Cost Management Report

「Price Hikes for Materials Expands Upward Pressure on Construction Costs Beyond Control」

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This report has been prepared by the Cost Management Group of the Engineering Dept. of Nikken Sekkei Ltd for information purposes. The information in this report is current as of the date of publication. Its completeness is not guaranteed, however. The contents are subject to change without notice. Unauthorized reproduction of this report is prohibited.

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Price Hikes for Materials Expands Upward Pressure on Construction Costs Beyond Control

Orders received are steady, but competitive environment remains severe

Construction orders in FY2021 have held steady. Orders received by the 50 largest firms from April 2021 to Feb. 2022 reached the highest level since the Lehman Shock (Fig. 1). On the other hand, profit margins on completed construction contracts at major construction companies* continue to decline, while competition for orders remains intense.
*Leading construction companies: Obayashi Corporation, Kajima Corporation, Shimizu Corporation, and Taisei Corporation. Takenaka Corporation is not included due to non-disclosure of quarterly financial results.

Divergence between construction cost index and materials price index widens

Construction materials prices soared due to the impact of high oil prices and other factors. The Producer Price Index rose 18% over the past year (Fig 2). On the other hand, the Nikken Sekkei Standard Building Price Index (NSBPI), which shows changes in actual construction costs, including labor costs and builder profits, has remained almost flat over the past year. This indicates that building contractors have been able to suppress upward pressure on construction costs.

  • Fig.1: Trends in profit margins on completed contracts for the four major construction companies Fig.1: Trends in profit margins on completed contracts for the four major construction companies
    Source: Compiled from the Ministry of Land, Infrastructure, Transport and Tourism's "Current Survey of Construction Orders (50 Major Companies)" + various financial data. Figures for FY 2021 profit margins on completed const. projects are current through Dec.

  • Fig. 2: Nikken Sekkei Standard Building Price Index (NSBPI) and the Producer Price Index for Construction Materials Fig.2: Nikken Sekkei Standard Building Price Index (NSBPI) and the Producer Price Index for Construction Materials
    Source: Compiled from the Bank of Japan's "Corporate Goods Price Index by Stage of Demand and Use”.

Fluctuations in materials prices partially impact construction costs

The impact of fluctuations in steel prices, crude oil prices, and exchange rates (which affect steel prices), on construction costs is estimated at the following values: +1.6% (oil prices), +1.1% (exchange rates), and +2.5% (steel prices), based on the rate of change over the past year (Fig. 3). These estimates are based on the assumption that all price (and exchange rate) fluctuations are reflected. As shown in Fig. 2, however, actual builder estimates are not the same. Looking at builder estimate unit costs, some items, such as rebar and glass, reflect almost all of the increases announced by manufacturers, while gypsum boards, package air conditioners, power distribution boards, and generators reflect only a small portion of the current increase (Fig. 4).

Preparing for future construction price rises is important

Given that many manufacturers have announced that they will raise prices in April and beyond, and given the current situation in which there are no factors that will allow materials price hikes to settle down, it is expected that more projects will reflect the price increases in quotations in anticipation of higher future materials prices. It is therefore important to prepare in advance, according to the individual project situation, by creating an environment conducive to price competition by considering value engineering proposals to offset price increases, and by building up reserve funds.

  • Fig. 3: Impact of Fluctuations in Crude Oil Price, Exchange Rates (Forex), and Steel Price on Construction Costs Fig.3: Impact of Fluctuations in Crude Oil Price, Exchange Rates (Forex), and Steel Price on Construction Costs
    Source: The World Bank's "Commodity Prices," the Bank of Japan's "Exchange Rates," the Economic Research Institute's “Construction Materials Price Index," Saitama Prefecture's "Price Fluctuation Analysis Tool," and Nikken Sekkei’s project data.
    Figures as of March 2022.

  • Fig. 4: Material Manufacturers' Price Revisions and their Respective Reflection in Contractors' Estimated Prices Fig.4: Material Manufacturers' Price Revisions and their Respective Reflection in Contractors' Estimated Prices
    Source: Based on documents published by each company and Nikken Sekkei's project data. Figures as of March 2022.

NSBPI Rises in All Three Regions

Nikken Sekkei Standard Building
Price Index (NSBPI)

The composite indexes for the Greater Tokyo, Kansai, and Tokai areas all rose about 3% from the previous quarter. Although the competitive environment continues to be severe for orders received, builders are unable to absorb the increase in materials prices, which is reflected in their submitted cost estimates.

Until the previous period, the increase in the total amount of quotations had tended to be limited by adjusting the price increases for steel materials and some facility equipment and materials with other types of construction work. In the current period, however, the increase has been larger due to continued price increases for steel, equipment and materials, in addition to price hikes on finishing materials, equipment and labor.

  • Fig. 5: Changes in NSBPI Fig.5: Changes in NSBPI

  • Fig. 6: % Change in NSBPI and Contribution of Construction and Equipment Fig.6: % Change in NSBPI and Contribution of Construction and Equipment

After a lull, steel prices show signs of rising again

Steel prices, which had continued to rise due to factors such as high raw materials prices, had remained flat since December 2021, but began to rise again in March 2022 in all areas except Sapporo (Fig. 7). Steel manufacturers such as Nippon Steel Corporation and Tokyo Steel Co., Ltd have announced additional price hikes. Caution is warranted as the upward trend is likely to continue.

A Growing sense of labor shortage

The labor shortage rate rose sharply in December 2021 (Fig. 8). In particular, the shortage of rebar construction workers in the Greater Tokyo region has increased, indicating that the supply-demand balance has worsened due to large-scale redevelopment projects.

  • Fig. 7: Trends in Steel Materials Prices (Ordinary Steel) Fig.7: Trends in Steel Materials Prices (Ordinary Steel)
    Source: Economic Research Institute’s "Construction Materials Price Index "

  • Fig. 8: Construction Skilled Worker Excess/Shortage Ratio Fig.8: Construction Skilled Worker Excess/Shortage Ratio
    Source: Ministry of Land, Infrastructure, Transport and Tourism, "Survey of Construction Labor Supply and Demand" (eight job categories, nationwide, seasonally adjusted)

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