Total construction to decline, nonbuilding construction to increase

Total construction is expected to be down by 13 percent in 2009 and down by seven percent in 2010, according to FMI’s Construction Outlook for the second quarter of 2009. Residential construction will decline 19 percent in 2009 and one percent in 2010. Nonbuilding construction continues to be the only area to increase with a four percent rise in both 2009 and 2010.

In put-in-place construction, nonresidential construction is expected to decrease for the rest of the year due to increases in cancellations and delays. Cancellations are five times the normal rate at 10 percent backlog and delays are four times the normal rate at 20 percent. In 2010, delays and cancellations are predicted to increase.

The increase in nonbuilding construction is likely due to the American Recovery and Reinvestment Act (ARRA). Ken Simonson, chief economist for the Associated General Contractors of America (AGC), says that military base realignments and renewable power projects may also be responsible for the increase.

Although the stimulus money is helping, FMI says the money being used for highways and streets barely offsets what the state and local governments would have spent on such projects. Stimulus fund might help some firms, but it won’t offset the downturn in private and state or local government-funded work, Simonson says.

“Buy American” provisions in the stimulus bill and troubles in reporting are holding up the flow of some stimulus money. The provision says that contactors must use materials that are made up of 50 percent or more American-made products. This provision was intended to help stimulate the industry, but has caused a problem in finding the lowest prices for job materials.

Lower material costs are helping many contractors make competitive bids for stimulus projects. Most companies are bidding at cost or below and many public owners are reporting bids 10 to 40 percent below estimates, according to Simonson.

Although material prices have declined, the cost benefit does not offset the lack of work. Louisiana and North Dakota were the only two states to report an increase in construction employment over the last year. States with the sharpest declines in employment over the past year include Arizona, with a 28 percent decline, Kentucky and Connecticut with a 21 percent decline each and Nevada and Tennessee with a 20 percent decline each.

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Before the construction industry is out of the recession, bank lending needs to resume and state and local revenues need to improve. In the mean time, contractors should be nimble in terms of looking for work in other regions or types of projects, Simonson says.