Construction has been, and perhaps will continue to be, on a rollercoaster ride for several years. COVID-19 has been a major downer, both for individuals and companies. Inflation and interest rate increases are causing more people to re-evaluate purchases, especially the largest one, a home. Residential construction is taking it on chin depending on where you live and commercial isn’t doing much better.
The NAHB (National Assn. of Home Builders) lamented that rising mortgage rates approaching 7%, along with declining builder sentiment stemming from stubbornly high construction costs and weakening consumer demand, pushed new-home sales down at a double-digit rate in September. Following a brief uptick in August, sales of newly built, single-family homes in September fell 10.9% to a 603,000 seasonally adjusted annual rate, according to newly released data by the U.S. Dept. of Housing and Urban Development and the U.S. Census Bureau.
New single-family home inventory remained elevated at a 9.2 months’ supply (of varying stages of construction). A measure near a 6 months’ supply is considered balanced. The count of homes available for sale, 462,000, is up 23.2% over last year. Of this total, only 56,000 of the new home inventories is completed and ready to occupy with the remainder not started or currently under construction.
AGC (Associated General Contractors of America) officials said that rising interest rates were hurting demand for housing and many private-sector projects while the impacts of new federal funding for infrastructure, semiconductor plants, and green energy facilities have yet to fully kick in. Still total construction spending increased by 0.2% for the month of September and by 10.9% for the year as nonresidential construction activity now outpaces residential construction.
AGC officials noted that gains in public sector transportation construction have lagged other fast-growing segments as officials grapple with Buy America and other new regulatory requirements. However, another problem is buried in the statistics: employment of skilled workers is faltering.
The construction industry added only 1,000 employees in October while it continued to boost wages for hourly workers as firms compete to hire from a small labor pool, according to an analysis by AGC of new government data. Association officials said the slight increase in construction employment is an indication of how hard it has become for construction firms to find qualified workers to hire.
Indeed, the construction sector would have added more jobs in October if only firms could find people to bring on board. However, the labor market conditions are so tight that the sector barely increased in size even as demand remains strong for many types of construction projects. Total construction employment moved up to 7,721,000 in October, an increase of 266,000 or 3.6 percent from a year earlier. Nonresidential building firms added 3,200 employees for the month, while residential building firms added 3,200. Those gains, however, were offset job losses among specialty trade contractors (-4,000 jobs) and heavy and civil construction firms (-400).
From these numbers it becomes obviously that, when general contractors feel the pinch, specialty, and subcontractors yell “Ouch!” That pain is being heard loud and clear around the globe and among the listeners is Dodge Construction Network and Procore Technologies. They partnered recently to issue a report, Top Business Issues for Specialty Contractors, on how economic, workforce, and technology trends are impacting construction worldwide.
The report reveals that 99% (!) of these companies experience erosion of their profit margin during construction, one third of which is tied to unplanned rework. In addition, about one third of their revenue is lost to unbillable changes, over 90% report negative impacts due to labor shortages, and 39% are still using spreadsheets, paper forms, and other outdated methods to manage key activities, instead of construction-specific software.
This global research focuses on five types of specialty contractors: mechanical, electrical, plumbing, steel, and concrete in the U.S., UK, Canada, and Australia/New Zealand.
Impact of Rework
According to the Construction Industry Institute, rework can account for between 2-20% of a project’s contract amount. Most of it is caused by errors or miscalculations during the planning phase, or mistakes not noticed until construction is already underway, forcing companies to devote precious time and resources to undoing and fixing work already completed.
Some companies are addressing this is with a unified data environment. Stored in the cloud and accessible to every project stakeholder, all critical documents are kept in one secure place, and all changes are documented and available for always viewing. Freed from the burden of a paper-based planning process, managers and workers alike can always have the current information in front of them and be sure their work will be as free from errors as possible, with the plans having been repeatedly vetted and approved by supervisors and managers from the unified data system.
Supply Chain Issues
Materials prices are highly volatile, and 31% of specialty contractors say they cannot pass cost increases on to owners on the lion’s share their projects. To deal with these challenges, nearly half are raising prices, especially concrete trades (56%). Price escalation and supply chain disruptions continue to register as the number one issue in construction contracts today note AGC.
