Labor Costs Push Construction Expenses Higher as Key Material Prices Stabilize

Gurugram, 14 November 2024 — The average cost of construction has surged up to 11% over the past year across India’s real estate sectors, mainly driven by rising labor expenses and a moderate increase in the cost of essential materials like sand, bricks, glass, and wood. Despite some stability in the prices of key materials such as steel and aluminum, labor costs have spiked by approximately 25% year-on-year in the private sector, intensifying financial pressures on developers.

Labor Costs Outweigh Material Costs in Construction Budgets

In the past 12 months, key construction materials have seen modest price movements, with cement prices notably declining by 15% and steel prices dropping slightly by 1%. However, labor costs have escalated sharply, making up over one-fourth of the overall construction budget. This surge reflects the rising demand for skilled labor, along with costs associated with training, safety, and regulatory compliance.

Badal Yagnik, CEO of Colliers India, noted, “Labor costs are driving up construction expenses significantly. With a 25% rise in labor costs, project budgets are increasingly stretched, which in turn impacts operational costs. Skilled labor demand and compliance costs are adding to this financial strain.”

Source: Colliers India

Residential Sector Faces the Highest Construction Cost Increase

The residential sector has experienced the most significant cost increases, with a year-on-year rise of around 11% as of October 2024. The growing demand for gated communities and quality infrastructure has driven residential developers to improve their offerings, which has contributed to higher construction expenses.

Source: Colliers India

Market Resilience Despite Rising Costs

Despite escalating costs, both the commercial and industrial real estate markets have witnessed robust supply additions in 2024. The office market, for example, recorded 37 million square feet of new completions in the first nine months of 2024, while the industrial and warehousing sectors saw 22 million square feet of fresh supply. Developers are increasingly adopting technology and sustainability practices across asset classes to meet the ongoing demand for Grade A developments.

Vimal Nadar, Senior Director and Head of Research at Colliers India, observed, “The commercial and industrial sectors continue to see strong new supply, and project schedules remain largely on track. Developers are advancing technology and sustainability measures to offset rising costs and enhance operational efficiency.”

Developers Turn to Cost Optimization and Local Sourcing

To address construction cost pressures, developers are revising budgets, improving supply chain management, and sourcing materials locally. Investments in automation and workforce training are also helping developers tackle skilled labor shortages, potentially easing project scheduling challenges.

In the long term, developers are expected to focus on circular economy principles, which promote resource efficiency and cost savings. By incorporating sustainable practices, developers can not only reduce costs but also enhance construction efficiency, fostering a more resilient and eco-friendly real estate landscape.