Cost Management Report

April-June 2024 issue.
「Construction Prices Slacken Slightly, but High Rate of Increase Remains Intact; Securing Construction Workers is Also an Issue」

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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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Construction Prices Slacken Slightly, but High Rate of Increase Remains Intact; Securing Construction Workers is Also an Issue

Orders received remain solid

Orders received by the 50 largest construction companies and MEP contractors (20 major firms in each category) for the April-December 2023 period were both the largest in recent history (Fig. 1). With semiconductor-related investments and other projects on the horizon, the supply-demand gap is not expected to be resolved in the foreseeable future.

Profits on completed work remain low

On the other hand, profit margins on completed construction contracts have remained sluggish due to the impact of large construction projects ordered from 2019 to 2021 when price competition was severe, and due to the “2024 Problem”*1 (Fig. 2). Although there is a time lag between profit margins on construction contracts and profitability at the time of order receipt, all companies have commented that their profit margins will recover from FY2025. We believe that the trend toward more selective ordering aimed at improving profitability at the time of order receipt will continue and strengthen in the future.

  • Fig.1: Trends in Orders Received by Builders & MEP Contractors Fig.1: Trends in Orders Received by Builders & MEP Contractors
    Ministry of Land, Infrastructure, Transport and Tourism (MLIT):
    A Statistical Survey of Orders Received for Construction Work (50 major companies),Results of a Survey of Orders Received in the Equipment Construction Industry (each of the 20 major construction companies).

  • Fig. 2: Average Profit Margins on Completed Work at 4 Major Construction Firms Fig.2: Average Profit Margins on Completed Work at 4 Major Construction Firms
    Prepared from each company's financial data.

Construction costs inflation rate moderates slightly, but remains high

The rate of increase in construction costs (NSBPI*2) has continued to exceed 4.7% since the October-December 2022 period. Since Oct-Dec 2023, it has slowed somewhat to 3.2% and 3.5%, but the annualized rate of increase remains high at over 10% (Fig. 3). It should be noted that construction costs reflect estimates submitted by prospective builders and do not directly reflect frequent estimate declines.

Tough contractor selection trend is becoming more pronounced

The process of selecting contractors in an appropriately competitive environment is becoming more difficult. Construction companies are increasingly avoiding competitive quotations from multiple firms, with more than half of all quotations being denied, or only one firm remaining for a special assignment. In some cases, no prospective contractors were secured at all (Fig. 4). Contractor availability has become a major risk factor in pushing projects forward, along with construction cost trends.

  • Fig. 3: NSBPI (Metro Area) Rates of Increase Fig. 3: NSBPI (Metro Area) Rates of Increase
    Compiled from Nikken Sekkei data.

  • Fig. 4: Construction Quote Participant Status Fig. 4: Construction Quote Participant Status

    Compiled from Nikken Sekkei data.

NSBPI: All Regions Continue to Rise; Kansai and Tokai Narrow the Gap with Greater Tokyo

Nikken Sekkei Standard Building Price Index NSBPI*2

While the NSBPI for Greater Tokyo saw merely the same level of increase as in the previous quarter, the Kansai and Tokai areas saw renewed surges, narrowing the gap with greater Tokyo (Figs. 5 and 6). Broken down by construction work category, temporary construction, framing, finishing and MEP work, labor costs, specialized construction costs and miscellaneous cost ratios continued to rise from the previous quarter. The tendency to reflect the risk of higher construction costs in estimate submissions, such as in response to the 2024 Problem, is pushing up construction costs as a result of more selective ordering against the backdrop of the widening supply-demand gap.

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

  • Fig. 6: % Change in NSBPI, Construction Work vs. MEP Work Contribution Fig. 6: % Change in NSBPI, Construction Work vs. MEP Work Contribution

The NSBPI Building-to-MEP Ratio Shifts: MEP Rises

Looking at the rates of cost increases by construction work category from the July-September 2021 period (before the most recent sharp NSBPI rise), MEP (electrical, HVAC, and sanitation), and miscellaneous costs rose significantly compared to those for finishing work, temporary construction, earthwork, and framing (Fig. 7). As a result, the NSBPI composite ratio balance shifted, with MEP costs rising 3.3 points and miscellaneous costs up 2.4 points, for a 5.7 point net fluctuation. (Fig. 8).

The Sense of a Labor Shortage Remains at a High Level

The labor oversupply/shortage ratio in February 2024 stood at 1.7%, continuing at the high level seen since December 2021 (Fig. 9). There are no prominent trends by construction task type or region, and no signs of improvement in the supply-demand balance.

  • Fig. 7: NSBPI by Construction Task Type, % Increase from July-Sep 2021 Fig. 7: NSBPI by Construction Task Type, % Increase from July-Sep 2021
    Compiled from Nikken Sekkei data.

  • Fig.8: NSBPI Composition Comparison Fig.8: NSBPI Composition Comparison
    Compiled from Nikken Sekkei data.

  • Fig. 9: Trends in the Oversupply/Shortage Skilled Construction Worker Ratio Fig.9: Trends in the Oversupply/Shortage Skilled Construction Worker Ratio
    Source: Ministry of Land, Infrastructure, Transport and Tourism (MLIT): Survey of Construction Labor Supply and Demand (eight job categories in all, nationwide, seasonally adjusted).

*1: Overtime work ceiling regulations will be applied to construction and logistics from April 2024.

*2: Nikken Sekkei Standard Building Price Index (NSBPI): An index showing price movements in construction prices, calculated independently by Nikken Sekkei Ltd. Using standard rental office space as a quantitative model, the index is calculated and converted into an index of construction prices that reflect prevailing prices, as identified through independent surveys from time to time. 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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