January 23, 2024

Analyzing a Decade of Construction

Trends in Building Materials and Labor Costs

Andrea M. Smiley, MPA

Abstract / Executive Summary  

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As the cost of housing continues to make headlines and impact the everyday lives of Washington families, understanding what is driving cost increases is crucial. This report delves into the intricate relationship between building materials and labor costs in the construction industry.

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Highlights
  • All phases of construction have experienced tremendous increases in material and labor costs.
  • It's become more evident that new construction costs are increasing more rapidly as more onerous energy code provisions are adopted.
  • The cost of labor has exploded in recent years. This could be occurring due to the aging workforce and shortage of skilled workers which trigger higher wages for those with these needed skills. Also important, but hardly given attention, is the impact payroll taxes and mandatory state benefits have on the cost of labor.

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Background

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Zoning regulations have played a huge part in making housing types of all kind unaffordable for Washingtonians. However, zoning alone will not solve the affordability issue. In recognizing this, elected leaders and policy staff from both sides of the aisle have requested the information on material and labor costs to help inform their future policy decisions.

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This report, along with other reports published by BIAW, lends insight into why construction costs are skyrocketing. While home builders can sometimes mitigate these costs through proactive planning, many of these costs are largely out of the industry's control. One such example is the cost of lumber, in which national trade relations and state laws can impact the cost that is passed down to the home builder -- and ultimately, the home buyer.

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Methodology

To complete this report, we relied upon data published by RSMeans, the industry standard for construction cost data on materials, equipment, and labor. The advantage to using RSmeans is its ease of pulling localized data. For this report, we used the Seattle metro area data, as this is the most populated area of the states. We intend to release more localized data in the near future for the following areas: Everett, Olympia, Richland, Spokane, Tacoma, Vancouver, Wenatchee, and Yakima.

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Our baseline home design remained unchanged until 2021, primarily due to the Washington State Residential Energy Code's incentive to use heat pumps to earn code compliance. For a list of all the inputs for 2014-2020 and 2021-2023, please view Appendix A.

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Results

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All phases of construction experienced increases of at least 16% over the last decade.

The most substantial increase observed was for site work, increasing at a rate of 107%, of which we predominantly attribute to the shortage of skilled labor. The second-highest escalation was recorded at 80% for exterior walls, driven largely by energy code's "envelope" (insulation and windows) minimum requirements. Following closely, framing saw a 66% increase while electrical costs surged 65%, both influenced by the labor shortage. It's entirely possible some of the cost increases for electrical are due to electrical code requirements and the stronghold organized labor has on this segment of the industry.

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Not far behind framing and electrical is plumbing, seeing a cost increase of 56%. It does not appear material costs increased but nominally so we attribute this increase to the shortage of skilled workers.

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The mechanical segment of the industry exhibited cost increases of 45%. This segment of the industry also experienced modest gains in labor costs, but it should be noted the increase is largely due to the added costs associated with heat pump systems that are heavily incentivized in the energy code, already described above.

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While it's typical to refer to plumbing, mechanical, and electrical as major system rough-ins, this report opted to break these phases out for educative purposes.

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Note: In the miscellaneous category, we included items such as appliances and air conditioning units until the year 2021, as this is a commonly included element of new construction. As such, our findings indicate a 16% increase in costs. However, once adjusting for the change in baseline home plans, a 50% increase is revealed. Appliances have slowly increased in cost in the last decade but similar to framing, the cost of constructing a one-car garage has increased substantially.

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Foundations experienced a 42% uptick due to increased costs in both materials and labor associated with this phase of construction. Concrete is typically used in foundations, and aside from experiencing material increases, labor remains the culprit. Largely due to the shortage of skilled workers, the concrete labor disputes that made headlines in 2022-2023 could have played a role in these cost increases.

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Experiencing an increase of 32%, the labor market for roofing has played a large part in increasing costs related to this phase of construction. Roofing holds one of the highest workers' compensation premium rates in the state, as it's one of the riskier segments of the industry for worker safety.

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Lastly, interior finishes saw a relatively modest increase of 16% in the last decade, primarily influenced by the increase in cost for flooring and drywall products. Again, the shortage of skilled labor also speaks to the increase of costs more broadly.

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Policy Recommendations

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As previously stated, some of the solutions to the cost increases cannot be executed on the state or local level. However, there are a few instances of where our state and local policymakers can make a difference. These include:

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  • Make reasonable reforms to the Washington State Apprenticeship and Training Council to allow for more apprenticeship opportunities to be offered statewide.
  • Modernize the Washington State Residential Energy Code to focus attention on meeting energy-use reduction goals while preserving affordability. The simplest fix would be to mandate the Washington State Building Code Council adopts the model International Residential Energy Code, moving away from a completely custom code. As an added benefit, if the model energy code from the International Code Council were adopted, obtaining tax credits under the Inflation Reduction Act would be easier and less expensive for home builders and buyers alike.
  • Provide funding for a Small Business Outreach Grant from Labor and Industries. Such a grant could be used to conduct outreach activities to educate employers of the benefits of enrolling in a retrospective rating program through a recognized entity. Programs such as these help reduce worker fatalities and injuries and lower workers compensation premiums paid by workers and their employers.

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Conclusion

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As this study illustrates, the rising cost of building new housing units isn't just because of antiquated zoning regulations; it's influenced by increases in building materials and qualified labor. It's time to have uncomfortable conversations regarding the unintended consequences of well-intentioned regulations imposed on the homebuilding industry. Less attention has been paid to regulations such as payroll taxes and mandatory state benefits (paid in whole or in part by employers) that contribute to the complex landscape of housing affordability in the state. Understanding these regulations snowball into exorbitant costs is paramount for policymakers and stakeholders seeking effective solutions to address the challenges faced by Washington families in attaining homeownership.

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Disclaimer

The content in this report is intended for informational purposes only. The information contained in this report may not constitute the most up-to-date economic, housing, or other information, nor does it represent a complete assessment of the housing market. This report does not constitute any recommendation or solicitation to any person to enter into any transaction or to adopt any investment strategy. Any business or investment decisions should not be based purely on the information presented in this report. Readers are encouraged to seek independent professional investment, legal, and/or tax advice. All liability with respect to actions taken or not taken based on the contents of this report are hereby expressly disclaimed. The content is provided "as is;" no representations are made that the content is error-free.