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Focus - Good, but not great

image Marc Ramsey, Director of Communications American Subcontractors Association, Alexandria, VA

SAN ANTONIO - With economists predicting a “subdued,” but possibly still “moderate” construction marketplace, indicating that the market is “in the process of either approaching or rounding a peak,” subcontractors, specialty trade contractors and suppliers are keeping a close eye on several issues that may factor in their business decisions in the coming year or two.

 

 

    Dodge Data & Analytics Chief Economist Robert A. Murray characterized the economic environment so far in 2017 as “good but not great,” noting that real GDP this year will be up 2.2 percent. Murray said the U.S. construction industry is now “fully into the mature stage of its expansion, one that’s characterized by slower rates of growth as activity approaches a cyclical peak.” He said that after rising 11 percent to 13 percent per year from 2012 through 2015, total construction starts advanced a more subdued 5 percent in 2016. “That deceleration has continued into 2017, with construction starts exhibiting an up-and-down pattern on a quarterly basis, often typical of a market that’s in the process of either approaching or rounding a peak.”
    Murray estimated total construction starts in 2017 to climb 4 percent to $746.5 billion. He added that job growth is not moving quite as fast as last year, but long-term interest rates remain low. For 2018, he estimated that economic growth will be
2.6 percent, and he said he expects job growth to continue at a moderate pace. He predicted total construction starts in 2018 to advance 3 percent to $765.2 billion.
    Subcontractors, specialty trade contractors and suppliers may react cautiously to the construction forecast, considering several issues that may factor in their business decisions.

Tax Bills

    While the media reports on the broad outlines of the House and Senate tax bills, ASA is deeply involved in those provisions that have a direct impact on the construction industry, as well as provisions that impact the operations of construction businesses. The Congressional Joint Committee on Taxation has reviewed each of these proposals to determine whether they would increase or decrease the tax burden on individuals or businesses. Construction businesses will ultimately have to evaluate the impact of the tax bills on their bottom line.

Infrastructure Funding

    President Trump pledged to introduce a massive $1 trillion infrastructure plan during his first 100 days in office, however, the construction industry is still waiting for a plan that it can embrace. Congressional leaders continue closed-door discussions on their own plans, but ASA does not expect to see any construction under a new infrastructure program until late 2018 or early 2019, if then.

Trade Shortage
    Union and non-union construction firms alike have been affected by the inability to find qualified skilled labor. According to Tradesman International, over a five-year period through 2011, the construction industry lost 2.3 million jobs. Numerous contractors reduced their work forces’ overtime to cut overhead that simply could not be covered. A surplus of available employees was created that had limited options. In the past few years, the market has returned, but the laborers have not. Many individuals either left the industry for other careers or retired. Compounded with a generation of students whose high schools were graded on college placement or did not encourage the trades, the construction industry has a current shortage and faces a troubling labor outlook.
    “The average subcontractor now faces an abundance of profitable work with a depleted staff and resources,” said Paul K. Reimer, AFSB, a contract-underwriting officer at Liberty Mutual Surety. “While cutting staffs down to their ‘A&B’ teams may have saved their organization in the downturn, it now hamstrings their ability to expand. Many find themselves forced into bringing in new employees who may not understand their corporate mindset and methodologies. This is a major concern from the underwriting side, as owners are forced to decide between simply standing firm with the resources on hand or hiring and growing.”
    Reimer warned that hiring the wrong employee could have drastic ramifications on the project a company assigns him or her. “One poor decision could potentially jeopardize the company’s balance sheet and ability to obtain future work,” he said. “In order to have the construction marketplace grow as an industry, we need to focus on acquiring the right talent and retaining it.”
    ASA encourages construction employers to invest their own resources in workforce development, including hiring apprentices; providing employees with specialized training; and working with local high schools, technical schools and community organizations to develop training programs to fill their needs.

Material Prices
    Reimer noted that material pricing for contractors on long-term projects has, and always will be, a concern and a key component to overall project pricing. “Once a project has started, a contractor has little leverage to bill material cost increases to a job (unless they include an agreement in their contract), so the ultimate effect is a reduction of the original profit margin,” he said.
    The construction industry has recently seen increases in fuel, metals, drywall, and lumber. And according to the Producer Price Index, increases in metals—copper, iron and steel scrap and brass—have shown the highest increases over 2017. Reimer said that products such as drywall, glass, and cement have all shown lesser increases—2 percent to 7 percent respectively—over the year. “The only material decreases we are seeing in 2017 have been insulation and asphalt paving,” he said.
    “Ideally, contractors can lock in prices with suppliers at the time of award and also bill for stored materials either on-site or in warehouses,” Reimer added. “This limits price fluctuation risks. Having strong supplier relationships remain key to protecting contractors, especially specialty contractors with limited sources to find materials.” -cmw


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Carol Wiatrek meditor@constructionnews.net