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By Duane Craig
April 16, 2018
The state and local government contracting market is expected to move "from bullish optimism to sustainable realism" in 2018, according to Onvia's 2018 State & Local Government Contracting Forecast. Offering 432,000 bid opportunities each year, this market can help contractors boost revenues and even make their businesses more sustainable through continuing contracts. Here's the background on the market and what to expect in 2018.
Timing and the Expected Growth
The typical government buying cycle takes between eight and 18 months. Government officials are concerned about the future direction of the economy, and they respond to forecasts as they map out their purchasing strategies. Seasoned government contractors also watch the public agencies and market indicators to sense future prospects. Onvia's late 2017 government contractor survey found confidence waning slightly among government contractors. They had lower expectations about the work coming their way from the public sector.
They expected their government businesses to grow at 3.8 percent in 2018, versus their earlier expectation of 5.7 percent in the spring of 2017. So, if these business leaders are right, government contracting growth will track slightly higher than its historical norm. The long-term growth trend over the past 25 years is 3.36 percent per year.
Historical Factors and Headwinds
That number, however, doesn't represent the wilder side of state and local construction spending. For example, from 1993 to 2001, state and local construction spending never went negative, ranging between 0.8 to 10.5 percent annual growth. From 2002 through 2007, the growth was between 0.7 to 12.9 percent in any given year. According to Census Bureau statistics, there were more negative years than positive from the beginning of the last recession through 2017, with spending between -6.6 and +5.5 percent.
So, many factors can change the government outlook, including cuts in federal money to states and municipalities, unexpected longer term positive effects of hurricane rebuilding, inflation, infrastructure initiatives, changes in trade agreements and changes in purchasing methods.
Even though state and local governments aren't cutting spending as they have in the recent past, their resources are still constrained by pension obligations. That's another factor holding growth to the average for 2018, even though other construction sectors are heating up. Also, while the extreme weather events of 2017 will open up new opportunities for 34 percent of surveyed government contractors, experts are wary that short-term boosts in disaster spending can lead to smaller budgets for government building over the longer term.
The State Government Picture
State governments post about 120,000 requests for proposals each year, usually most of them in the first two quarters. For 2018, bid volume is expected to drop slightly before turning to modest gains in 2019. Infrastructure projects and vertical building are two of the bright spots in 2018 for contractors seeking a piece of the state government pie.
Contractor opportunities though will vary widely based on the state. Besides their unique conditions, states whose large shares of revenues depend on fossil fuel extraction face continuing shortfalls. To make the matter worse for all states, gas tax revenues are dropping due to vehicles using less fossil fuel. Contractors can make themselves valued partners to state contracting agencies by helping them meet their construction needs while delivering a high return for tax dollars spent.
The Local Government Picture
The 77,000 city, county, and special district governments let out over 300,000 bids and RFPs each year. Contractors have very good opportunities to capture some of this business as the volume is increasing at a sustained clip. From a percentage view, however, 2018 will appear weak compared to 2017, even though contracts abound. That's because 2017 saw a lot of pent-up demand and wait-n-see projects released in the aftermath of the 2016 elections. For the rest of 2018, expect average growth.
Bright spots for construction contractors in the local markets include "smart city" infrastructure and education facilities. Private investment, just like public-private partnerships, will continue to attract more local government interest.
The Federal Impact On State and Local
Two areas influenced by the federal purse are ripe for opportunities in state and local government construction contracting. They are Community Development Block Grants and the Transportation Investment Generating Economic Recovery (TIGER) program. Both programs were targeted by the executive branch for elimination, but Congress had other thoughts in passing the March omnibus spending bill. Instead of eliminating the CDBGs, Congress expanded them by $300 million. And, the TIGER program's funds jumped from $500 million to $1.5 billion.
The CDBGs fund a wide range of construction activities at both state and local levels. They include rehabilitation of single-family and multifamily dwellings; housing construction; modernizing public housing; improving energy efficiencies of buildings; water and sewer improvements; and street improvements.
In 2017, the majority of TIGER grants went to rural areas for construction projects like transportation facilities, roads, shipping facilities, bridges, bicycle accommodations, pedestrian facilities, rail freight improvements, and flood warning systems. Contractors serving rural areas can expect more TIGER opportunities as the executive branch continues favoring rural communities.
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