Cost Management Report

「Impact of Rising Material Prices & Delivery Delays is Increasing
Maintaining a Competitive Environment is Critical to Controlling Risk」

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This report was prepared for informational purposes by the Cost Management Group, Engineering Department, Nikken Sekkei Ltd. The contents of this report are current as of the date of preparation, but completeness is not guaranteed. The contents of this report are subject to change without notice. Unauthorized reproduction is prohibited.

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Impact of Rising Material Prices & Delivery Delays is Increasing
Maintaining a Competitive Environment is Critical to Controlling Risk

Forecast for orders received is on par with the prior FY
Profit margin recovery is expected, but at a low level

FY2021 orders were higher than the previous year for both major (*1) and semi-major (*2) construction contractors. We expect orders in FY2022 to be at the same level as for FY2021, indicating that construction demand is firm. Profit margins on completed projects are expected to increase from FY2021 which was impacted by large projects ordered under intense competition, but recovery is expected to be weak and lower than in FY2020 (Fig. 1).

＊1: Major construction contractors: Obayashi Corporation, Kajima Corporation, Shimizu Corporation, Taisei Corporation, and Takenaka Corporation.
＊2: Semi-major construction contractors: Eight construction contractors (excluding Haseko Corporation) with individual sales of more than 250 billion yen in the past three years, including Hazama Ando Corporation, Kumagai Gumi Co., Ltd., Penta-Ocean Construction Co. Ltd., Tokyu Construction Co., Ltd., Toda Corporation, Nishimatsu Construction Co., Ltd., Maeda Corporation, and Sumitomo Mitsui Construction Co., Ltd.

Awareness of soaring materials prices and delivery delays heightens

The price of construction materials continues to soar against the backdrop of supply constraints caused by the COVID-19 pandemic and rising resource prices due to the Ukraine crisis. In addition to steel columns, the shortage of semiconductors continues to cause delays in the delivery of MEP equipment and materials, which is significantly impacting both construction costs and schedules. In response, the Ministry of Land, Infrastructure, Transport and Tourism (MLIT) has released a document on setting appropriate contract fees and construction schedules, raising awareness of extended construction schedules and rising construction costs (Fig. 2).

  • Fig.1: Construction orders received & profit margins on completed work for major and semi-major construction contractors Fig.1: Construction orders received & profit margins on completed work for major and semi-major construction contractors
    Source: Prepared from various financial data

  • Fig. 2: Documents related to setting appropriate contract prices and construction periods Fig.2: Documents related to setting appropriate contract prices and construction periods
    Source: Prepared from various press materials
    MLIT: Ministry of Land, Infrastructure, Transport and Tourism
    JFCC: Japan Federation of Construction Contractors

Difference from 2007-2008:soaring prices for many materials, not only steel

A comparison of recent construction price trends with the two most recent price hikes (Fig. 3) shows that in 2007-2008, the main factor behind the sharp rise in construction prices was the rise in steel prices due to rapid Chinese demand. By contrast, in 2013-2014, materials prices rose by a smaller margin, influenced by stronger domestic construction demand, including for post-earthquake reconstruction and the Tokyo Olympics. The difference this time is that the rise in construction materials is larger than in 2007-2008, with price hikes in a wide range of materials, including steel products. On the other hand, the strong impact of the supply-demand gap originating overseas is similar, and construction prices may stabilize or even decline once external factors are resolved.

Price fluctuation risk exists even after contracts are signed

The documents in Fig. 2 and the responses of contractors to rising material prices indicate that price fluctuation risk remains, even after contractor selection (Fig. 4). In order to control the risk of price fluctuation after selection of the builder, it is important to maintain an environment of price competition for as long as possible, for example, by selecting a builder after finalizing detailed designs.

  • Fig. 3: NSBPI and Producer Price Indexes for construction materials & steel Fig.3: NSBPI and Producer Price Indexes for construction materials & steel
    Sources: Bank of Japan, "Corporate Goods Price Index by Stage of Demand and Use - Intermediate Goods/Construction Materials," Economic Research Institute, “Construction Materials Price Index: Ordinary Steel (Tokyo)," prepared by Nikken Sekkei.

  • Fig. 4: Comments on materials prices, etc. in each company’s financial statements Fig.4: Comments on materials prices, etc. in each company’s financial statements
    Source: Prepared from each company's financial data

Upward Price Momentum Has Not Slowed, Rising About 10% On-Year

Nikken Sekkei Standard Building
Price Index (NSBPI)

The overall price index rose about 5% from the previous quarter and 10% from the same period a year ago. Compared to the most recent highs (2015; 2019 for the Kansai Area), the Greater Tokyo Area has risen to the same level, with Kansai reaching its highest level, while Tokai continues to rise at a pace almost on par with its peers. Prices for steel products, construction materials, and MEP equipment remain under strong upward pressure, while some labor costs are also rising.

The prolonged delivery period for steel and materials has not improved, and if this affects construction schedules, it will lead to higher temporary construction costs and overhead expenses. It is thus necessary to keep a close eye on the situation.

  • Fig. 5: NSBPI trends Fig.5: NSBPI trends

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

Steel Prices Rise Anew

Steel prices, which had remained flat since December 2021, rose 11-16% in the three months from March 2022 (Fig. 7). Prices for steel scrap, the main raw material for electric arc furnaces, have fallen as panic buying of Russian scrap has subsided due to fears of reduced distribution. Alternatively, prices for coking coal, the main raw material for blast furnaces, have continued to soar against a backdrop of supply stagnation caused by restrained procurement from Russia and inclement weather in Australia. Upward pressure on steel material prices remains strong.

The labor shortage feeling intensifies

The labor shortage rate had been weakening since 2020, but began to rise again in December 2021, reaching as high as 2% the following April, and then falling to 1.4% in May (Fig. 8). In April, shortage rates rose compared to the previous month for all seven occupations, except for plumbers, the difference being largest for plasterers and rebar workers. The 1.4% shortage is as high as shortages seen in 2006, 2011-12, and 2018-19. Going forward, the trend needs to be monitored closely.

  • Fig. 7: Change in steel prices (ordinary steel) Fig.7: Change in steel prices (ordinary steel)
    Source: Economic Research Institute “Construction Materials Price Index.”

  • Fig. 8: Changes in the ratio of excess/shortage of skilled construction workers Fig.8: Changes in the ratio of excess/shortage of skilled construction workers
    Source: Ministry of Land, Infrastructure, Transport and Tourism, "Survey of Construction Labor Supply and Demand” (total of 8 occupational categories, nationwide, seasonally adjusted).

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