State of the Industry: The Year of Great Transition

Politics, materials, skilled labor and technology. Groundbreaking content; we know. But how will these four factors drive the construction industry forward—or slow it down—in 2019? We caught up with three industry veterans to ask them how these key factors will affect the construction industry this year. Who are these heavy hitters, you ask?

Steve Jones is the senior director of industry insights research for Dodge Data & Analytics. Ed Sullivan is the chief economist and senior vice president of market intelligence for the Portland Cement Association (PCA). Dale Kopnitsky is the executive vice president and general manager for Skanska’s building operations in the Washington, D.C., area. Jones, Sullivan and Kopnitsky all have years of construction experience under their belts—experience that comes in handy for strategizing and planning ahead. Read on for their takes on what your business can expect in 2019.

On Changes in Washington

As many newly elected officials take office this month, much of the industry is keeping a close watch on how the changes in leadership at both the federal and state levels and the passage of new bills will trickle down to the construction industry. First up: the infrastructure bill. An infrastructure bill is long overdue. But the block has been on how to finance it,” Sullivan said. “It’s very simple to me—the gas tax. We just haven’t had the political will on a national level to do this.”

Sullivan said he thinks a federal infrastructure bill will not be a reality until a year or so down the road. “The issue is not whether we want or need new roads and bridges; it’s whether we have the will to finance it. Yes, it’s going to cost taxpayers money. But we have to pay for it somehow.”

Jones mentioned the increased use of and interest in public-private partnerships (P3) as another way to finance necessary infrastructure projects. While P3 projects aren’t as popular a financing option in the United States as they are elsewhere in the world, Jones said he sees a lack of funding on the federal and state levels, making these types of projects a more viable option in the future.

What worries Sullivan just as much as the need for a federal infrastructure bill is the federal deficit. While revenues are continually increasing at the state level, on the federal level, the country faces a huge deficit. “Entitlement programs are the No. 1 expenditure for states,” Sullivan said. “We are running deficits in a time of prosperity. Typically, you don’t do that unless you’re in a recession. When you have that, coupled with balanced budget amendments, you have to prioritize.” According to Sullivan, in most states, governments are being forced to decrease commitment to public infrastructure spending to pay for other costs.

On Materials Costs

It seems like tariffs were the subject of more conversations than we can count in 2018—and for good reason. How much are they really altering materials sourcing and planning in 2019, though? Dodge’s survey for the USCC/USG Commercial Construction Index for Q2 2018 revealed more than half of the general contractors and trade contractors surveyed expected a high degree of impact from the tariffs. In the Q3 2018 index, when tariffs were in place, about half of those surveyed still expected a high degree of business impact from the tariffs.

According to Jones, however, over that same period, the percentage of those surveyed who expressed concern about material cost fluctuations having a great impact on their business increased from 38 percent to 44 percent. While contractors are worried about the role tariffs will play on cost of materials, other materials that aren’t subject to tariffs are also on their minds. Jones said the area where he expects to see the tariffs to affect change is in bidding. “[Contractors] are facing a lot of uncertainty, so they could factor in even more incremental margin than is called for by the current elevated prices.”

Regardless of what happens to tariffs over the next couple months (ahem, China), the general feeling is that the potential effects felt by an increase in materials costs have already reached an apex. Kopnitsky said that while the Skanska team did experience notable increases in pricing in 2018, the company is hoping that the price hikes caused by the tariffs have plateaued. “However, we have seen some indications that suppliers are already planning price increases in anticipation of those tariffs,” Kopnitsky said. For Skanska, preparing for that means paying close attention to the market and keeping its clients informed.

Sullivan said changes regarding tariffs could have an effect on more than just materials in this industry. “We are right at the threshold in terms of the tariffs not having a significant, adverse impact on the economy,” he said. “If you push it a bit further, it will tip things. I wouldn’t be worried about the price of materials; I would be worried about the actual strength of economic conditions.”

On Skilled Labor

The skilled labor shortage has now been in flux for the better part of a decade. At the time of printing, the U.S. unemployment rate was 3.7 percent—the lowest the country has seen since the 1960s. “Catching up takes time,” Sullivan said. “The economy continues to grow at a robust pace. We considered the problem to be construction-focused, but it’s not—it’s the entire economy.” According to Sullivan, it’s important to note that the shortage is in certain areas—in urban areas, the shortage is significant, whereas in rural areas, it isn’t much of a problem.

Construction companies are responding to the shortage with a number of different solutions. Many contractors are looking to attract and retain industry talent by offering competitive training and continuing education programs. Often, however, the employees who benefit from additional training opportunities are then poached by other companies that want their skillset. The bottom line for many companies, though, lies in the changeover of generations.

“Until the industry figures out a way to recruit and train more young people, and more people from underrepresented populations, it will continue to be a problem,” Jones said. “There are a lot of solutions discussed out there, but most aren’t enough to deal with that demographic shift.” Jones said Dodge has seen a growing interest in how technology, prefabrication and the shift to more collaborative and integrated project delivery processes can make the industry more appealing to new skilled workers. But in an industry that continues to lag behind in terms of tech adoption, don’t expect to see tech solving the labor shortage dilemma in the next year alone.

On Construction Tech

The industry seems to be on board with the idea of a jobsite team that is as collaborative and up-to-date as possible. However, there is still a disparity between companies that have already integrated various technologies and those that are just beginning the process. One thing will not change from 2018 to 2019: Data is king. The trouble is figuring out how to organize and apply it to the task at hand.

“There is an exciting convergence of technologies like sensors, cameras, robotics, smart equipment, laser scanning, augmented reality and an array of wearable devices that bring vital contextual intelligence directly to the worker on the jobsite and enable managers to compare what should get done with what does get done in nearly real time—the key to improving construction productivity, which has been essentially flat since the 1960s,” said Jones.

According to Kopnitsky, the industry can be hands-on, only more intelligently so with the use of data and the knowledge it provides. “Success,” he said, “lies in rationalizing those streams of information and putting them to work.”