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Construction Health Update: The Cost of Doing Business Is Rising


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As of Monday, January 16 our national Construction Health Indicator score is 83.8.

The cost of doing business is getting more expensive for construction companies. Rising labor, commodities, and materials costs are predicted to start digging into your bottom line in the coming months – if they haven’t already. And after a boom in 2016, housing starts are down 18% from November’s figures. In retrospect, all of these signs point to the fact that 2016 was likely the construction industry’s post-recession peak. 

How does this affect you?

Energy is Controlling Materials Prices and Your Bottom Line 

According to the Bureau of Labor Statistics’ (BLS) monthly Producer Price Index (PPI) report, construction material prices fell 0.5% between October and November. This marks the steepest decline in construction industry inputs to the PPI since last February.  

According to Procore’s Chief Economist, Anirban Basu, this is just “the calm before the storm”. 

Recent deals made by OPEC members to suppress oil production have artificially inflated energy prices. As a result, crude petroleum prices rose 18.9% for the month. Meanwhile, natural gas prices rose 23.1% and unprocessed energy materials rose 14.6%.

Because of this, the price to produce and ship materials like concrete have increased by 0.9% last month. Iron and steel prices rose 0.6% for the month and 2.2% on the year.

Increases in commodity prices could translate into further stagnation in construction spending volumes. Especially if your clients are not prepared for related cost increases and decide projects are no longer sensible. 

Increases in commodity prices could translate into further stagnation in construction spending volumes. Especially if your clients are not prepared for related cost increases and decide projects are no longer sensible.

Investments are About to Increase Drastically

Construction input prices rose 0.4 percent for the month, according to analysis of U.S. Bureau of Labor Statistics by Associated Builders and Contractors (ABC). This is an increase of 2.1 percent year-over-year, the largest 12-month increase in 30 months.

Housing starts are down 18% from November’s high figures and most predictions agree that this will be a trend moving forward. The 2017 Dodge Construction Outlook from Dodge Data & Analytics, also predicts a slight slowdown, but not until 2018.

Nonresidential spending expanded to $712.4 billion on a seasonally adjusted, annualized rate in November, representing the highest level of spending in eight years.

The Construction Backlog Indicator (CBI) and the American Institute of Architects' Architecture Billings Index (ABI) both portend slowing in the U.S. Northeast region which was hit hard in the third quarter, with architecture billings down more than 5 index points and construction backlogs down 19.4% year-over-year. 

The Construction Backlog Indicator (CBI) portends slowing in the U.S. Northeast region, with architecture billings down more than 5 index points and construction backlogs down 19.4% year-over-year. 

Backlog now stands at 8.7 months. This is an increase of 2% from the second quarter, and 2.2% on a year-over-year basis according to Associated Builders and Contractors’ (ABC) Construction Backlog Indicator (CBI).

The average age of all fixed assets in the U.S. stands at 23 years. The rise in backlog, supported by a proposed $1 trillion infrastructure plan suggests that fixed assets like factories and hospitals could soon get a revamp.

The Associated Builders and Contractors (ABC) forecasts a slowdown of growth in the U.S. commercial and industrial construction industries in 2017 due to rising commodity prices and potential further interest rate increases this year. 

However, the fitful consumer-led recovery is still expected to support modest construction spending and employment. The U.S. economy continues to expand amid a weak global economy and despite risks, nonresidential spending should expand 3.5% in 2017, said ABC Chief Economist Anirban Basu. 

Labor Shortage Remains One of the Industry’s Largest Obstacles

The construction unemployment rate expanded by 1.7 percentage points in December and stands at 7.4%. By comparison, the national unemployment rate ticked higher to 4.7% in December. 

More than 80 percent of ABC members report difficulty finding appropriately skilled labor. Accordingly, many construction firms are required to do more with fewer people, which should eventually show up in construction productivity data that reflect the amount of output generated by the average worker on a per-hour-worked basis.

Additionally, data from the U.S. Bureau of Labor Statistics indicate that construction job openings stand at a 10-year high and that average hourly earnings for construction workers rose to $28.28 per hour in 2016. The demand for construction workers is positioned to remain high and is likely to increase already significant wage pressures.

The Final Caveat

2017 will be an inflection point for your company. Businesses will finally be forced to change the way that they operate in order to stay viable. To overcome the industry’s slow growth will require maximum efficiency on all fronts. 

That’s all we have for now. Keep building and we’ll keep crunching the numbers. Check back here daily as numbers refresh and we’ll continue to translate this into meaningful digests that will help you make informed decisions all week long.

Click here for recaps from Construction Health Updates from past weeks.

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