Painting a broader picture of 2022, the general mindset is one of optimism as construction contractors expect increasing demand for various types of projects, despite ongoing supply-chain and labor challenges.
“Contractors are, overall, very optimistic about the outlook for the construction industry in 2022,” says Stephen E. Sandherr, the Associated General Contractors of America chief executive officer. “While contractors face challenges this year, most of those will be centered on the need to keep pace with growing demand for construction projects.”
Recent surveys conducted by AGC, the Associated Builders and Contractors and Wells Fargo Equipment Finance Construction Group show renewed optimism among contractors and distributors for increasing profits and new equipment sales this year.
“The last two years have become increasingly unpredictable, due in large part to the coronavirus and public officials’ varied reactions to it,” says Ken Simonson, AGC chief economist. “Assuming current trends hold, 2022 should be a relatively strong year for the construction industry.”
ABC Chief Economist Anirban Basu says the big picture is the average construction firm in America is busy. “Despite the omicron variant, ongoing supply-chain issues, elevated energy and materials prices, and rampant staffing shortages, the average nonresidential contractor remains upbeat,” he says. “Perhaps the most remarkable aspect of the (ABC's) survey findings is the expectation that industry profit margins will expand during coming months, implying that contractors expect to pass along enough price increases to project owners to countervail the rising costs of construction service delivery.”
From an outside perspective, the general opinion would be that the construction industry is euphoric heading into 2022 or, then again, maybe not.
What’s really going on?
“We are still in an unbalanced economy where supply can’t keep up with demand,” Basu says. “The supply chain is broken, meaning transportation costs are up.There are not enough ships to transport goods and not enough truck drivers, so if you’re a manufacturer and you can’t get product to the market, why manufacture in the first place?”
The delay in bringing new equipment to market has resulted in used and new equipment prices holding up and even increasing.
“The supply-chain disruptions are also resulting in the costs, not just the disruptions, but all of what's going on with inflation and things like that are resulting in the cost of new equipment going up as well,” says James Heron, national sales manager for the Wells Fargo Equipment Finance Construction Group.
Dealers are reporting to Wells Fargo that they can get equipment to sell but not as much as they want. “For 2022 their new equipment sales will be good, but they certainly could be better if they had more products to sell,” Heron says.
Equipment dealers anticipate the supply-chain issues being dealt with in the second and third quarter of this year. “They expect to have equipment to sell this year,” Heron says.
Distributors are largely optimistic about new equipment, with 61% stating they expect an increase in sales, according to the Wells Fargo survey. Among contractors, the expectation of new equipment purchases in 2022 is mixed: 43% say it will remain the same, 38% say it will increase, 14% say it will decrease.
Heron says a larger backlog of jobs and long-term confidence in local and national economies, followed by lower equipment costs, would encourage contractors to purchase equipment. Similarly, half of contractors surveyed feel that their purchases of used equipment will remain the same, while 60% of distributors think their sales of used construction equipment will increase.
As things are now, due to the supply-chain disruptions and rising prices, which roll back to the OEMs, it’s hard for equipment dealers to maintain their inventory right now.
Heron says typically, dealers get their equipment from an OEM and put it on an inventory line of credit and then it is sold to the end user, the credit line is paid off and the same or another financial institution assists in providing finance for the purchase.
“What's happening is the equipment is really coming straight from the OEM into the dealership, and the dealer has it pre-sold and it immediately goes to the end user. And it doesn't really sit on their inventory line or even their showroom floor,” Heron says. “Because it's just that efficient of a process or that backed up a process, the equipment is moving right to the end user.”
The result is some dealers are optimistic about sales in 2022, due to the price of equipment going up and thus being able to maintain their margins among the rising costs. Also, Heron noted that the equipment dealers also expect to make more than normal revenue from services such as maintaining used equipment, parts and supplies and equipment rental.
AGC’s survey also found that the rising costs and the pandemic is continuing to impact the industry. Eighty-four percent of respondents reported that costs have been higher than anticipated, while 72% say projects have taken longer than anticipated because of the pandemic. As a result, 69% have put higher prices into bids or contracts, while 44% have specified longer completion times.
Supply-chain bottlenecks are also impacting construction. According to AGC’s survey, only 10% of firms report they have not had any significant supply-chain problems. Sixty-one percent have turned to alternative suppliers for materials, and 48% have specified alternative materials or products.
Rising construction costs and slowing schedules have contributed to a significant number of project delays and cancellations. Forty-six percent of contractors report having a project delayed in 2021 but rescheduled, while 32% had a project postponed or canceled that has not been rescheduled.
With the supply-chain disruptions and inflation, prices are rising. “What's interesting is that the market is willing to bear those rising costs,” Heron says. “Inflation is here, rates have definitely moved up this year, and they're expected to continue to grow.”
