Cost Management Report

「The Unfilled Supply-Demand Gap: High Work on Hand Volume for Buildings and MEP」

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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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The Unfilled Supply-Demand Gap:
High Work on Hand Volume for Buildings and MEP

Construction work on hand remains high this fiscal year

In FY2022, total orders received by the four major construction companies *1 rose 7% from the previous year, while the amount of work on hand rose 3% (Fig. 1). By contrast, in FY2023, both orders received and construction work on hand are expected to decline. The reason for this decline in spite of large-scale redevelopment projects, data centers and semiconductor plants projects at hand, is thought to be self-restraint in heed of supply constraints.

Profit margins are expected to remain low due to competition for very large projects

While construction work is abundant, profit margins on completed projects has remained low at 6% since FY2021 (Fig. 2). Profit margin recovery has been delayed due to an increase in provisions for losses caused by unprofitable large construction projects awarded in a fiercely competitive environment. The impact of unprofitable projects is expected to continue until around FY2024. Companies are expected to continue working to improve profitability at the time of winning work so that profit margins may be restored.

  • Fig.1: Trends in Work on hand and Orders Received by Major Construction Firms Fig.1: Trends in Work on hand and Orders Received by Major Construction Firms
    Prepared from each company's financial data

  • Fig. 2: Profit Margins on Completed Work and Allowance for Losses at Major Construction Firms Fig.2: Profit Margins on Completed Work and Allowance for Losses at Major Construction Firms
    Prepared from each company's financial data

MEP orders received are restrained due to adjustments in work on hand

In FY2022, the five major mechanical subcontractors *2 and five major electrical subcontractors *3 tallied their highest totals for construction work on hand (Fig. 3), which represented a significant increase over the previous year. In FY2023, both mechanical and electrical subcontractors plan to curb orders and are expected to continue to exhaust work on hand. With an abundance of work on hand, selective order taking is expected to continue.

Overtime work limit compliance is expanding

Another factor that will cause construction costs to rise is compliance with overtime work ceiling regulations that will take effect in April 2024. Temporary work costs and other expenses will rise due to extended construction periods resulting from the shift to “eight days closed per four week” work schedules. According to estimates based on the Ministry of Land, Infrastructure, Transport and Tourism's common expense formula *4, construction costs will increase by approximately 1% (Fig. 4). This formula was revised in March 2023, and overall costs have been revised upward, including increases in on-site management costs for MEP works. Although this formula does not apply in kind to private-sector projects, the same caution should be exercised with regard to factors such as increases in labor costs for general contractors.

  • Fig. 3: % change in NSBPI from the previous quarter by work type Fig.3: Change in Work on Hand and Orders Received by MEP Contractors
    Prepared from each company's financial statements
    Mechanical subcontractors = 5 companies total; electrical subcontractors = 5 companies total

  • Fig. 4: Impact of Overtime Work Limits and Revisions to Common Expense Formulas Fig.4: Impact of Overtime Work Limits and Revisions to Common Expense Formulas

    Prepared based on Nikken Sekkei data, assuming an office building of 15,000 sqm.
    Common expense = common temporary work costs + site management costs + general management costs

Greater Tokyo's Upward Momentum Continues, Showing Disparity with Other Regions

Nikken Sekkei Standard Building Price Index（NSBPI)*5

The composite index (greater Tokyo area) rose about 6% from the previous quarter and about 22% from the same period last year. The Kansai region rose at the same rate as the previous quarter. In the Tokai region, building work slightly slackened, but there was no sign of a halt in the rise (Fig. 5).

Construction work costs continue to rise along with increases in the prices of various materials such as ready-mixed concrete and glass, as well as price hikes for temporary work, steel frames, and finishing works. In addition to list price revisions for various types of equipment, labor and specialty work prices continue to rise due to the supply-demand gap, driving up 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

Individual material price indexes continue to rise

Looking at the Corporate Goods Price Index, which shows price fluctuations for goods traded between companies, price of doors and windows continue to rise (Fig. 7). In particular, the price of glass has been rising significantly since the end of 2022, probably as a result of price revisions by the three major glass makers *6 since October 2022 deliveries and their reflection in market prices.

Ready-mixed concrete prices in Osaka see large price increases

The ready-mixed concrete cooperative of Greater Osaka revised up its prices in April 2023, raising the price of ordinary concrete with 18 MPa strength from 21,800 yen to 25,500 yen per cubic meter. The results were quickly reflected in market prices, leading to a large increase in the ready-mixed concrete price index for Osaka (Fig. 8). As ready-mixed concrete associations in other areas have also announced price increases from spring onward, it is highly likely that these will be reflected in the index in the future.

  • Fig. 7: Trends in the Corporate Goods Price Index for Building Materials Fig.7: Trends in the Corporate Goods Price Index for Building Materials
    Compiled from the Bank of Japan's "Corporate Goods Price Index”

  • Fig. 8: Trends in ready-mixed concrete prices Fig.8: Trends in ready-mixed concrete prices
    Compiled from “Quantity Survey Data", Economic Research Association

*1: Four companies: Obayashi Corporation, Kajima Corporation, Shimizu Corporation, and Taisei Corporation.

*2: Five companies: Asahi Kogyosha Co., Ltd. , Sanki Engineering Co., Ltd. , Taikisha Ltd., Dai-Dan Co., Ltd., and Takasago Thermal Engineering Co., Ltd.

*3: Five companies: Kandenko Co., Ltd., Kyudenko Corporation, Kinden Corporation, Toenec Corporation, Yurtec Corporation.

*4: Formula for calculating common temporary construction expenses, site management costs, and general management costs when calculating estimated prices for public works projects.

*5: Nikken Sekkei Standard Building Price Index (NSBPI): An index showing price movements in construction prices, calculated independently by Nikken Sekkei Ltd. The index is calculated using standard tenant office space as a quantitative model and reflects actual construction prices determined by Nikken Sekkei's own surveys 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.

*6: Three companies: Nippon Sheet Glass Co., Ltd., AGC Inc., Central Glass Co., Ltd.

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