The construction industry is strong. But even in the midst of a fairly busy market where many firms will tell you their backlog is healthy, there are challenges.
Not only are construction costs rising, but you also might be tempted to bid lower than usual to avoid having idle workers. Or maybe your worst problem is simply not having enough information on your side to make confident, informed business decisions.
In either case, Procore’s Chief Economist, Anirban Basu, is here to give you everything you need to focus on this April.
If you’re short on time, start with these big picture need-to-knows.
- Labor is ground zero for potential profit loss. When hiring unskilled workers to fill labor gaps, monitor your insurance premiums and productivity levels.
- Input prices continue to fluctuate and squeeze profits. Be mindful of lumber and copper prices when bidding.
- Despite rising interest and mortgage rates, homebuilders are predicted to see increased demand and housing starts.
Some markets are red hot. But infrastructure is not one of them.
According to analysis by the Associated General Contractors of America, construction spending in January slipped one percent. But, what we should be celebrating is that the $1.18 trillion dollars spent in the first month of 2017, is still a 3.1 percent improvement from 2016.
Although infrastructure is currently the industry’s greatest weakness, other markets are aiding in the industry’s recovery.
Nationwide demand for new apartment buildings is visible in metropolitan areas. Out of the 12 U.S. major metro areas surveyed under Rider Levett Bucknall North America’s Crane Index, 33 percent of all cranes were dedicated to residential projects.
As the overall economy continues to improve, purchasing a home is becoming a more realistic option for young first-time buyers. But, nearly half (47%) of homes on the market today are sold in less than a month, according to the National Association of Realtors. So, homebuilders should be prepared to see continued increases in the demand for housing starts.
According to the American Institute of Architects, commercial construction spending is also expected to increase 8.3 percent in 2017. This is thanks to certain subsegments of nonresidential construction that are rising with consumer confidence, like hotel rooms, retail centers, and shipping warehouses for online retailers.
The key to solving labor challenges in the short term is to increase productivity.
In February, construction employment jumped by 58,000 jobs. This is the highest level since 2008, thanks to both the residential and nonresidential markets. But Basu cautions that in order to ensure continued growth, construction executives will need to have an adequate supply of new workers to replace those retiring or leaving the industry.
We are already seeing the consequences of the current skilled labor shortage. In the past year, average hourly earnings have increased by 3.2 percent. At $28.52 per hour, construction wages own the fastest rate of wage increase over all other private sector workers.
This, according to Basu, is where the cross currents of the labor shortage dilemma can threaten your margins.
Increasing compensation to attract higher skilled laborers is not working. And this is evident in the fact that the industry has added more than 219,000 construction jobs over the past year. However, the industry isn’t getting any more productive because the people being hired are lower skilled workers.
Having these less affordable, less productive workers on the payroll can lead to the temptation to bid low on projects in order to maintain cash flow and avoid idle workers. Regardless if this is the case, you need to look out for one very unpredictable variable: input prices.
International trade climates are unpredictable, affecting the accuracy of your bids.
The most recent numbers from the Bureau of Labor Statistics revealed a 4.8% rise in material prices between February 2016 and February 2017.
According to Ken Simonson, AGC’s Chief Economist, “Contractors cannot pass these costs along on projects already underway, and the data show they are not yet able to price new buildings at a level that reflects their rising materials and labor costs.”
As you bid on projects in the month of April, these are the input price fluctuations you should keep an eye on.
Copper prices fell last week, as the end of a strike at the world’s largest copper mine in Chile eased supply worries. Copper for delivery in the month of May settled down 0.5 percent to $2.6310 on the Comex division of the New York Mercantile Exchange.
Meanwhile, lumber could be stuck in a U.S.–Canadian trade dispute for the next four to five years thanks to the now-expired Softwood Lumber Trade Agreement. As a result, tariffs on lumber could be as high as 30 percent beginning as early as this spring. Expect difficulty getting commitments for lumber packages now and into the future.
Anirban’s Words of Wisdom: Invest in technology now. In construction, there are thousands of construction firms, but no one has significant market share.
It might be because of this that construction companies don’t feel the pressure of competition to adopt technology, or automation techniques as quickly as other industries. The automobile industry, online retailers, shipping, and airline industries have all been revolutionized by a shift in technology or automation. And as a result, we have seen a consolidation in those who own majorities in the market.
So, you might not feel the pressure to adopt technology now, but it’s the early adopters that will acquire the market share. Do everything you can now to invest in technology, boost productivity, and ultimately, consolidate the industry.