Global issues such as the Russian invasion of Ukraine will not help the situation, ABC’s Basu says.
“Oil and other key input prices are rising, placing further upward pressure on the cost of delivering construction services,” he says. “Those elevated costs have already been leading some project owners to postpone projects in the hope of procuring more favorable bids in the future. Steel, copper, aluminum, neon and nickel prices are all implicated by the outbreak of war, and sanctions on Russia and limits on its exports will be in place long after hostilities end.”
As of mid-February, ABC reported that its Construction Backlog Indicator declined to 8 months in January. The reading is down 0.2 months from December 2021 but up 0.5 from January 2021.
Basu says the dips in December and January in backlog are not cause for particular concern. “Declining backlog indicates that some projects are postponed or canceled in response to rising costs and/or extended delivery timelines,” he says. “The principal challenge for contractors remains a lack of sufficiently skilled labor, a structural issue that will not go away soon and a circumstance contractors have dealt with for years. The situation is likely to deteriorate further as federal infrastructure dollars begin affecting the economy more forcefully in the near future.”
What should we be building?
Prior to the pandemic, nonresidential construction, such as traditional office, hotel and lodging construction, was doing well.
“We built a ton of hotel rooms in this country just before a pandemic, and now we know that business travel has been affected by behavioral changes wrought or rendered by the pandemic,” Basu says. Also, many employers have found that employees are as productive or more productive working from home.
“Circumstances are worse in the nonresidential construction segment,” he says. “While construction spending is up 13% in the industry’s residential component, nonresidential spending is up less than 4% year-over-year.”
In certain categories, he says, spending is down in both real and nominal terms.
“The fading of pandemic-related construction spending has produced a decline of 35% in the public safety segment,” Basu says, adding that financial impacts on the education sector stemming from the pandemic have resulted in a 7% decline in education-related construction spending. “Spending in the beleaguered lodging segment is down nearly 25% in nominal terms,” he says.
The Infrastructure Investment and Jobs Act passed in November and stimulus from Covid-19 relief will pump billions in new spending into roads, bridges, energy production and other projects across the country.
However, from the financial perspective, Heron suggested that the infrastructure investment will not likely be felt much in 2022. Although Congress approved an additional $550 billion, those projects won't start to come to fruition until 2023 and beyond.
“I think on top of that is all the pent-up demand in the construction space for many reasons will even be further exacerbated and create additional opportunities for contractors,” Heron says. “I think the skilled labor is going to become even more of an issue because of the growth that construction is going to offer the economy.”
According to AGC’s outlook survey, contractors are most optimistic about the market for highway and bridge construction, which has a net reading of positive 57%. They are similarly optimistic about transit, rail and airport projects, with a net reading of 51% and water and sewer projects, with a net reading of 50%. These segments all stand to see increased federal investments because of the infrastructure bill. Contractors are also upbeat about demand for federal construction projects, with a net reading of 37%, and power construction, with a net reading of 29%.
The highest expectations among predominantly private-sector categories in the AGC survey, with a net reading of 41% each, were for warehouses and other healthcare facilities, which include clinics, testing facilities and medical labs. The outlook for hospital construction is also strong, with a net reading of 38%.
The AGC survey indicated that there was optimism about multifamily residential construction, with a net reading of 32%, and manufacturing construction, with a net reading of 27%. Expectations were more subdued, however, for public buildings, with a net reading of 20%; kindergarten through 12th-grade school construction, with a net reading of 19%; higher-education facilities, with a 16% net reading; and lodging, with a 6% net reading.
Only two categories received negative net readings, both of -8%: retail and private office construction.
While traditional private office construction is expected to be down, Basu says he expects growth in data center construction. “Not because of infrastructure, because the need to have repository for data is growing literally exponentially,” he says. “People use the word exponentially too much, but literally the growth of data and need to house data and analyze data is growing by leaps and bounds.”
In recent months, the spending trend is up, according to ABC’s analysis of data published by the U.S. Census Bureau. The data show nonresidential construction was up 1.3% in January to $839.9 billion. Private nonresidential spending increased by 1.8%, while public nonresidential construction spending rose 0.5% in January.
However, the spending data is not adjusted for inflation, and in real terms, according to Basu, construction spending likely was down for the month. “Total construction spending is up more than 8% from last year, but materials prices are up approximately 24% over that span. Worker compensation costs have also been rising rapidly,” he added. “As a result, contractor profit margin expectations have worsened in recent months, according to ABC’s Construction Confidence Index.”
People come first
Construction executives reported to Wells Fargo that the greatest risks to the construction industry are the availability of skilled workers and supply-chain disruptions. Rising material costs and inflation also factor highly. The ability to hire qualified workers is also the top cost concern among 53% of contractors, followed by materials costs and employee wages and other benefits.
