The construction industry was undoubtedly one of the hardest-hit segments during the Great Recession, due in part to years of minimal new construction projects, a drastic halt in the homebuilding industry and a significant hit to the unemployment rate. Additionally, construction was also an industry that suffered from a very slow recovery following the recession, with many only beginning to be optimistic of the industry's standing and direction within the past 1 to 2 years.
However, the outlook is positive for the foreseeable future, with fundamentals strong, growth steady and momentum building in several sectors of the industry. In fact, according to the Associated General Contractors of America (AGC), construction employment totaled more than 6.5 million this past February, the most since December 2008, and is up more than 250,000 jobs compared to a year ago, which is a 4 percent increase. Although the general outlook from business owners and contractors is optimistic, there are several challenges that the industry will face over the next 18 to 24 months.
According to the United States Bureau of Labor Statistics, since peaking in April 2006, employment in construction fell by 2.2 million, or 28.8 percent, by December 2010. Although unemployment rates have decreased and more construction firms are now hiring, there is wide concern in the industry about the availability of experienced workers, especially for the skilled trades, such as carpenters, framers and bricklayers or masonry. In fact, a survey conducted late last year by the AGC revealed that nearly 80 percent of construction businesses are having a hard time finding qualified skilled labor.
With the significant layoffs during the recession, many skilled workers in the construction industry left for other, thriving sectors, such as energy and oil and gas, and have not shown much interest in returning now that the construction industry has experienced a recovery.
Construction business owners are also challenged to find experienced project managers and technical experts with substantial industry experience, since many of the project managers who were laid off during the recession are now at or nearing retirement. Labor shortages are expected to continue in the coming years, as the number of Americans retiring also will increase. According to the American Association of Retired Persons, those in the baby boomer generation are turning 65 at a rate of about 8,000 people per day. The construction industry will continue to experience skilled labor shortages and will need to be proactive in finding ways to recruit new talent and retain existing talent in order to replenish the losses experienced by an aging workforce.
Rising Subcontractor Costs
With a surge in new construction work and the shortage of skilled labor mentioned above, subcontractors have the opportunity to be selective with the projects they pursue, so labor costs are rising. In the coming months, as new business opportunities present themselves to general contractors, it is imperative for GCs to take a more focused approach to the projects they take on in order to remain profitable. Many business owners, feeling confident with where the industry stands economically, are being selective about the projects they commit to and are taking a more managed growth policy.
Upcoming Financial Reporting Changes
There are recent accounting and financial reporting rules changes that construction business owners and contractors should be aware of in the near future. The Financial Accounting Standards Board (FASB) has recently issued accounting standards updates related to accounting for both revenue recognition and leases. Revised revenue rules will require companies to follow certain steps to recognize revenue from contracts with customers. While this may not lead to substantially different accounting results for any one company, the new rules, their impact and each company's policies will need to be evaluated and considered.
New reporting rules related to leases will change the way a company is required to report its leases and may result in dramatic changes to its balance sheet. Construction business accounting teams should familiarize themselves with the new rules and the impact they will have on financial reporting.
As with most industries during an election year, there is increasing uncertainty among construction business owners of what the future might hold. This uncertainty is likely to remain until November 2016, when legislative direction may become clearer.
The next 1 to 2 years should remain positive for the construction industry, which will continue to experience steady growth with new work, decreasing unemployment rates and strong opportunities in the healthcare, education and homebuilding sectors.