Cost Management Report

「Supply-Demand Gap in MEP Work Becomes Major Cause of Construction Price Hikes
Request for Cost Pass-throughs Continue」

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

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Supply-Demand Gap in MEP Work Becomes Major Cause of Construction Price Hikes
Request for Cost Pass-throughs Continue

MEP work orders steady
Profit margins expected to fall slightly

The cumulative total of orders received for MEP work (by the 20 major contractors) for the April-December 2022 period was the largest in the past 15 years, indicating firmness. Profit margins on completed construction projects (at 11 major contractors) is expected to slightly decrease from the previous year due to rising cost prices and other factors (Fig. 1). Against the backdrop of firm orders, it is likely that cost increases will be passed through to the client in the form of higher MEP work costs.

Deviation rates for MEP work sharply increase

Securing MEP contractors continues to be difficult, and general contractors state that they are reportedly denied quotations. Against this backdrop, since the second half of last year, the number of projects with significant upward deviation in MEP work cost estimates (Fig. 2) has markedly increased. In order to improve the situation, it is necessary to close the supply-demand gap, which is the main cause of the discrepancy.

  • Fig.1: Change in MEP work orders Fig.1: Change in MEP work orders
    Prepared based on the Ministry of Land, Infrastructure, Transport and Tourism (MLIT)'s "Results of Survey on Orders Received in the MEP Work Industry (20 major contractors)" and each firm's financial data. Gross profit margin figures for FY2022 are as of December.

  • Fig. 2: Average deviation rate of cost estimates by Building and MEP work＊1 Fig.2: Average deviation rate of cost estimates by Building and MEP work＊1

    Source: Nikken Sekkei Ltd

The main driver behind rising construction costs is shifting from steel to MEP work costs

Looking at the Nikken Sekkei Standard Building Price Index (NSBPI)＊2 by work type, the rate of increase in building work, mainly steel products (the driving force until last year) shrank, while the rate of increase in MEP work continued to rise. This indicates that the main driver of construction price increases has shifted from steel products to MEP work (Fig. 3).

Requests for cost pass-throughs persist
Remain aware of downside risks

As an indication that requests for cost pass-throughs are persisting, in March, the Ministry of Land, Infrastructure, Transport and Tourism (MLIT) issued a letter to all concerned parties, citing the "Urgent Survey on 'Abuse of Superior Bargaining Position' under the Antimonopoly Act" released by the Japan Fair Trade Commission at the end of last year (Fig. 4). It is highly likely that upward pressure on construction prices will continue for the time being due to wage revisions and rising consumer prices. On the other hand, the possibility that the overseas financial crisis may spread to the domestic construction market must also be kept in mind.

  • Fig. 3: % change in NSBPI from the previous quarter by work type Fig.3: % change in NSBPI from the previous quarter by work type

    Source: Nikken Sekkei Ltd

  • Fig. 4: Appropriate contract price setting, etc. Fig.4: Appropriate contract price setting, etc.

    Prepared from "Establishment of Appropriate Contract Price Reflecting Transaction Prices for Labor, Raw Materials, Energy, etc." dated March 8, 2023, by the Ministry of Land, Infrastructure, Transport and Tourism (MLIT).

Building Work Slows Slightly, But MEP Work Continues to Accelerate; Composite Index Continues to Rise

Nikken Sekkei Standard Building Price Index (NSBPI) ＊2

The composite index (for the Greater Tokyo Area) rose about 5% from the previous quarter and about 21% from the same period last year. It has continued to rise since the beginning of 2022 (Fig. 5). In building work, prices for various materials such as ready-mixed concrete and glass continue to rise but have slowed somewhat since steel prices have reached a high. In MEP work, in addition to the protracted rise of raw materials and logistics costs, the continuous increase of labor and specialty contractor prices brought about by the supply-demand gap is leading to a rise in overall construction costs (Fig. 6).

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

  • Fig. 6: Percent Change in NSBPI and Contribution of Building Work and MEP Work Fig.6: Percent Change in NSBPI and Contribution of Building Work and MEP Work

Manpower shortage is a factor in soaring MEP prices

Looking at the contribution of work type to the rate of change in NSBPI for each type of MEP work, the impact of rising labor costs on electrical work and rising prices of specialty contractor work on HVAC and sanitary work were significant. The recent rise in labor costs has been conspicuous for all types of work, indicating that the main cause of the sharp rise in MEP work is the labor shortage, rather than the rise in prices for materials and equipment (Fig. 7).

Steel prices rise slow to a crawl

Steel prices have generally remained flat since the middle of last year in all regions (Fig. 8). General contractors' estimates of unit construction costs for both steel frame and rebar, which had continued to rise since mid-2022 due to higher processing and assembly costs, have leveled off.

  • Fig. 7: Contribution of construction type to NSBPI % Change in MEP Work Fig.7: Contribution of construction type to NSBPI % Change in MEP Work
    Source: Nikken Sekkei Ltd

  • Fig. 8: Steel prices (ordinary steel) Fig.8: Steel prices (ordinary steel)
    Compiled from "Cost Estimation Data" by the Economic Research Association

＊1: Average deviation rate: the deviation rate that indicates how much the estimated cost deviates from the estimated price, averaged for each project by year.

＊2: The Nikken Sekkei Standard Building Price Index NSBPI is calculated independently by Nikken Sekkei Ltd.
Using a standard rental office as a model, construction prices were calculated and indexed. Prevailing prices were ascertained through in-house research and reflected as needed.
The first quarter (Q1) is from January to March, Q2 is from April to June, Q3 is from July to September, and Q4 is from October to December.

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