“I think one of the issues for construction is that many of these Americans who are looking for a job are looking for remote work,” Basu says. “They don't want to commute or go to a construction jobsite, be in a restaurant, at a store for retail, hotels and so on.”
A recent model developed by ABC from U.S. Census Bureau and U.S. Bureau of Labor Statistics data, suggests the industry will need to attract 650,000 additional workers on top of normal pace of hiring in 2022 to meet the demand for labor.
He says one thing that happened over the past two years is that baby boomers retired in large numbers. ABC reported that 1.5 million baby boomers were lost in the labor market prematurely.
“These are some of our most productive workers in construction, finance, trades and other professions,” Basu says. “Many of these older construction workers were really dedicated to the industry. This was their dream to work in construction. It's far more difficult I've found to convince younger people that construction offers a pathway to prosperity."
Based on historical Census Bureau Job-to-Job flow data, an estimated 1.2 million construction workers will leave their jobs to work in other industries in 2022. It is expected that this will be offset by an anticipated 1.3 million workers who will leave other industries to work in construction.
“The workforce shortage is the most acute challenge facing the construction industry, despite sluggish spending growth,” he says.
Accounting for inflation, he noted that spending has likely fallen over the past year. As spending does eventually rise, it only deepens the gap between supply and demand in the labor market.
“An added concern is the decline in the number of construction workers ages 25 to 54, which fell 8% over the past decade. Meanwhile, the share of older workers exiting the workforce soared,” Basu says. “According to the Centers for Disease Control and Prevention, the industry’s average age of retirement is 61, and more than 1 in 5 construction workers are currently older than 55.”
However, he says, the scarcity of qualified skilled workers is even more pressing. “Since 2011, the number of entry-level construction laborers has increased 72.8%, while the number of total construction workers is up just 24.7%,” he says.
For reference, he notes the number of electricians was up 23.9% over that span, while the number of carpenters declined 7.5%. Also, he says ,the number of construction managers has increased by just 2.1%.
“More than 40% of construction workforce growth over the past decade is comprised of low-skilled construction laborers, who represent just 19% of the workforce,” Basu says. “The roughly 650,000 workers needed must quickly acquire specialized skills. With many industries outside of construction also competing for increasingly scarce labor, the industry must take drastic steps to ensure future workforce demands are met.”
In 2023, ABC projects the industry will need to bring in nearly 590,000 new workers on top of normal hiring to meet industry demand, and that’s presuming that construction spending growth slows next year.
“There are many things going on that dealers, OEMs and associations (ABC and AGC) are doing that is working to help improve the supply or the shortage of skilled labor by going out and educating high school students, parents, colleges and junior colleges and helping to onboard students into training for these skilled positions,” Well Fargo’s Heron says.
Some dealers even sponsor tuition for students seeking to get into the industry and help pay their way through a mechanic or other trade program at a technical or community college. When they come out, they guarantee them a job and put them in a current career path. “These mechanics have maintained some of the equipment and are educated very well, and they're trying to teach our society not everyone needs to afford a college degree,” Heron says. “They can be a tradesman and make a lot of money and move up within an organization. I think that’s progress there, but certainly I think the growth in the industry is outstripping it. So it's going to take a while for that to change.”
Increasing inflation, however, could help reduce the worker shortage by causing more people to head back to work. “More and more people will have difficulty paying their bills, and that might induce them back into the labor market, which I think would be a positive,” Basu says.
Optimism about growing demand for many types of construction projects is leading many firms to plan to hire workers this year. Seventy-four percent of respondents to AGC’s survey expect their firms will expand headcount in 2022, compared to just 9% who expect a decrease. Forty-seven percent of firms expect to increase their headcount by 10% or less. However, 22% say their headcount will grow by 11% to 25%, and 5% anticipate an increase of more than 25%.
Adding those workers will be a challenge. An overwhelming 83% report they are having a hard time filling some or all salaried or hourly craft positions, compared to only 8% who say they are having no difficulty. And three-fourths of respondents say it will continue to be hard to hire or will become harder to hire this year.
Doing more with less
“Businesses are spending more on equipment, so capital investment is up,” Basu says. “They can't find workers, so they’re looking for equipment that enhances productivity and maybe displaces workers altogether.”
As technology expands, the concept of equipment replacing workers is only going to grow. Many manufacturers across multiple sectors are developing alternative fuels, including electric vehicles, and are ultimately working toward autonomous machines.
“When driverless vehicles become a real option for people, you will see a wave of purchases of driverless vehicles,” he says. “We're short 80,000 truck drivers in this country, so it's almost a necessity to do that.”
From the manufacturers to the contractors, there will be a lot of investment in technology related to equipment and data going forward.
