Global growth continues to be strong, creating a positive outlook for construction, but growing economic and geopolitical uncertainty are driving a demand for greater cost reduction and productivity. Arcadis’ Will Waller analyses the 2018 Arcadis annual survey of global construction costs

01 / Introduction

From forest fires to trade tariffs, presidential visits to spy scandals, 2018 has certainly been tumultuous. Nevertheless, sentiment is high and the global economy continues to grow – at a rate that is expected to be almost 4% this year and next.

Construction demand is typically closely related to broader economic performance. The global construction market is worth more than $8tn and the sector has been enjoying healthy annual average global growth rates in recent years, with a further 4% growth expected in 2019.

However, in a world where markets are intricately interconnected, economic and geopolitical events may be taking their toll, causing an increasingly uncertain outlook. In some economies, growth rates seem to have topped out and economic performance around the world is starting to look less synchronised. Even the celebrated and eminent One Belt, One Road development strategy curated by the Chinese government is showing signs of progressing slower than previously anticipated.  

Increasing oil and commodity prices, rising interest rates, trade tensions and currency pressures are all playing their part in unsteadying the ship a little, as well as contributing upwards pressure on construction costs, which could negatively affect the viability of projects and reduce demand for construction.

The overheating of markets has put industry performance under the spotlight for some time, but growing economic and geopolitical uncertainty is taking its place as a reason to further enhance focus on cost reduction and productivity boosting initiatives. 

Figure 1 - US$ change vs other currencies in year to August 2018

Figure 1: US$ change vs other currencies in year to August 2018

Source: Arcadis,

02 / Currency movements

After mixed performance in 2017, the past year has seen a relatively strong performance of the US dollar. The US dollar index against a basket of other major currencies has gained more than 5% since the beginning of 2018 and the dollar has appreciated more than 6% against the euro, its most often traded counterpart. Moreover, the fact that there is a “net long” position in the dollar at the moment indicates that markets think the currency is more likely to strengthen further than to weaken.

Deregulation, tax cuts, spending increases, interest rate rises and a wave of confidence have all contributed to improving economic growth in the US, contrasting with many other economies that are losing momentum. All this has made the US dollar a relatively more attractive home to place funds, increasing its value.

US president Donald Trump’s “trade war” has also no doubt contributed to boosting the dollar. The Chinese yuan, for example, saw depreciation as fears over the potential negative economic impacts of aggressive trade tariffs from China’s biggest trade partner and world’s largest economy set in. China may also have taken steps to deliberately devalue the yuan to offset some of the impacts of the tariffs.

The Turkish lira has seen dramatic devaluation in the past year by almost 100%. A combination of worsening relations with and the ramping-up of metal tariffs by the US have been major contributors to depreciation of the lira.

Of the 28 currencies featured as part of our international construction cost index, only five strengthened against the dollar, including the Malaysian ringgit, Saudi riyal, South Korean won, Arab Emirates dirham and Qatari riyal. All except the ringgit are tied to the dollar and saw just minor movements. The Malaysian ringgit appreciated almost 5% in the year against the dollar. In truth, the ringgit has been depreciating against the dollar as an overall longer-term trend, but it is possible that the promise of political and economic reform, coupled with robust economic growth, has kept it relatively more buoyant than comparable Asian currencies, for now.

Sterling has remained weak following its depreciation in 2016 and 2017. Brexit-related uncertainty coupled with lacklustre economic growth has seen its value stabilise at about €1.11 and $1.28. This has continued to drive cost inflation in imports, with construction materials rising in cost by 5% to 6% in the year. On the flipside, there is evidence that a weaker pound has helped stimulate foreign investment, particularly from India and East Asia into property and built assets.

03 / Outlook in construction markets around the world

Average growth in the global construction market is expected to be 4% in 2019, though of course growth rates around the world are expected to vary. 

China, the largest construction market in the world, is expected to see 7% growth in output next year. Though high by global standards, this constitutes a slowdown on its performance in previous years. This is a result of pledges made following the National Congress of the Communist Party last October to focus on debt management, control of pollution and taming of property prices.  

India also stands out – the market there is expected to grow by more than 50% over the next 10 years. Rapid urbanisation, industrial development and infrastructure need are driving the growth. Government initiatives to boost foreign investment, reduce red tape and decrease transaction costs will also all support strong future growth.

More mature markets, including the US, Hong Kong, Singapore, Germany, France, the UK, South Korea and Canada will all see positive, but more muted, growth rates of between 2% and 4% in 2019. This is reflective of relatively stable economic growth, albeit it in the low percentages.  

The US construction market holds a lot of potential for greater levels of growth.  The US economy appears to be performing well and gathering momentum. If Trump’s previous promises on infrastructure spending come to fruition, the $1tn programme would add significant heat to the market. The key to making this happen will be in attracting private finance and funding to pay for and support the viability of projects.

Although past a peak, the Netherlands stands out as a mature construction market that is experiencing strong demand, with 5% growth expected in 2019. Robust economic performance and demand for housing are key factors behind this.  

