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MBN USA

March 22, 2022

Outlooks strong for both residential, commercial markets

By Tonya McMurray

The construction industry is seeing steady growth but is struggling to manage supply chain and labor shortages. The industry has been strong since early in the COVID-19 pandemic, surpassing pre-pandemic gross domestic product, or GDP, levels by the third quarter of 2020 and adding more than $20 billion to the economy every quarter since, according to Deloitte’s 2022 Engineering and Construction Industry Outlook.

Much of the early post-pandemic growth in construction came from the residential market, but growth in the commercial sector began to pick up in 2021 and is projected to continue, said Kenneth D. Simonson, chief economist for the Associated General Contractors of America, or ACAG.

“Homebuilders and residential specialty trade contractors have been extremely busy ever since the initial pandemic lockdowns ended in the spring of 2020,” he said. “Conditions for nonresidential construction were generally weak until the second half of 2021, but more types of projects are on the increase. It appears 2022 will offer increased opportunities for most types of building construction as well as infrastructure projects.”

Troi Taylor, president of Houston, Texas-based Taylor Construction Management LLC, agrees. “The state of construction is booming,” he said. “Clients are spending money. We see a diversity in lines of construction from aviation to mass transit to education and health care. Everybody is spending.”

But while business opportunities are plentiful, supply shortages, increased costs and a scarcity of skilled workers are creating significant challenges and leading to lower profitability. Industry margins are likely to decline even more in 2022 as those challenges persist, according to Deloitte.

Supply shortages

“Every link in the supply chain — from factories in the U.S. and abroad to ports to warehouses — is frayed,” Simonson said. “Manufacturers are still playing catch-up with orders placed months ago. Ports are so jammed with containers they can’t unload ships on a timely basis. Containers are stuck in ports or outside of distribution centers because there aren’t enough chassis, truck drivers, rail crews or warehouse workers to move and unload them. As a result, delivery times are very unreliable, forcing contractors to finish projects late or scramble to find alternative supplies.” [See related article on Page 18].

In addition to delivery delays, supply-chain bottlenecks have resulted in higher prices. During the first seven months of 2021, prices of critical construction materials experienced double-digit increases every month, according to Deloitte.

Taylor said those price increases have continued.

“You are taking a gamble when you give someone a schedule because you don’t necessarily control the schedule,” he said. “And you don’t necessarily control your costs. It’s Economics 101. The costs for commodities change based on demand. Sometimes, the cost of materials may change twice in the same week.”

Taylor said one strategy his company uses to combat the supply-chain challenges is to order needed materials and equipment earlier in the process. As the design team is completing plans for new buildings, the company places orders and stores the materials in warehouses so they will be available when builders are ready for them. He said the company also leverages its relationships with materials suppliers to make sure they can get a place in the queue for orders rather than soliciting bids and multiple quotes for materials.

“That’s not the traditional way of purchasing anything,” he said. “It definitely comes with risk, but for those clients with mission-critical needs, it’s an option they’re open to today that they would not have considered two years ago.”

Finding workers

The nationwide labor shortage impacts all phases of construction. With nearly every industry struggling to hire employees, there are fewer designers, code regulators and construction workers. Deloitte reports that 60% of construction firms report project delays related to workforce shortages.

Simonson said those workforce shortages will likely continue and perhaps even worsen due both to an increased risk of COVID-19, as well as other job opportunities.

“One large, ongoing survey finds that construction workers are far less likely to have been vaccinated against COVID-19, and [are] far more hesitant to get vaccinated, than other workers,” he said. “This makes them more susceptible to becoming ill and leaving contractors without full, healthy crews. Second, industries that formerly paid workers much less than construction — fast food, warehousing and local delivery, for example — have sharply raised starting pay and bonuses, while other industries may offer more flexibility about working hours and locations compared to construction.

“These facts mean construction firms will have to increase wages more, pay more overtime to the workers they do have, and invest more in labor-saving methods,” Simonson said.

The Great Resignation

Taylor said another factor contributing to the labor shortage is the number of skilled professionals choosing to retire.

“They initially took off because we had a nationwide shutdown and everyone was quarantined,” he said. “Then they realized they actually enjoyed being home. Typically, that wouldn’t be a big issue for us because we would just incentivize them with a bigger and a better compensation package — whether it’s more vacation, a better 401(k) or higher salaries. But now, quality of life for many of those skilled professionals trumps anything that we can offer them in the workforce, especially in the pandemic.”

Taylor said there are inexperienced workers available, but clients are often hesitant to accept those workers, especially when doing business with small or minority-owned firms.

“Our clients don’t want inexperienced folks learning on their jobs,” he said. “If we’re building a new hospital, they want someone who has built 10 hospitals before theirs, not somebody who has worked under somebody and now is going to take the reins as a product manager.”

Taylor Construction Management is addressing that challenge by hiring experienced workers that can be billed to clients and then hiring less experienced workers at its own cost to shadow the more experienced person. This method allows workers to gain experience and gives clients a chance to gain confidence in the less experienced workers for future projects.

“It’s a cost from a monetary perspective and from a time perspective,” Taylor said. “And it’s a risk. You may train those folks for nine months or a year, and then they may go get another job. But at this point, the labor pool is so strained that it’s a gamble we are willing to take.”

He said the company is also considering hiring workers from overseas to fill open positions.

“We’re at that point where we have significantly more job openings and opportunities than we have experienced individuals to do them in the health care and aviation and the education sectors,” Taylor said.

In addition to struggling to find adequate staffing for construction projects, the lingering effects of the COVID pandemic have impacted productivity on job sites. Safety precautions such as social distancing, checking temperatures and disinfecting equipment all slow the daily work process, he said. And, when workers or their family members are exposed to COVID-19, the resulting quarantine requirements delay work on job sites even more.

“You literally have to reschedule and pivot daily,” Taylor said. “On a construction site, you typically could go a week or more before readjusting your schedule. Now it’s every day. Everything is slower and you really can’t guarantee cost or schedules.”

Continued opportunity

Deloitte projects the construction industry will remain strong with an added boost from the recently passed Infrastructure Investment and Jobs Act, which provides funding for health care, public safety and other public infrastructure.

Simonson expects new residential construction to remain robust with somewhat less demand for home renovation and additions. He expects commercial construction to continue to grow as well.

“Warehouse and data center projects remain hot niches,” he said. “Manufacturing, renewable energy and select health care and infrastructure markets will be emerging categories. Overall, the outlook is very favorable but finding workers and materials — along with bidding projects with sufficient contingency for price and delivery fluctuations — will be major challenges.”

Even when labor and supply shortages begin to resolve, the construction industry will still confront changes brought about by the global pandemic, Taylor said.

Estimators, and project managers and executives have realized they can review drawings, approve invoices and lead teams with the use of remote tools. Many of them will continue to want to work at least some portion of their schedule from home, and it may be more cost-effective for construction companies to operate in a hybrid mode.

“COVID-19 has opened the door to show that you can work smarter,” Taylor said. “Some things have to be face-to-face, but a lot of stuff is going to be virtual now. Change in industry means opportunity for minority-owned and small businesses. We are seizing opportunities — even if the profit margins are flat. When the market becomes more competitive, we’ll have a broader portfolio and relationships with clients that felt we were there for them when they needed us. It will never be what it was in 2019, but we can take advantage of opportunities in the disruption caused by COVID-19.”

To learn more about Associated General Contractors of America, visit agc.org.

To learn more about Taylor Construction Management, visit TCm-llc.com.