Increase in construction expenses observed during the past year in Latvia
Rising Construction Costs in Latvia: A Deep Dive
Latvia's construction sector is grappling with escalating costs, as revealed by recent data. Here's a breakdown of the key factors contributing to this trend.
Labour Costs on the Rise
The financial health of subcontractors has been under strain due to rising interest rates and payment delays, leading to a tightening of financial conditions. This, in turn, has caused net margins to plummet, with electrical contractors experiencing a 50% drop. The resulting distress and defaults among subcontractors could push labour costs upward, as firms scramble to retain workers in the face of shortages and grapple with higher costs of credit and delayed payments.
Maintenance and Insurance Costs Soaring
Although direct references to maintenance costs in Latvia’s construction sector are limited, increased builder’s risk claims—especially fire-related losses accounting for 50-70% of claims—indicate a rise in risk and potentially higher insurance and maintenance-associated expenses. These risk exposures necessitate more spending on prevention, safety systems, and repairs, indirectly increasing overall construction and operational costs.
Building Material Prices Skyrocket
The European building materials market, including Latvia, has been hit by inflationary pressures due to supply chain disruptions caused by geopolitical tensions and raw material cost surges. Steel and cement prices have risen by about 20% since 2021, while Eurozone inflation reached 8.5% in early 2023. Sustainability regulations such as the EU Carbon Border Adjustment Mechanism also impose further cost premiums on materials, particularly for non-EU suppliers. These factors have combined to drive up the prices of building materials, directly impacting construction budgets in Latvia.
Overview of Cost Changes
- Construction costs rose by 0.3% in December 2024 compared to November 2024.
- Prices of building materials in 2024 as a whole reduced by 0.4%.
- Compared to a previous time (not specified), labor remuneration of workers increased by 5.9%.
- In the 4th quarter of 2024, compared to the 4th quarter of 2023, the level of construction costs rose by 2.0%.
- Maintenance and operational costs of machinery and equipment in 2024 as a whole rose by 3.0%.
- It is not specified how the costs and prices compared in December 2024 to their levels in the previous time.
- Prices of building materials remained the same in December 2024 compared to November 2024.
- It is not specified what the costs and prices were in November 2024.
- Labour remuneration of workers in 2024 as a whole rose by 6.2%.
- In the 4th quarter of 2024, compared to the 3rd quarter of 2024, the level of construction costs rose by 0.2%.
- In December 2024, labor remuneration of workers increased by 0.9% compared to November 2024.
- Labour remuneration of workers in 2024 was higher than in a previous time (not specified).
- Prices of building materials in 2024 were lower than in a previous time (not specified).
- It is not specified what time period the 5.9%, 2.7%, and -0.4% changes in labor remuneration, maintenance costs, and building material prices respectively refer to.
- In 2024 as a whole, the 12-month average level of construction costs in Latvia increased by 2.1%.
- The 12-month average level of construction costs in 2024 was higher than the 12-month average level of 2023.
- Maintenance and operational costs of machinery and equipment in 2024 were higher than in a previous time (not specified).
These factors have created financial strain for construction firms, potentially leading to project delays, cancellations, and increased construction budgets overall. The situation underscores the need for careful budgeting and strategic planning in the construction sector to navigate these challenging economic conditions.
The Manufacturing industry in Latvia might experience challenges due to the financial strain on construction firms, as escalating construction costs could impact the supply of materials.
The rising labor, maintenance, and insurance costs in the construction sector, as well as increasing prices for building materials, could lead to financial implications for the Finance sector, as construction firms might seek additional funding to manage their projects.