The United Arab Emirates and Saudi Arabia are also expected to see healthy output growth levels next year of 5% to 6%. The Dubai government announced spending increases focused largely on infrastructure. The upcoming Expo 2020 in Dubai is also generating a lot of construction activity.  

In Saudi Arabia, rising oil prices are supporting expansionary government budgets with heavy investment in infrastructure and housing planned. The Saudi government also plans to invest an additional $22bn on a series of megaprojects including at the Red Sea, Qiddiya and Neom. These will be overseen by a public investment fund and should drive up construction activity within the kingdom and attract established international contractors to the market.  

Meanwhile, over in Qatar, preparations for the Fifa World Cup in 2022 are propelling growth.

Construction markets where growth is buoyant typically support rising construction prices. When demand is increasing, the supply chain can increase prices in accordance with rising input costs, overheads, risk appetite and targeted profit margins.  

The rate of construction market activity and tender price inflation are therefore key variables that affect international construction cost comparisons.

Figure 2 - Global construction markets size and growth outlook

Figure 2: Global construction markets size and growth outlook

Source: Arcadis, Euroconstruct, BMI

04 / International construction cost comparison index

Key factors

The reasons behind a city’s position in the index are complex. Some cities are simply much cheaper or more expensive than others, and relative labour and material costs will always be a big cost driver. Quality of product is also an important influence, and a city’s position in the index will also be strongly influenced by the levels of quality, complexity and functionality of buildings typical to that city. In cities where projects are generally of a higher quality and/or complexity and where specifications are expected to be more sophisticated, the costs of construction will typically be higher.

A city’s position in the index relative to other cities can also be influenced by the effectiveness of local industry – a consideration that is applicable when markets are broadly comparable, for example France versus the UK. 

How productive an industry is will determine what outcomes it can deliver for what value. Therefore cities with more effective industries when assessed against comparable peers may show relatively lower in the index.

Because the ranking is based on a common currency – the US dollar – the strength of the US dollar versus the currencies of the various cities is also a key influencer on where each city sits in the international cost comparison.

Industry performance has been under intense focus in many mature construction markets, as the cost of construction has escalated to a significant level. As a result, there is always a focus on cost reduction but more importantly also on increasing productivity. The advent of new technologies and digitalisation offers an unprecedented opportunity for a potential step-change in this area.

Index positions

San Francisco, New York and Hong Kong maintain their positions as the top three most costly cities to construct. 

Chicago, Macau, London, Geneva, Copenhagen, Tokyo and Stockholm maintain their positions in the same order and, along with new entrants including Dublin, Boston, Philadelphia, Washington DC and Toronto, form the next 12 most expensive cities in the world in which to build.

At the other end of the scale, the 10 lowest ranking cities in the index remain the same, except that Bangkok and Ho Chi Minh City have swapped places and Lisbon is a new entrant in this year’s index.

Across the index, there has not been significant shifts in city positions. The index has this year been characterised by relatively stable tender price inflation around the globe, at reasonably similar levels, coupled with the strengthening of the US dollar. 

A result of this is that any city that denominates with the US dollar has maintained a high position or moved up the ranking.

Figure 3 -International construction cost comparison

Figure 3: International construction cost comparison

  • The Arcadis international construction cost index is a relative comparison of construction cost in 55 cities.
  • The comparison is made on a US dollar basis.
  • It indicates the difference in what a client might expect to pay for construction of an equivalent building function.
  • The ranking is based on construction costs in 55 locations covering 13 building types. 
  • Costs are representative of the local specification used to meet market need and function. As a result, the differential represents differences in specification as well as the cost of labour and materials, rather than in building function.
  • Costs in local currencies have been converted into US dollars for the comparison, but no account has been taken of purchase power parity
  • Construction costs are current in Q3 2018
  • Exchange rates were current on 13 August 2018
  • Any overall construction cost index will always be based on averages and provide an indication of cost levels only. Exact location cost differences will inevitably vary depending on precise locations, projects, sectors and timings.  

05 / Global commodity prices

After three years of mixed performance, 2018 saw good rises in commodity prices in the first half of the year. The strength of the dollar has also made commodities relatively more expensive for buyers in other currencies. Most commodities are traded in dollars and so when a domestic currency is weaker than the dollar, it makes purchasing commodities denominated in that currency relatively costlier.

  • Oil: At $70 (roughly £55) per barrel in August, it increased by approximately 50% in the year.
  • Thermal coal: The price of thermal coal has increased by more than 30% in the year to about $105 (roughly £82) per tonne. As a key ingredient in the steel-making process, this can contribute to steel price inflation.
  • Iron ore: The price of iron ore has risen 7% in the year to about $70 (roughly £55) per tonne. As a key ingredient in the steel-making process, this can contribute to steel price inflation.
  • Copper: At about $6,000 (roughly£4,660) per tonne, copper prices have fallen by about 5% in the year to August.
  • Timber: Timber prices have broadly risen by around 4% in the year.

