In recent years, rising inflation has cast a long shadow over the construction industry, particularly in the realm of highway construction projects. The cost of such projects has witnessed a significant surge, with the first quarter of 2023 seeing an astonishing 53.8% increase compared to the fourth quarter of 2020, according to data from the Federal Highway Administration (FHWA).
For the past two decades, the FHWA has diligently maintained the National Highway Construction Cost Index (NHCCI). This index relies on data gleaned from successful bids on state highway building projects, providing a unique perspective from the viewpoint of buyers, such as state authorities. It delves into various factors, including material costs like steel and asphalt, labor expenses, profit margins, and overhead.
Transport Topics states that this relentless climb in construction costs has had profound implications for government investments in new roads, highways, and bridges, especially considering the substantial influx of federal funds from the bipartisan infrastructure law of 2021. The law allocates a staggering $350 billion from fiscal years 2022 through 2026 to states and municipalities for highway and bridge construction projects. However, the relentless inflation wave threatens to dampen the impact of these funds.
"The NHCCI reached a new all-time high in the first quarter of 2023, increasing by 2.7% from the previous quarter. This soaring trend has been on a consistent upward trajectory over the last ten quarters, culminating in an eye-popping 53.8% growth in highway construction costs during this period."
Bureau of Transportation Statistics in its NHCCI 2023 Year in Review Report
A Deeper Dive into the Numbers
Breaking down the numbers, we find that construction component costs for materials like concrete, grading/excavation, and asphalt have been the primary drivers behind this year's steep price hikes. Interestingly, the inflationary pressures on construction material prices may not be the sole culprits; other factors like labor, transportation, and price markup could also be contributing to the surge.
When analyzing asphalt costs, for instance, it's essential to consider the influence of labor, transportation, and price markup on the overall cost increase, rather than attributing it solely to the material's price fluctuation. This nuanced view suggests that the elevated inflation levels observed in 2021 and 2022 may have been fueled by supply chain disruptions and fluctuating oil prices, as highlighted by an FHWA economist.
The broader construction landscape has not been immune to the inflationary woes. The U.S. Census Bureau's data, released on November 1st, painted a vivid picture of the situation. Non-residential public construction of highways and streets surged to $98 billion in spending through September, a notable 15.5% increase compared to the same period last year. This reflects the growing challenges that the construction industry faces in navigating the inflationary storm.
In June 2022, rising material costs had already begun to impact infrastructure projects across the United States, forcing officials to reassess their plans. The U.S. Department of Labor reported a staggering 8.6% year-over-year surge in consumer prices in May 2022, the highest rate since 1981. This inflationary surge was driven by a range of factors, including:
- worldwide supply chain backlogs
- robust consumer and business spending
- geopolitical events like Russia's invasion of Ukraine
The construction industry felt the pinch too, with the price of essential construction materials soaring. For example, the cost of a foot of water pipe in Tucson, Arizona, surged by 19%. In a small Massachusetts town, the price of a ton of asphalt jumped by 37%. Even estimates for projects like a new airport terminal in Des Moines, Iowa, witnessed a whopping 69% increase, along with several years of delays.
Looking Ahead
The Infrastructure Investment and Jobs Act, passed in November 2021, injected $1.2 trillion into rebuilding the nation's aging infrastructure, including roads and bridges. However, the impact of this funding has been curtailed by the relentless rise in material costs. State officials have been faced with projects that now demand significantly more financial resources than initially estimated.
In some instances, low bids have come in far above engineers' estimates, leading to project delays and reevaluations. For example, in Casper, Wyoming, the low bid for a major intersection and a new bridge project came in at $35 million in the spring but exceeded a state engineer's estimate by a staggering 55%, prompting officials to rethink their approach.
Despite these challenges, the bipartisan infrastructure law aims to position the United States for long-term success by strengthening supply chains and lowering costs through its "Made in America" requirements for construction materials like steel and iron. These provisions are intended to create a more resilient infrastructure sector, safeguarding against future disruptions.
As we move forward, it's evident that managing inflation in the construction industry will remain a critical consideration. Highway construction projects, in particular, will need to adapt to this evolving landscape, balancing the need for critical infrastructure upgrades with the challenges posed by rising costs. In the face of these challenges, careful planning, innovative solutions, and efficient project management will be paramount to ensure the continued development and improvement of our nation's highways.
In conclusion, the impact of inflation on highway construction projects cannot be understated. As construction professionals grapple with rising costs, finding ways to optimize budgets, streamline operations, and source materials efficiently will be essential to successfully navigate this turbulent era in the construction industry.
LOOKING FOR HIGHWAY PROJECTS IN THE CHICAGO AREA?
