The Economic State of Construction
A (mostly) favorable economy, a labor shortage, and the burning question: ‘How can the industry build more with less?’
The U.S. economy is favorable, with real GDP (gross domestic product) increasing at an estimated annual rate of 3.5% in the third quarter of 2018. This follows a 4.2% increase in real GDP during the second quarter of 2018, according to the BEA (Bureau of Economic Analysis). The strong U.S. economy has acted like a tide lifting most boats, and that includes the construction industry. For instance, the ABC’s (Associated Builders and Contractors’) Construction Backlog Indicator, which reflects projects under contract, but yet to be executed, was at an all-time high of 9.9 months in Q2 2018, indicating robust demand for construction services. ABC further estimates there will be a total of $1.28 trillion in construction spending in 2018 and projects spending will grow to $1.33 trillion in 2019.
Describing the current state of the construction industry, Ed Zarenski of Construction Analytics says 2018 started the year with a record backlog after spending slowed in 2017; but last year’s slowdown had followed the strongest five-year growth period ever recorded (2012-2016).
Despite an overall positive economic outlook for construction in the coming years, key hurdles will challenge the industry to think outside the box in potentially uncomfortable ways. Among the solutions construction firms need to be thinking about is how they can leverage technology to streamline workflows, achieve maximum process efficiencies and build quality, and, in general, alleviate bottlenecks and other issues associated with the labor shortage, which is expected to get worse before it gets better.
Speed Bumps Ahead
Michael Bellaman, ABC’s president and CEO, says rising interest rates represent one of the biggest economic challenges that could affect project starts in the future, and the cost of inputs, such as wages and materials, are also creating challenges for firms of all sizes. “In September, prices for inputs to construction were up more than 7% compared to the same time last year,” Bellaman says. “(ABC) anticipates that materials and human capital costs will continue to rise going forward. For small businesses, which make up the majority of the construction sector, cash flow remains critical as they grow their businesses.”
Ken Simonson, chief economist, AGC (The Associated General Contractors of America), says the two biggest economic challenges facing construction right now are finding enough qualified workers and pricing projects at a high enough level to cover rising labor costs and unpredictable spikes in materials prices in light of ever-changing tariffs.
Meanwhile, the skilled labor shortage in construction is and will continue to be a serious setback. ABC estimates there are 500,000 open positions in the U.S. construction industry right now, and the number of vacancies will continue to grow as construction spending increases. The shortage often delays project times and increases construction costs.
Across the board, contractors seem to agree it is more difficult to attract young adults to the construction industry than it was in the past. As Baby Boomers retire in growing numbers, their shoes are too infrequently filled by workers from younger generations. Simonson says the difficulty in finding and keeping qualified workers has forced some firms to pass up projects they would otherwise bid for their companies. “The current workforce shortage has its roots in the shift decades ago by parents and school guidance counselors who believed all kids should go to college,” Simonson explains. “The situation worsened when construction employment shrank for five years from 2006 to 2011, while other industries had milder and shorter downturns.”
The trickle of skilled labor coming into the industry compared to the boomer retirement exodus is creating an imbalance that often adds to cycle time and may even hurt finished product quality. The labor shortage also puts upward pressure on wages, which can impact project profitability. Connor Lokar, speaker and economist, ITR Economics, says higher wages may cause GCs (general contractors) to miss out in some cases when they try to protect their margins and pass higher costs through to customers.
Lokar encourages construction firms to consider how challenges can lead to opportunities. In fact, he says opportunity may even lie within the labor shortage. “Contractors that can maximize their efficiencies and thrive with retention will be able to pick up marketshare in some markets where other GCs have to turn away or delay projects too long due to lack of labor,” Lokar explains. “If you can turn what is a weakness for everyone else into a strength, you can thrive.”
Opportunities and Solutions
As labor costs go up, so too does the economic incentive to innovate and automate. Lokar says contractors need to be continually investing in anything that can augment labor productivity or replace it all together.
By wading through the options available to identify and implement technologies that will create real value—and these options may include everything from iPad tablets to AI (artificial intelligence)-enabled robots, ABC’s Bellaman says construction firms will be better able to deliver their work safely, on budget, and on schedule. “Technology is automating the commodity-based steps in the construction process—both in the blue-collar and white-collar processes,” Bellaman adds. “Virtual design in construction and BIM (building information modeling) technologies are allowing designers and construction teams to standardize designs early to facilitate prefabrication. This technology creates the foundation for modularization and automation of the construction process. Collaborative cloud technologies eliminate the reliance on paper documents, speed up information flow, and help ensure everyone is working from the most current contract documents. Laser scanning, photogrammetry, and AR (augmented reality) also are playing a material role in capturing as-built conditions and converting plans into a real-life virtual reality for users.”
And while technology adoption will slowly make processes more efficient, and making investments in processes—such as modular construction and panelized construction that help builders build more with less—are crucial, the labor shortage must be addressed, and recruiting the next generation of construction workers remains a key goal.
The scarce supply of labor and the related “skills gap” is prompting construction companies to rethink how they deliver work, and it’s forcing the industry as a whole to redouble its efforts in recruiting, retaining, and upskilling the next generation of construction workers. Subcontractor trades and industry associations are working hard to convince younger people that high-paying jobs are available in light construction immediately after high school and that training for these jobs is readily available.
While some contractors are turning to labor-saving equipment, technologies, and offsite construction or manufacturing, others are upping their investments in recruitment, training, and overtime to make up for unfilled positions and to train inexperienced workers. Many are doing both. “Contractors are trying to get the word out that construction is not just dirty, dangerous, dead-end work but involves cool tools like drones, laser- and GPS-guided equipment, 3D printers and robots, and even augmented-reality goggles for training,” AGC’s Simonson says. “All of these devices and others allow firms to train workers faster, use fewer or less-experienced workers, or make experienced workers more productive.”
In the meantime, construction companies are looking outside of the industry to acquire talent that can help them take advantage of the economic upswing. “Firms are increasingly looking at transitioning military personnel, workers who are leaving disrupted industries, people transitioning out of the criminal justice system, and communities of people who have traditionally not been exposed to the construction industry to build the talent pipeline,” says ABC’s Bellaman.
While the economic state of construction looks positive now and for the foreseeable future (with some caveats), trade tensions and tariff uncertainties, along with rising input costs and a construction labor shortage cast a haze on an otherwise sunny forecast. However, by implementing technology that can add operational value and discovering ways to maximize assets of both human and machine varieties, construction companies will be better poised to compete in the new world they’re helping to build.