Why do construction input costs change?

This research looks at past changes in construction wages and prices for five key infrastructure construction materials, shining a light on why projects often cost more than expected. It analyses several decades of price data for construction inputs to understand how they are affected by both global and local factors. Understanding what drives infrastructure costs allows us to better plan and mitigate risks and get more infrastructure for the money we spend.

Key findings

• New Zealand economy-wide factors are important for understanding labour cost fluctuations but not material costs. Wages in construction track wages elsewhere in the economy. For material prices, we find little evidence that increased investment or strong economic conditions in New Zealand drive higher prices.
• Global factors play a significant role in material price fluctuations but not labour costs. Key material prices are correlated across countries, particularly for tradeable materials. Global commodity prices are highly predictive of our material prices, especially for structural steel, timber, and diesel fuel. Conversely, construction wages in New Zealand do not appear to be affected by Australian construction or economy-wide wages.
• Prices for both materials and labour adjust quickly. When construction wage growth is faster or slower than economy-wide wage growth, the gap is closed within a couple of years, rather than decades. For materials, changes in global prices are reflected in New Zealand prices almost instantly.
• Industry-specific factors play a modest role for labour costs and a possible role in material prices. An especially tight labour market for construction workers may drive modestly higher construction wages temporarily, but not in the long run, as higher wages draw in more workers. For materials, local or industry-specific costs like transport costs or regional demand could put pressure on prices.