Cost Management Report

「Competitive conditions persist Rising materials prices to push up construction costs」

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The “Cost Management Report” (quarterly) provides an overview of domestic and international economic conditions and, drawing on a wealth of cost data derived from our track record as the leading architectural firm in market share, delivers timely, independent analyses of the construction market from a neutral perspective.

*This report has been prepared by the Cost Management Group of the Engineering Dept. of Nikken Sekkei Ltd for information purposes. The information in this report is current as of the date of publication. Its completeness is not guaranteed, however. The contents are subject to change without notice. Unauthorized reproduction of this report is prohibited.

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Orders received, work on hand steady

In the first half of FY2021, orders received by major construction companies* were at the same level as in FY2019, while the amount of construction work on hand remained at a high level, suggesting that the volume of construction work remained firm (Fig. 1).
* Leading construction companies: Obayashi Corporation, Kajima Corporation, Shimizu Corporation, and Taisei Corporation. Takenaka Corporation is not included due to non-disclosure of quarterly financial results.

Difficult competitive environment continues

On the other hand, the competitive environment for orders continues to be difficult. Profit margins at major construction companies on completed projects have been declining since FY2017. In addition, provisions for losses on construction contracts (the estimated amount of losses on construction contracts already awarded) has risen, indicating that the environment for orders already received has been highly competitive (Fig. 2). This is evident from firms’ financial data, which illustrates expectations that the future competitive environment for orders will remain severe.

Fig. 1: Trends in orders received and work-on-hand at 4 major construction firms
Source: Compiled from the financial data of each firm.
The count for construction projects on hand in FY21 is as of September.
Fig. 2: Trends in profit margins & provisions for losses on construction contracts at 4 major construction firms
Source: Compiled from the financial data of each firm. The count for construction projects on hand in FY21 is as of Sept.
Figures for profit margin on completed construction & allowance for loss on construction = 4-company avg.

The increase in large construction projects is a competitive factor

While the volume of construction work has been strong, one of the reasons for the continued fierce competition is the increasing scale of construction work. The availability of orders for large-scale construction projects with construction costs exceeding several tens of billions of yen has a significant impact on order plans, so companies are highly motivated to secure orders, resulting in likely fierce competition. In fact, the supply of office space property of at least 100,000 square meters in Tokyo's 23 wards (at time of completion) has been rising overall for the last decade, most prominently in the year 2020 and is forecast to continue. (Fig. 3).

Materials prices are increasing

Despite the fiercely competitive environment, contractors are finding it increasingly difficult to mitigate the upward pressure on construction costs due to rising material prices. In addition to the manufacturers mentioned in the previous issue, LIXIL has announced price increases starting in April 2022, and the trend of rising material prices is expanding. Looking at the price index that surveys the price trends of construction materials, the index in November 2021 was up 17% compared to January 2021, a sharp rise in less than a year (Figure 4).
Given the low likelihood of material prices returning to their original levels, it will be difficult for contractors to absorb the increased costs while accepting a decline in profitability at the time of contract signing, and therefore, construction prices are expected to rise.

Fig. 3: Supply of office space of 100,000 sq.m. or more per unit in Tokyo's 23 wards / 3-year historical moving average
Source: Mori Building survey of large-scale office building market trends in Tokyo's 23 wards.
Fig. 4: Price index of construction materials
Source: Bank of Japan: Corporate Goods Price Index by Demand Level and Use.

NSBPI Rises Slightly in All Three Districts

Nikken Sekkei Standard Building Price Index NSBPI

The overall indexes for the Tokyo metropolitan area, the Kansai region and the Tokai region all rose from the previous quarter. Prices for materials, such as steel and electrolytic copper, continue to rise, despite the fiercely competitive environment for receiving orders.
In both the construction and facility sectors, builders are increasingly unable to absorb the increase in materials prices. This is reflected in the quotations they submit.

Fig. 5: Change in NSBPI
Fig. 6: Percent Change in NSBPI & Building Work, MEP Work Contributions

Steel prices continue to rise

Steel price increases have been widespread, with prices in all regions 7-9% higher than in the previous issue of this publication (September 2021) (Fig. 7). Although the price of iron ore, on which China relied for imports, has fallen as a result of China's crude steel production cuts, prices for other raw materials such as coking coal have continued to rise.
Steel prices are therefore expected to remain high.

Labor shortage persists

Although the range of increase and decrease has widened since the beginning of 2021, the shortage rate of workers since April 2008 has remained low (Fig. 9). On the other hand, the number of workers in the construction industry is decreasing and the workforce is aging. Thus the unit price of labor merits continuing attention.

Fig.7: Change in steel prices (ordinary steel)
Source: Economic Research Institute “Construction Materials Price Index.”
Fig. 8: Trends in timber prices
Source: Economic Research Council cost estimation data
Fig.9: Trends in the Oversupply/Shortage Skilled Construction Worker Ratio
Source: Ministry of Land, Infrastructure, Transport and Tourism, "Survey of Construction Labor Supply and Demand” (total of 8 occupational categories, nationwide, seasonally adjusted).