Inflation poses biggest threat to IIJA rollout: U.S. DOT official

Six months into the roll out of the Infrastructure Investment and Jobs Act, inflation, coupled with chronically high cost of building U.S. transportation projects, is proving to be the biggest challenge.

And the longer it takes to spend the money, the more cost pressures threaten to swallow the once-in-a-generation level of funding.

“Externally our biggest headwind is the current economic environment,” said Katie Thomson, director of the Bipartisan Infrastructure Law Implementation at the U.S. Department of Transportation, speaking Wednesday during a webinar on the six-month anniversary of the IIJA hosted by the Eno Center on Transportation.

“Some of it is unique to the current economic environment and some of it is a trend of escalating construction costs that we’ve been seeing in the transportation sector for quite a while,” Thomson said. “Whether it’s acute or chronic, we need to address it.”

The $1.2 trillion IIJA, signed into law by President Joe Biden in November 2021, is being implemented just as inflation has hit a 40-year high. Six months in, the feds have sent out $110 billion, most of that in the form of annual formula funds sent to the states. By the end of the year, the government hopes to finalize rules and post notice of funding opportunities for the act’s hundreds of new programs, with awards given out for many of them, Thomson said.

So far, states are reporting to the administration that material costs and workforce shortages are proving to be major challenges, she said.

The strains are showing on the bid side, Thomson said, with many sponsors only seeing one or two bids for their projects.

“Many [project sponsors] may be getting only one, two or three bids, that are all coming in high,” she said. Sponsors are “not seeing the kind of robust competition among contractors and are having to go out with projects at much higher costs than anticipated.”

The DOT is trying to speed up its process of awarding grants “so the time value of money” is preserved, she said.

Construction material costs, which often rise faster than the consumer price index, have surged over the last year while a shortage of skilled construction workers has plagued the industry.

The 2021 fourth quarter annualized rate of highway component costs was up 14.2% compared to the third quarter, said Jeff Davis, a senior fellow with Eno, during a separate IIJA webinar on June 16 hosted by the American Enterprise Institute. Highway component costs were up 7.3% in calendar year 2021 over 2020, he said.  

While the IIJA features appropriations through 2026, much of the money won’t actually be spent for the next decade or even longer, Davis said.

“The longer the money takes to spend, the more inflation is going to eat away at it,” Davis said.

A 7.3% annual increase in highway construction costs through 2027, which will be the peak year of IIJA spending, would eat up the entire increase in highway spending in the act, Davis warned.  

It’s happened before, he said.

In the 1970s, highway capital spending by all levels of government was outpaced by highway construction cost price inflation.

 “The entire 1970s was a lost decade,” he said.

And in 2005, additional highway funding in the surface transportation SAFETEA-LU Act was largely eaten up by inflation costs due in part to rising steel costs, Davis said.

On the positive side, the IIJA puts lots of money in other areas besides highways, like railroads and electric vehicles, and inflation won’t have the same impact on all sectors, he said.

Despite a slow start due to Congressional delays on the new budget, the pace of the rollout has since quickened, Thomson said.

The one-year anniversary should offer an overview of the pipeline of deals across the country and insight into what the administration is looking for in a project, she said.

“That will send an important signal about the types of projects that we think merit investment, but also give us at the DOT and the public a sense of how do all these pieces come together, at the project level and cumulatively. Are we advancing our collective interests in the safety and efficiency of the transportation network?”