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It’s been a little more than two and a half years since the passage of the bipartisan Infrastructure Investment and Jobs Act (IIJA) provided a much-needed boost to the highway construction industry. At the same time, inflation has erased the impetus it intended to give.
In March, the Federal Highway Administration (FHWA) updated its quarterly index of highway construction costs. This showed that the National Road Cost Index (NHCCI) increased by 6% in the July-September 2023 quarter from the previous April-June 2023 quarter. This was the 11th consecutive quarter of cost increases. The July-September 2023 NHCCI reflects a 69% increase in highway construction costs from the October-December 2020 quarter.
*Click on the graphic for more details
The damage caused by inflation has been felt more severely in the highway construction industry than in the entire general economy. The steady increase over these 11 quarters can largely be explained by the combination of rising asphalt and oil prices. The two biggest factors driving the quarterly increases are the price of asphalt (heavily tied to the price of crude oil), followed by costs associated with grading and excavation (dependent on the price of diesel). If you convert each quarter to what FHWA was getting for its money between October and December 2020, contracts signed by FHWA have lost $47 billion in purchasing power since then. The IIJA has seen it lose almost a fifth of its funding power due to economic inflation. It’s still a landmark bill, but the industry isn’t getting the price we thought it would when it was passed.
What is the overall net impact of this loss of purchasing power? For agency owners who have been dealing with the impacts of inflation since the pandemic, the answer is pretty obvious. They estimate the work, get bids that validate the estimate, award the work, and by the time the work is done, inflation has made the original estimates vastly undervalued. This leads to multiple exchange orders, disputes and claims. All of this hurts budgets, schedules, and the overall health of an agency’s highway program and its relationships with its stakeholders.
Inflation and cost escalation are not new to our industry. History and the market dictate that prices will eventually level out and, in some cases, decline. But navigating this period can be stressful for all parties involved. Identifying and, more importantly, proactively addressing challenges is crucial to mitigating the impacts and stress of cost escalation on your projects.
