“Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair.” ~Sam Ewing~
The fight against inflation is an ongoing budgeting battle, while there have been short periods of time when inflation stalls are even declines it has for the most part risen steadily in the United States for well over 100 years. There are numerous indices that track construction inflation in the United States and none, that we have found, indicate a prolonged period of flat or declines in the overall inflation rate. With respect to reserve studies, we want to track what is most reliable to the end consumer; the organization paying for the completed project.
There are many indices tracking inflation rates for all types of commodities, industries, services, etc. however there are relatively few that track the inflation rate in the construction industry – specifically cost to the end consumer and even fewer that specifically track output costs (i.e., the selling costs to the end consumer, after the Vendor profit and overhead has been considered). Below are some of the more commonly referred to inflation indices that are used by Reserve Study Companies:
Consumer Price Index (CPI) - tracks a basket of goods and services for Urban consumers in the United States related to food transportation, medical care, apparel, recreation and some housing rents. Note that there is nothing listed for residential construction costs or non-residential construction (e.g., condominium, co-ops, HOA community common areas, worship facilities, commercial) and is not a good indicator of inflationary factors in the construction industry. It is, unfortunately, used very frequently for this purpose as most people assume that construction is one of the baskets of goods & services covered.
Link to CPI: https://www.bls.gov/cpi/
Link: List of Basket of Goods and Services in the CPI: https://www.bls.gov/news.release/cpi.t02.htm#cpipress2.f.8
Producer Price Index (PPI) – tracks the material costs for Producers (vendors) at the wholesale level in the United States. This index is closer to the overall non-residential side of things but is missing consideration for labor costs, overhead, profit, etc., for the Vendor. If you are a Construction Company trying to make projections this could be an appropriate index to follow but in the reserve study, we need information for the end consumer which does consider the full picture; this index is simply missing most of them. Link: https://www.bls.gov/ppi/
So What Inflation Indices Should Be Utilized For Reserve Budgeting?
I would argue that the above indices are better than nothing as they do consider different aspects of the overall economy but neither cover actual construction output (i.e. cost to the end consumer) inflation estimates. They are missing some of the most important and expensive aspects of the construction process. For example, when construction is booming in areas of the United States, labor costs go up rapidly as Vendors try to retain their workers and overhead & profit margins increase due to increased demand from the end consumer.
Example: if a roof vendor has numerous condominium communities in need of roof replacements all at once the vendor will typically raise their fee; simple supply and demand principles.
Below are some more appropriate indices for tracking inflation related to the end consumer in non-residential construction:
Mortenson Cost Index – is a selling index (final cost) that tracks the cost of non-residential building prices in 6 cities and has a national average. Link to Mortenson Construction Cost Index By City: Mortenson Cost Index
Turner Actual Cost Index - nonresidential buildings only, final cost of building: Turner Cost Index Link
Rider Levett Bucknall Actual Cost Index - nonresidential buildings only, final cost of building, selling price. Seattle, Portland, Honolulu, Rider Levett Bucknall Actual Cost Index Link: Quarterly Construction Costs Report
RS Means Index and ENR Building Cost Index (BCI) are examples of input indices. They do not measure the output price of the final cost of buildings; they measure the input prices paid by subcontractors and include consideration for labor costs. These indices do not represent final cost so won’t be as accurate as selling price indices (e.g., above Mortenson Index / Turner Actual Cost Index / Rider Levett Buchnall Index).
RS Means City Index: https://www.rsmeans.com/rsmeans-city-cost-index.aspx
Engineer News Review CCI Index: https://www.enr.com/economics/historical_indices
AGC - The Construction Association Inflation Alert: https://www.agc.org/learn/construction-data/agc-construction-inflation-alert
State of Hawaii Research & Economic Analysis: https://dbedt.hawaii.gov/economic/qser/construction/
San Francisco & Los Angeles - California Construction Cost Index CCCI: California Construction Cost Index CCCI