The price of materials and services used in nonresidential construction jumped 12.6% in September from a year earlier despite a dip of 0.2% in August according to an analysis by AGC of government data. Association officials note that the construction industry was suffering the most from inflation, adding that new Buy America rules set to go into effect in 2022 will only aggravate the situation.
The producer price index for inputs to nonresidential construction—the prices charged by goods producers and service providers such as distributors and transportation firms—decreased 0.2% from August to September but rose 12.6% since September 2021. That outpaced the 8.5% year-over-year rise in the overall producer price index for finished goods.
The absence of a price escalation clause is considered a “killer clause” for many general contractors working on private vertical construction. Public owners are taking notice as well. The TxDOT (Texas Dept. of Transportation), in an April 2022 internal memo, recognized there have been availability issues and increased lead times for items as well as “significant increases (over 100% in some cases) in some material prices.” The memo lays out eight ways TxDOT strives to be a good owner in these challenging times. Let’s examine some of the highlighted strategies here:
- Pay as soon as possible for materials.
- Allow expanded use of purchasing and storing materials beyond just long lead items under its “delayed start authority.”
- Pay higher prices when the timing for purchasing materials is delayed by the owner.
- Pay the higher price when the quantity of material needed is increased.
- Allow for substitutions.
- Consider deletions to avoid long lead times or more expensive materials.
- Consider giving additional time.
- Refer matters to the TxDOT Administrator (if all else fails).
Better Financial Control and Payment Process
The Dodge-Procore report shows that only 27% of specialty contractors are paid within 30 days of invoicing for completed work and 29% report their typical period exceeds 60 days. They cite technology to automate the process as the way to help their company get paid faster with less conflict. A major impact of slow pay is on the financial status of the billing company. Even those companies with reserve funds to cover payroll and material needs can be hit with unexpected costs.
Sudden failure of construction equipment can result in a mad scramble on the ground to replace or repair the defective machinery, effectively grinding progress to a halt. Advanced sensor technology, like telematics, can continually monitor equipment for signs of fatigue or failure and automatically send data back to managers. This gives companies the opportunity to know in advance if a piece of equipment is headed for the repair shop—or the scrap heap—and allows them to make switch out or repair the faulty equipment before the project starts. GPS enabled sensors can track the exact location of a piece of equipment, reducing the possibility of theft and increasing the chances of finding equipment that gets stolen from a job site, which is another major contributor to dinging a company’s bottomline.
Digitally keeping better track of job-related costs like labor, equipment utilization, and daily production data is a wonderful way companies can improve efficiency and cut down on costs. By replacing paper-based timesheets, materials tracking, and equipment utilization with a mobile solution—and there are dozens to choose from—supervisors can spend less time crunching numbers and easily pass relevant information into a company’s enterprise system digitally, where payroll staff or managers can change or approve it.
Finding the right skilled labor, especially in the technical crafts, at this time and in this market is the “800-pound gorilla in the room,” a threat that cannot be ignored. Thirty-two states added construction jobs between August and September, reports AGC, and an equal number boosted construction employment during the past twelve months, according to federal employment data. The job gains were welcome news but a significant labor shortage in the industry held back even larger employment gains.
AGC urged Congress and the Biden administration to boost funding for career and technical education programs, for measures to allow more immigrants with construction skills to lawfully work as a short-term measure to relieve labor shortages. And while training programs and temporary measures to alleviate the labor shortage are good short-term programs, there is another employment issue hanging over the industry: the loss of legacy knowledge.
Already struggling with workforce shortages, companies say an average 33% of their current workforce is likely to retire in the next five years, threatening to dramatically worsen the situation. Stepping up technology adoption, offsite methods, and jobsite automation are among the ways companies are adapting.
Implementing technology into a construction operation doesn’t have to be a cost-prohibitive undertaking. By embracing digital and mobile technology, actual cost savings can be realized almost instantly, boosting the firm’s bottom line and freeing up time for the next project. The projected cost savings in rooting out inefficiencies over time can be massive, and an intelligently planned technology implementation will pay for itself after just a few jobs.
Despite the wide availability of construction-specific software solutions, there are some companies that still rely on outdated methods to manage critical processes. The labor shortage underlies the top obstacles to adoption, which include resistance from field staff and time required to evaluate, implement, and train for innovative solutions. These challenges can be overcome but it takes effort and management skill. Convincing long-term employees that technology adoption does not mean end-of-the-line for them may be the hardest part.
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