The construction industry has persevered through two years of unprecedented challenges, and it maintains a largely favorable outlook for the next two years and beyond. According to Associated Builders and Contractors, companies held an average of 8 months of backlog as of February 2022, which is consistent with the pre-pandemic backlog levels held in February 2020. Additionally, the Architecture Billings Index published by the American Institute of Architects has registered a positive reading in each of the 13 consecutive months from February 2021 to February 2022. This indicates that architects have been increasingly busy over the last year, which should generate a strong pipeline of new opportunities for contractors in the commercial, industrial, and residential sectors. Meanwhile, the $1.2 trillion infrastructure bill enacted in November 2021 promises to spur a new generation of public works project opportunities for civil contractors.
The extent to which contractors can successfully convert these opportunities will largely depend on their ability to navigate the formidable challenges of the day. Three of the most significant challenges currently facing contractors are:
Employee retention and engagement
According to benefits research firm PAS, Inc., the turnover rate among professionals and middle managers working in the construction industry rose to 18% in 2021: the highest rate in 15 years. To combat this trend, companies are increasingly crafting compensation arrangements for key employees that encourage and reward the next 2-5 years of continuous service (i.e. the near-term and mid-term). There has also been a renewed emphasis on training and development. By establishing a defined path for career growth and advancement, contractors are providing key employees with an incentive to stay beyond the next raise. A recent study published by LinkedIn Learning, for example, found that employees tend to stay twice as long at companies with high internal mobility than they do at companies with low internal mobility.
According to the US Bureau of Labor Statistics, the cost of construction materials rose by 22% during 2021, and construction wages increased by 4% during that same period. Among the common construction materials most significantly impacted were steel, fabricated metal, and softwood lumber, which experienced cost increases of 127%, 42%, and 13%, respectively. With these trends expected to continue, accurately bidding and estimating these costs will be especially critical to the profitability of future projects. To hedge against significant future cost escalations and create stability within their projections, some contractors are implementing a more widescale use of commodity futures contracts. As recently note by Barley Snyder, many contractors are also exploring the increased usage of price escalation clauses in their customer contracts.
Supply chain disruptions
The variability and duration of lead times for key materials have increased dramatically over the last year. According to the Institute for Supply Management, the average lead time for orders of production materials rose to 97 days in February 2022: its highest level since 1987. Contractors are responding to longer lead times and delivery uncertainties through the stockpiling of uninstalled materials. Companies with large cash reserves are better equipped to implement this strategy.
Looking Ahead: What will tomorrow’s top challenges be?
While the three issues discussed above will deservedly receive the majority of contractors’ attention over the coming months, it is prudent to plan for the next round of challenges as well. Many economists consider the emergence of increased financing costs to be a likely development over the next 6-18 months. A recent forecast published by Goldman Sachs predicts that the Federal Reserve will increase interest rates by 1.75% throughout the course of 2022, with additional interest rate increases likely in 2023. We will continue to monitor the challenges and opportunities that emerge over the coming months and discuss the industry’s responses in future posts. For more information regarding our construction experience, be sure to visit our construction services page and don’t hesitate to reach out to a member of our construction team.