The Construction Industry’s Growth Trajectory

The construction industry continues to gain momentum as 2018 comes to a close. Backlogs are generally substantial, but recent trends have indicated that the release of work into production is somewhat unpredictable and is subject to delayed starts. This trend is likely to continue due to a number of factors, including regulatory agencies releasing work and funding for larger projects being garnered, such as Hudson Yards in New York City, which will be the largest construction project area in the history of the United States.

A recent survey of ENR’s top 400 contractors, as a group, revealed the firms generated $375 billion in contract revenue in 2017, compared to $366 billion in 2016—an increase of 2.1 percent. The contractors interviewed believed that the trend would continue throughout the latter part of 2018 and into 2019. Additionally, recent reports issued by Dodge Construction suggest that U.S. construction starts will increase by 3 percent with additional room for expansion.

One key factor predicted to ensure continued growth in the construction industry is the Tax Cuts and Jobs Act of 2017 and the potential infrastructure spending to follow. Another element providing a boom to the industry is hurricane rebuilding in the Southeastern region of the U.S., as well as other natural disaster rebuilding from the wildfires in the Western region of the U.S.

The construction market has benefited in specific geographical regions during 2017 and 2018 from 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.

For Amazon, this trend will likely continue into 2019, specifically as it relates to Amazon’s second North American headquarters, which may be under at least some level of construction in 2019. As more of these giants continue to grow and expand in the market, the need for mega-construction projects and related infrastructure projects should follow.

Certain sectors of the construction and development arena have been and will continue to be impacted more favorably than others in 2019. For example, solar and power construction should continue to improve and provide steady growth, while amusement and recreation construction spending have proven unpredictable. State highway funding may see some improvement, even with the uncertainty regarding federal funding for large projects.

Airport and train infrastructure also continue to show signs of significant improvement. Each of these sectors have been impacted by project funding and political scrutiny toward large projects. However, once jobs are released, there is a generally a significant windfall of construction work that enters the marketplace.

Strategy

While there are more than favorable signs of continued growth in the construction industry, there are still legitimate fears, pushing some to proceed with caution. Some risk factors causing trepidation in the market include:

• Political and regulatory uncertainty
• National economic uncertainty
• Local and regional economic uncertainty
• Rising material costs
• Rising interest rates
• Immigration employment protocol changes
• Skilled labor shortage 

As the industry has improved over the past several years, construction companies have been able to rethink their approach to the market and reallocate resources to projects that will provide better financial return with more controllable risk. As the quantity of opportunities continues to increase, so will the overall quality of projects available for bidding. Many construction companies have harnessed the favorable conditions provided by these trends as a chance to focus on what they do best (as opposed to simply accepting any project opportunity that comes along).

Labor

The biggest issues that the industry continues to face are the extremely tight supply of skilled workers and the perceived negative notion younger workforce entrants have of construction. With baby boomers set to retire within the next 5 to 10 years and the intense federal pressure to limit and reduce the immigrant labor force coming from Mexico and Central America, the construction industry is faced with the monumental task of finding workers despite the many barriers to employment.

Industry lobbyists and special-interest groups continue to address these issues at the state and federal levels in an effort to develop funding for trade education
programs, apprenticeship programs and ways to create a softening approach to immigration protocol, which should all help to some extent.

However, time is not a friend to this issue, and training is critical to develop the workforce needed to complete the current backlog and future projects.

Materials

Unfortunately, in another blow to the industry, building materials costs have continued to increase due to high demand, attributable to the influx of available general and specialty construction projects. Steel costs have become particularly problematic, as the political pressures levied by the tariff costs continue to affect relationships between the U.S. and its trading partners.

In addition to steel prices, the varying fluctuation in the oil industry has continued to impact the price of almost every component used in the construction industry. Based on oil’s nature as a commodity, this isn’t likely to change in 2019.

Technology

Advanced technologies are beginning to become the norm in the construction industry. An industry that was once perceived as archaic is now looked upon as cutting-edge. The use of building information modeling (BIM) collaboration, cloud computing and mobile data has and will continue to be a critical asset for construction companies to properly manage operations.

In addition to back-office technologies, construction businesses have been effectively implementing technology in the field as it relates to personnel, equipment and real-time jobsite viewing.

While GPS technology continues to be used in construction, visual job inspections and oversight has been impacted by the use of drones, which have become more prevalent in conducting site surveys, site inspections and general site management. Drones have proven to be invaluable for 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 on more complex and dangerous jobsites.

Bottom Line

The 2018 U.S. construction market continues to experience solid growth and is expected to continue with this trend into 2019. While significant backlogs are always a good problem to have, they are a problem nonetheless.

For many contractors, the ultimate completion of this work will be based upon a continued stable economy, improved international relationships, political policy clarification and, most importantly, finding the workers to complete the projects

In other words, a solution to the skilled labor shortage is imperative. An economy is only as good as the men and women that participate in its success, and the construction industry cannot support an influx of projects without the right people and supplies to complete them.