Cost Management Report

July-September 2024 issue.
「Construction Costs Continue Steady Rise 1H 2024 Saw High Growth Continue, Similar to Last Year」

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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 Costs Continue Steady Rise
1H 2024 Saw High Growth Continue, Similar to Last Year

Materials Prices Revised Up On Upward Price Swings, Supply-Demand Gap

At the beginning of the year, we forecasted the main scenario for construction cost trends in 2024. At that time, we said that the upward cost momentum that had persisted until end-2023 was likely to weaken, but that price hikes would nevertheless continue. Six months later, upward pressure on each cost factor has failed to weaken, and construction costs continue to rise at a high rate. Looking ahead, we see little likelihood of a downward swing in the rate of increase (Fig. 1).

Materials Prices Rise Moderately

The total average of the Corporate Goods Price Index had been hovering around 120 until end-2023, only to surpass that mark in January 2024. It is expected to continue to rise moderately (Fig. 2). Costs for construction materials have also continued to rise moderately from January 2024. Rising labor and transportation costs are also pushing up prices for ready-mixed concrete and other materials.

  • Fig.1: Revised Forecast of Construction Prices (NSBPI) for 2024 Fig. 1: Revised Forecast of Construction Prices (NSBPI) for 2024
    Compiled from Nikken Sekkei data.

  • Fig. 2: Change in Corporate Goods Price Index Fig. 2: Change in Corporate Goods Price Index
    Compiled from the Bank of Japan's "Corporate Goods Price Index" and the "Short-term Economic Outlook" from the Japan Centre for Economic Research (JCER). ※ The index for construction materials (intermediate goods) is based on the 2015 index, which accounts for stage of demand & usage, as well as product classification and weight. Forecasts: JCER.

Construction Companies are Curbing Orders and Reducing Work on Hand

At the four major building general contractors*1, five major machinery subcontractors*2, and five major electrical equipment subcontractors*3, total work on hand has continued to increase since FY2019. For FY2024, however, it is expected that orders will be restrained and that the amount of work on hand will be consumed (Figs. 3-5). Meanwhile, the trend toward selective ordering is expected to intensify.

Securing Construction Workers is Becoming More Difficult

The environment for selecting prospective contractors, as described in the previous issue of the Cost Management Report, is becoming more severe. Cases where multiple estimate providers cannot be realized -- resulting in a sole estimate for a given project – are increasing, as are instances where a prospective contractor cannot be secured. (Fig. 6). In particular, many machinery subcontractors decline to offer any estimate, increasing the difficulty of securing prospective contractors, a major risk factor.

Figs. 3-5: Trends in Work on Hand and Orders Received by Construction Companies

  • Fig. 3: Total of 4 Construction Firms Fig. 3: Total of 4 Construction Firms
    Prepared from each company's financial data.

  • Fig. 4: Total of 5 Machinery Firms Fig. 4: Total of 5 Machinery Firms

    Prepared from each company's financial data.

  • Fig. 5: Total of 5 Electrical Equip. Firms Fig. 5: Total of 5 Electrical Equip. Firms

    Prepared from each company's financial data.

  • Fig. 6: Bid Estimate Participant Status Fig. 6: Bid Estimate Participant Status

    Compiled from Nikken Sekkei data.

Upward Price Hike Trend Expected to Strengthen Anew in All Regions, with Significant Impact on MEP

Nikken Sekkei Building Price Index (NSBPI)*4

In all regions, price hike momentum is spreading. While some of this is attributable to upward pressure due to construction, the impact of price hikes on MEP work is significant (Figs. 7, 8). In addition to higher labor and specialty construction costs and the reflection of price revisions in equipment construction, the expense ratio is also rising.

Similarly, costs are rising for building construction, temporary construction, frame construction, finishing work in general, and for overhead. The widening supply-demand gap is further increasing the trend to reflect higher construction costs in submitted estimates.

  • Fig. 7: Changes in NSBPI Fig. 7: Changes in NSBPI

  • Fig. 8: % Change in NSBPI, Construction Work vs. MEP Work Contribution Fig. 8: % Change in NSBPI, Construction Work vs. MEP Work Contribution

Elevators and Escalators: Tight Supply and Demand
Conditions have Become More Pronounced

Looking at the NSBPI by construction category, the index for electrical and elevator/escalator work rose sharply, by 10% from the previous quarter (Fig. 9). The widening supply-demand gap is behind both factors. But it should be noted that the elevator and escalator industry significantly impacts construction projects broadly, as super-large scale construction projects in the Tokyo metropolitan area compel tightness in the workforce. In addition, the timeframes allotted for new projects to be completed spans several years into the future.

A Growing Sense of Labor Shortage

Labor costs continue to rise due to competition for workers. Meanwhile, the diffusion index (DI) for construction industry employee headcount also continues to rise. Compared to other industries with a pervasive sense of labor shortages, the DI is second only to the DI for accommodations & food services (Fig. 10).

  • Fig. 9: Change in NSBPI by Construction Work Type vs. Previous Year Fig. 9: Change in NSBPI by Construction Work Type vs. Previous Year
    Compiled from Nikken Sekkei data.

  • Fig.10: Change in DI for Employment (Large Firms), by % point Fig.10: Change in DI for Employment (Large Firms), by % point
    Compiled from the Bank of Japan's "National Survey of Enterprises and Short-Term Economic Outlook."

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

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

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

*4: 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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