Figure 4: Inflationary versus deflationary influences on global commodity prices

Inflationary influences

  • Global economic growth is positive, which is driving demand for commodities
  • Strong growth in construction activity is driving demand for key commodities 
  • New technological trends, such as the growth in demand for electric vehicles, is driving demand in some commodities such as cobalt 
  • The global average consumer inflation rate is the highest it has been since 2013, with 3.5% inflation expected in 2018

Deflationary influences

  • The continued buoyant economic growth outlook is coming under increasing threat 
  • The introduction of trade barriers around the world threatens to add more friction to the trade process, which could hamper demand 
  • The JP Morgan and IHS Markit Global Manufacturing Purchasing Managers Index (PMI), indicates that manufacturing may be slowing down, which could adversely affect demand for commodities. The score was 52.7 in July, down from 53.0 the month before – continuing a downward trend

Figure 5 - World Bank commodity price indices

Figure 5: World Bank commodity price indices

Source: World Bank

06 / Cost growth expectations

Figure 6 - Tender price inflation expectations for 2019

Figure 6: Tender price inflation expectations for 2019

Source: Arcadis

These are approximate anticipated tender price growth %s in 55 cities and are purely indicative. They should not be relied upon in any way.

We expect to see construction tender prices to escalate in all 55 cities in 2019, reflecting the fact that, in general, demand for construction is growing everywhere and input costs are also rising. Buoyant construction demand usually allows the supply chain to pass on input cost pressures to clients in construction prices.

The expected rates of inflation in 2019 are, of course, variable – from just over 1% in Singapore and Brussels to 6%-7% in Wuhan, Jakarta and Abu Dhabi and 10% in Istanbul. The global average expectation is 3.8% and most city forecasts (33) are broadly within +/- 1% of this.

07 / Conclusion

Notwithstanding the introduction of additional uncertainty following the introduction of trade barriers this year, the global growth outlook continues to be a positive one. Though there may be some loss of momentum, expectations for growth in construction demand remain very positive.

In Asia: China, India, the Philippines, Indonesia, Malaysia and Vietnam are all expected to see robust growth in construction output – an average of 8% in 2019. Tender prices are expected to rise at an average of 4.5% across cities in these countries, largely driven by escalating demand for building resources.

Construction demand growth in the US is expected to be 3% in 2019 but could be significantly higher if Trump’s proposals for a $1tn infrastructure programme gather more momentum.

European markets are seeing a relatively synchronised growth, but Sweden, the Netherlands, Ireland and Poland all stand out, with an average of 7% growth expected in 2019. Tender prices are expected to grow in these countries by 5% on average in 2019. This reflects the increased demand enabling the supply chain to pass through input cost rises and expanded margins where possible.

In the Middle East, significant output growth, averaging at 11%, is expected in the United Arab Emirates and Qatar. Dubai’s preparation for the World Expo 2020 is driving investment in high-value commercial building and transport infrastructure projects. Qatar is seeing large investments in infrastructure to prepare for the Fifa World Cup, which should support activity through to 2022. Saudi Arabia is also seeing good growth in construction demand.

These particularly buoyant markets, coupled with respectable growth across all the markets featured in this article, sets the positive outlook. However, rising commodity prices, interest rates, trade tensions and currency pressures could all pose a threat to this trend if global economic momentum is lost as a result. The strength of the dollar, making foreign debt more expensive, is creating tighter liquidity conditions that could also start to bring instability in emerging markets and play a part in hampering growth.  

Construction cost differentials across Europe are very large, with an almost 70% difference between Lisbon and London, for example. Construction costs vary in Europe for several reasons. Specifications and methods used may be relatively simpler in some markets than others, making construction cheaper. More straightforward access to labour and materials locally may also make construction cheaper. For example, in some European markets, materials will generally be sourced much more locally, negating the cost impact that so often accompanies importing large proportions of materials.

Where markets are more comparable in terms of specification, methods, materials and labour – for example London compared with Stockholm – the effectiveness of local industry also plays a role. How productive an industry is will determine what outcomes it can deliver for what value. Therefore cities with more effective industries, when assessed against comparable peers, may be relatively cheaper.

Productivity in construction has barely increased in 10 years, a problem that is the same all around the world. For markets where construction is relatively cheap, this is less of a concern for clients. However, for expensive construction markets there is a need for a continued focus on productivity boosting initiatives. In many markets, it is unlikely that construction costs can be reduced, or projects made much more efficient without some fundamental shifts in the way things are done.  

Automation, digitalisation, offsite construction and robotics all have promise, carrying the potential to fundamentally change how projects are designed, planned, constructed and operated. As demand for construction continues to grow and costs continue to rise, both the challenge and opportunity for clients will be collaborating with the supply chain in a way that encourages and enables long-term investment in such innovations.

For such a highly cyclical industry, the risk is always that taking a long-term view like this is difficult in the good times, when the supply chain wants to make the most of the profit-harvesting opportunities in front of them. But equally in the bad times, when investment retrenches, organisations enter “survival mode”.  

The question that construction industries everywhere continue to grapple with is: how can the right balance be struck?