Engineering and construction costs continued their upward trend in May, with material prices remaining elevated despite some minor easing, according to the latest Engineering and Construction Cost Indicator released by PEG and S&P Global Market Intelligence.

The overall headline Engineering and Construction Cost Indicator—a key metric that tracks inflation in wages and materials for the engineering, procurement, and construction (EPC) sector—saw a slight dip to 71.9 in May, down from April’s reading but still signaling persistent cost pressures. The materials and equipment sub-index dropped 3.7 points to 72.0, while subcontractor labor costs fell more significantly to 71.4 from 82.4 the previous month.

Materials and equipment costs eased somewhat following a sharp surge in April, with seven out of twelve major components showing declines. The most notable drops were recorded in shell and tube heat exchangers and gas and steam turbines, each down by 25.7 points to 64.3. Other categories experiencing decreases include pumps and compressors, transformers, electrical equipment, fabricated structural steel, and ready-mix concrete—though all remain in elevated ranges, signaling ongoing supply tightness.

Conversely, carbon steel pipe, alloy steel pipe, and copper-based wire and cable prices edged higher, increasing between 5.6 and 10.7 points. Additionally, ocean freight rates from Asia and Europe to the U.S. saw moderate rises of 12.5 and 10.4 points respectively, though these remain the only categories still in contraction territory with readings below 50.

Economist Keyla Goodno of S&P Global Market Intelligence explained the ocean freight trends:
“We can expect containerized freight rates—especially from mainland China—to lift in the second half of the year, coinciding with the Q3 peak season and frontloading shipments before July and August deadlines while tariff rates are lower. However, freight rates are unlikely to surpass summer 2024 levels as rates have begun rising from a lower point compared to last year's second quarter. Consequently, port congestion and temporary capacity constraints will primarily drive rising rates in the interim, however, long-term growth is limited by weak underlying demand, leading to excess ocean capacity that will help stabilize prices.”

The subcontractor labor cost index saw a sharper decline in May, dropping from 82.4 to 71.4. The declines were concentrated in the U.S. South and Eastern and Western Canada regions, where all labor categories experienced falls. Canadian labor costs decreased modestly by roughly 10 points, whereas the U.S. South saw steeper declines between 20 and 25 points. Other U.S. regions showed no significant changes in subcontractor labor costs this month.

Looking ahead, the six-month outlook for construction costs rose notably to 85.5, reflecting increased expectations of rising expenses. Materials and equipment expectations jumped to 83.0, up 6.1 points, with ocean freight from Asia and Europe to the U.S. leading gains with 25.0 and 22.9-point increases respectively. Electrical equipment costs also surged by 14.4 points. Ready-mix concrete was the only major component to decline substantially in expectations, falling 14.6 points. Despite this, all but one category remain elevated, with readings at or above 75.

Subcontractor labor cost expectations climbed sharply by 23.6 points to 91.3—the second-highest reading in over two years—indicating anticipated tightness in labor markets. Most labor categories across regions forecast increased costs, except civil and instrumentation and electrical contractors in Eastern Canada, which saw modest decreases.

Market participants also reported ongoing shortages of skilled trades such as welders and electricians, as well as supply challenges for electrical equipment components like switchgear and circuit breakers. Demand for shipping containers remains high amid persistent port congestion. Some project delays and pauses have been attributed to concerns over tariffs, which continue to weigh heavily on market sentiment.

Overall, the data underscore the ongoing challenges the engineering and construction sectors face amid volatile material markets and labor constraints, with cost pressures expected to persist in the near term as supply chain dynamics remain complex.

Originally reported by SP Global.