Corporation is not included because it does not disclose its quarterly results.

Difficult competitive environment continues

On the other hand, the competitive environment for orders continues to be difficult. Profit margins at major construction companies on completed projects have been declining since FY2017. In addition, provisions for losses on construction contracts (the estimated amount of losses on construction contracts already awarded) has risen, indicating that the environment for orders already received has been highly competitive (Fig. 2). This is evident from firms’ financial data, which illustrates expectations that the future competitive environment for orders will remain severe.

  • Fig. 1: Trends in orders received and work-on-hand at 4 major construction firms Fig. 1: Trends in orders received and work-on-hand at 4 major construction firms
    Source: Compiled from the financial data of each firm. The count for construction projects on hand in FY21 is as of September.

  • Fig. 2: Trends in profit margins & provisions for losses on construction contracts at 4 major construction firms Fig. 2: Trends in profit margins & provisions for losses on construction contracts at 4 major construction firms
    Source: Compiled from the financial data of each firm. The count for construction projects on hand in FY21 is as of Sept. Figures for profit margin on completed construction & allowance for loss on construction = 4-company avg.

The increase in large construction projects is a competitive factor

While the volume of construction work has been strong, one of the reasons for the continued fierce competition is the increasing scale of construction work. The availability of orders for large-scale construction projects with construction costs exceeding several tens of billions of yen has a significant impact on order plans, so companies are highly motivated to secure orders, resulting in likely fierce competition. In fact, the supply of office space property of at least 100,000 square meters in Tokyo's 23 wards (at time of completion) has been rising overall for the last decade, most prominently in the year 2020 and is forecast to continue. (Fig. 3).

Materials prices are increasing

Amid fierce competition, builders are finding it increasingly difficult to contain the upward pressure on construction costs caused by rising materials prices. In addition to the manufacturers mentioned in the previous issue, LIXIL has announced that it will raise its prices from April 2022. The price index for construction materials in November 2021 was 17% higher than in January 2021, a sharp increase in less than a year (Fig. 4).

Construction costs are rising

As materials prices are unlikely to fall back to their original levels, it will be difficult for builders to absorb the increased costs without eroding order profitability. Thus, we believe that construction prices will start to rise.

  • Fig. 3: Supply of office space of 100,000 sq.m. or more per unit in Tokyo's 23 wards / 3-year historical moving average Fig. 3: Supply of office space of 100,000 sq.m. or more per unit in Tokyo's 23 wards / 3-year historical moving average
    Source: Mori Building survey of large-scale office building market trends in Tokyo's 23 wards.

  • Fig. 4: Price index of construction materials Fig. 4: Price index of construction materials
    Source: Bank of Japan: Corporate Goods Price Index by Demand Level and Use.

NSBPI Rises Slightly in All Three Districts

Nikken Sekkei Standard Building Cost Index (NSBPI)

The overall indexes for the Tokyo metropolitan area, the Kansai region and the Tokai region all rose from the previous quarter. Prices for materials, such as steel and electrolytic copper, continue to rise, despite the fiercely competitive environment for receiving orders. In both the construction and facility sectors, builders are increasingly unable to absorb the increase in materials prices. This is reflected in the quotations they submit.

  • Fig. 5: Trends in NSBPI Fig. 5: Trends in NSBPI

  • Fig. 6: % change in NSBPI & contribution of construction and equipment Fig. 6: % change in NSBPI & contribution of construction and equipment

Steel prices continue to rise

Steel price increases have been widespread, with prices in all regions 7-9% higher than in the previous issue of this publication (September 2021) (Fig. 7). Although the price of iron ore, on which China relied for imports, has fallen as a result of China's crude steel production cuts, prices for other raw materials such as coking coal have continued to rise. Steel prices are therefore expected to remain high.

Lumber price rise pauses

Lumber prices have been flat since August 2021, after a period in which they rose due to the “wood shock.”

Labor shortage persists

Although the range of increase and decrease has widened since the beginning of 2021, the shortage rate of workers since April 2008 has remained low (Fig. 9). On the other hand, the number of workers in the construction industry is decreasing and the workforce is aging. Thus the unit price of labor merits continuing attention.

  • Fig. 7: Changes in steel prices (ordinary steel) Fig. 7: Changes in steel prices (ordinary steel)
    Source: Economic Research Council cost estimation data

  • Fig. 8: Trends in timber prices Fig. 8: Trends in timber prices
    Source: Economic Research Council cost estimation data

  • Fig. 9: Trends in the “over/under” ratio of skilled construction workers Fig. 9: Trends in the “over/under” ratio of skilled construction workers
    Source: Ministry of Land, Infrastructure, Transport and Tourism, construction labor supply & demand survey (8 occupations, nationwide, seasonally adjusted)

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