Turner Construction Cost Index down for the Year – But Does it Show the Whole Story?

The Turner Construction Cost Index was released today for the fourth quarter of 2009.  And to nobody’s surprise construction costs are down again.  However, they are only down 2.07% this quarter versus 5.77% in the first quarter of 2009.  This caps a horrifically dismal year and brings the total of construction cost decline to 12.62%. 

Karl F. Almstead, the Turner vice president responsible for the Turner Building Cost Index said, “The decrease in construction costs is reflective of decreased private sector development and investment.  Commodity prices have slightly increased due to global demand, but have not resulted in upward pressure on construction pricing.”  

So if commodities (materials) have gone up in price, but overall construction costs have dramatically reduced, it doesn’t take Albert Einstein (thank God) to figure out that the labor costs have been significantly reduced.  This could be done by reducing pay to workers or of course working less people more efficiently.  It’s probably a combination of the two, but either way, it’s pretty bad if you’re working in the construction industry.  However, I presume that employment is better than none at all. 

However, I still remain a little suspicious of the number, and it’s mainly because of some of the bidding I have been involved in lately and some conversations I have had with other construction folk in the area.  I think construction costs are actually down much more than 12%.  I was talking with a preconstruction manager at a holiday party last week and he said that they are building retail space at the same square foot cost they were building for this same client in 1995.  Now, the Turner Construction Cost Index in 1995 was at 492, 40% lower than the current level of 832, and 45% off its average high from 2008 (I did have to consult with Einstein on that one). 

I find it very hard to believe that construction costs have dropped 45%.  But, in certain parts of the country where real estate may be less of a premium, like where my colleague was from, this could be the case.  Also,  retail may command a lower price in a down economy because people just simply aren’t buying as much stuff  (no Einstein comment please). 

Plus, who the hell really knows where Turner gets these numbers anyway.  Their explanation for how the index is derived is as follows: 

Turner’s Building Cost Index is determined by the following factors considered on a nationwide basis: labor rates and productivity, material prices and the competitive condition of the marketplace.   

I would think that it is in their best interest to make the numbers look lower to attract people who are thinking of building something.  Or perhaps it is in their best interest to inflate the numbers so when they give a client a number it is lower than what they were expecting. 

Regardless of the conspiracy theory you choose to apply here, we can all agree that construction costs are damn near as low as they can go.  If I had two cents to rub together, I’d be building something at these rock bottom prices.  Of course I wouldn’t be building a whole lot with only two cents, so I would have to apply for a loan from a bank.  And therein lies the problem.   

Tags: Construction blog, Construction Costs, Construction Economics, John Poole, Turner Cost Index