Officials with Sage noted in AGC’s report that construction firms are being more strategic about information technology as they try to remain competitive in the current environment. Sixty-one percent of contractors indicate they currently have a formal IT plan that supports business objectives. An additional 7% expect to create a formal plan in 2022.
“Amid the challenges the industry faces, technology plays an essential role in keeping teams connected and projects moving,” says Dustin Stephens, vice president of construction and real estate at Sage. “The past few years have highlighted just how crucial mobile and cloud-based solutions are, and we will continue to see these technologies play an integral role in helping construction firms bounce back.”
Stephens added that most firms plan to keep their technology investment about the same as last year. When asked whether they planned to increase or decrease investment or stay the same in 15 different types of technologies, most respondents – ranging between 69% and 89% – said their investments would remain the same.
The adoption of cloud-based technologies is only likely to increase as construction firms seek more flexibility from their solutions.
Findings were similar to last year with 60% of the firms using mobile software for daily field reports, and about 60% will use mobile technology for employee time tracking and approval.
Of course, the use of technology is not without its challenges. Stephens says 41% of contractors can't find time to implement and train on new technology. That is down from 44% in 2020. “This has been a tough challenge over the past few years,” he says. “We can alleviate some of these concerns by starting slow and automating the technology in stages.”
Also, 9% of firms list keeping company data secure from hackers as the biggest IT challenge, which was up 33% in 2020. Stephens says more than 30% of firms cite employee resistance of technology.
“As industry navigates the lasting impacts of the pandemic, technology will continue to have big impacts in keeping projects moving by providing increased flexibility, efficiency and collaboration tools,” Stephens says. “This will play an integral role in helping businesses bounce back and succeed in the current environment.”
No jobs, no labor. . .let’s expand
While the pandemic was treacherous for contractors, this next early stage of recovery can be as well. From a business perspective, the construction industry is somewhat like the wild west.
“There are so many issues that can trip a contractor up, it's amazing that you deal with so much risk on an ongoing basis, and you seem to manage through that process,” Basu says.
Cost increases for training, recruiting and equipment, as well as options for larger bond capacity, can be factors driving some smaller firms to consider mergers or acquisitions this year.
“It's not a bad time to sell a construction firm because the outlook is pretty good, and investors right now are paying a lot for enterprises that generate good cash flow,” Basu says. In this case, bigger might be better to maintain success going forward.
It remains possible for firms to grow organically and on their own, although that is always going to involve more risk. In these times of economic turmoil and before taking such a step, Basu suggested ensuring you have a solid relationship with your banker and insurer before moving forward with such actions.
According to Basu, based on past experiences, most construction firm failures occur during early construction recovery coming out of economic turmoil.
“As firms are getting ready for the next generation of construction projects, they take on some expenses,” he says. For example, they start hiring staff, leasing or purchasing equipment, or even taking on more space.
“All of a sudden, their capital requirements get bigger, and if they don't price those projects that are coming correctly, and they don't build enough contingency and margin for those projects, they end up losing money. But also they've got these all these new obligations that start faltering, and they lose a bonding or something else happens,” Basu says.
What’s it really looks like?
According to AGC, contractors are taking steps to cope with many of the challenges. The association’s report states that firms are finding alternative suppliers and materials to use in their projects, boosting pay and adding other incentives to attract new workers. They are raising bid prices to reflect higher materials costs and building more time into their construction schedules to accommodate supply-chain obstacles. And they are adopting new technologies designed to bring efficiencies into their operations.
The benchmark U.S. National Optimism Quotient (OQ) used by Well Fargo registered 112, a 44% increase from its mark of 78 a year earlier, showing leaders ended 2021 feeling cautiously optimistic. Contractors and distributors alike are optimistic in their outlook for local nonresidential construction; roughly half expect it to increase compared to 2021.
Wells Fargo calls any reading above 100 or more as “strong optimism.” Due to changes with the pandemic and in speaking to clients since the survey was done in October 2021, while the number remains at 112, the label was adjusted to “cautious optimism.”
Heron anticipates an interesting year ahead for the construction industry, noting that despite the looming risks and concerns, construction executives see key opportunities in an improved overall economy, improved qualified labor availability, the recent enactment of the infrastructure law, and low interest rates.
“Finding skilled workers and supply-chain disruptions are executives’ two biggest concerns,” Heron says. “However, in this rapidly changing environment, they also believe that the passing of the Infrastructure Investment & Jobs Act and historically low interest rates will create new opportunities in the future.”
“I think 2022 is going to be a good year for them and 2023 is going to be even better.”
Charlie Wilson, president of CT Wilson Construction in Durham, N.C., summed the feelings of many by saying: “We're kind of in the perfect storm right now, and the labor constraints and issues of material procurement are really what's holding us back.”