This article also appeared in the ASA’s Contractor’s Compass on November 1st, 2019.
The United States construction industry continues to demonstrate positive improvement and momentum into the third quarter of 2019. According to a recent national survey completed by Engineering News Record Magazine’s Top 400 Contractors, they, as a group, generated approximately a growth rate of 2.1% over the past year. The contractors interviewed believed that the 2019 trend should likely continue into 2020. Other national reports issued by Dodge Construction and FMI Corporation consulting firm suggest
s that construction starts will increase by 3% with additional room for expansion, if work is released more quickly and money is available to fund stalled projects.
While this is good news, construction company backlogs are generally substantial, and recent trends have indicated that the release of work into production is somewhat unpredictable and subject to delayed starts. This trend is likely to continue in 2020 due to a number of factors, including the regulatory agencies releasing work, as well as funding for larger construction projects that require federal, state, and local funding as well as private investment.
The construction market has benefited certain geographical regions from very large construction projects. The completed projects include new campus facilities for high-tech giants such as Google and Apple and continued warehousing and distribution centers worldwide for Amazon. The trend for Amazon is likely to continue in 2019, specifically as it relates to Amazon’s second North American headquarters that is currently under construction in Arlington, Virginia. As more of the corporate giants continue to grow and expand in the market, the need for large mega construction projects and related infrastructure projects should follow.
Certain sectors of the construction and development arena have been, and will continue to be, favorably impacted going into 2020, more than others. For example, solar and power construction should continue to improve and provide steady growth. Amusement and recreation construction spending have proven to be very “lumpy” and unpredictable, such as the Las Vegas Raiders new NFL stadium, slated to open in 2020. Highway and general transportation infrastructure funding may see some improvement potentially tempered by uncertainty regarding federal funding for large projects. Airports and train infrastructure continues to show signs of significant improvement as larger budget friendly airlines like Southwest Airlines continue to expand.
Construction Concerns and Renewed Strategy
While there are very favorable signs of continued growth in the construction industry, there are still fears in the marketplace that have caused some to proceed with caution. The risk factors that have caused some level of trepidation in the construction market are as follows:
- Political and regulatory uncertainty
- National economic uncertainty
- Succession of the old guard to the new guard
- Rising material costs
- Rising interest rates
- Immigration employment protocol
- Overall shortage of construction workers
As the construction industry has improved over the past several years, construction firms have been able to re-think their approach to the market and re-focus resources to projects that will provide an acceptable financial return with a more controllable risk. As the quantity of opportunities continue to increase, so will the overall quality of projects available for bidding. Many construction firms have been able to favorably use the overall improved trends in the construction industry as a means to focus on what they do best as opposed to simply accepting any project that comes along, regardless of the job’s ultimate strategic and financial risks.
One of the single biggest issues that the national construction industry continues to face is the extremely tight supply of skilled workers and the perceived negative notion that younger members of the workforce have when entering the construction industry. With the baby boomer generation set to retire within the next five to ten years and with the intense federal pressure to limit and reduce the immigrant labor force for Mexico and Central America, the local and national construction industry is faced with a monumental task of finding workers. With unemployment at historic lows, skilled laborers are picked up very quickly by construction firms in order to staff projects immediately, leaving a less skilled labor pool for other companies to use.
Industry lobbying groups and special interest groups continue to address these issues at the state and federal level in an effort to develop funding for trade education and apprenticeship programs, as well as ways to create a softening approach to immigration protocol, which should help to some extent. However, headway needs to be made quickly and training is critical to develop a skilled work force to complete the backlog of construction projects both now and in the future.
Material Pricing Pressures
Building material costs, like all other sectors of the economy, have also continued to increase for many reasons, including but not limited to high demand from the general increase in the construction industry to specific trade products such as steel, which continue to rise. Steel costs have become particularly problematic due to the political pressures levied on the tariff costs that will come into play with trading partners of the United States. In addition to steel prices, the varying fluctuation in the oil industry has continued to impact almost every component used in the construction industry. Based on the commodity nature of oil, this is likely to continue into 2020.
Technology continues to become the norm in the construction industry and its operational and financial impacts have caused very important changes in the world of construction. An industry that was once perceived as archaic is now looked upon as cutting edge. The use of BIM (Building-Information-Modeling) collaboration, cloud computing, and mobile data has and will continue to be a major asset for construction companies to properly manage operations. In addition to office related technology, construction firms have been effectively implanting technology in the field as it relates to personnel, equipment, and job site viewing.
While GPS technology continues to be used in construction, visual job inspections and oversight have been greatly impacted by the use of drones. Drones have become more prevalent in conducting site surveys, site inspections, and general site management and have proven to be invaluable, producing quicker and more accurate land surveys, while reducing the costs associated with inside and outside labor. Contractors have been able to more effectively manage multiple jobs and more complex and dangerous job sites through the use of drones.
The Bottom Line
The 2019 national construction market continues to experience solid results and is expected to continue this trend into 2020. While backlogs continue to be very significant for many contractors, the ultimate completion of this work in 2020 and beyond will be based upon a continued somewhat stable economy, improved international relationships, political policy clarification, and most importantly, finding the workers to complete the projects. An economy is only as good as the men and women that participate in its success, and the construction industry will be judged by this same standard.