Are we headed for a recession? Are contractors still experiencing labor shortages and material delays? What is the overall outlook for the market? I have recently done a deep dive into the state of the residential construction market. Today let’s take a closer look at the heavy civil construction market and unpack where we are headed amid a changing economic market and following the IIJA (Infrastructure Investment and Jobs Act).
Pointing to some specific data, the FMI 2022 Heavy Civil Construction Index, Third Quarter Report, gives us a peek into the current state of the market and what is to come in the months ahead.
Released in August, the 2022 third quarter index reports expectations for future industry contraction. Here is what it found. The index fell to 48.4 from 57.7, which is the second time since the index started in 2018 that it has dipped below 50.
The takeaway? The market is contracting. In fact, 70% of respondents agree with FMI’s expectation for a 12-to-18-month recession and 93% are concerned interest rates and economic weakness will weigh against their backlogs. While expectations for the U.S. economy and local economies were mostly negative, outlooks on the overall health of their engineering and construction businesses remain positive.
The highway and bridge, aviation, and port, marine, and docks segments exhibit the greatest optimism, while perceptions for the residential and commercial site development segments decline. Total heavy civil construction put in place is anticipated to grow by 2.3% in 2022, with growth in all segments except the air and rail/transit subcategories of transportation.
Of course, like many sectors, cost of materials and labor continue to be significant considerations. This index shows 41% believe labor shortages will grow and 45% expect materials shortages to ease, but prices will stabilize higher than before.
There is always a bit of good news if you look for it. In this index, margin on work acquired seems to be holding steady, with three-quarters of respondents indicating that margins are at or above the levels a year ago. Compared to last quarter, 86% report equal or better bid margins. This is likely because contractors have been working to align estimates with quickly rising costs. In some instances, contractors are raising bids to account for unknown cost increases.
While this index shows contraction for heavy civil construction, perhaps there will be new opportunities on the horizon as well. New legislation could lead to more work in construction. FMI points to an example of how quickly legislation can directly impact the built environment—outside of heavy civil. The CHIPS and Science Act, which Biden signed into law on Aug. 9, 2022, is one example. Before this was signed, just the expectation that it was going to pass led Samsung to announce a massive plan to build 11 new chip fabrication plants in Texas.
For heavy civil, chiefly, the Infrastructure Investment and Jobs Act, enacted last year, will invest $110 billion of new funds for roads, bridges, and major projects. Additionally, other new legislation such as the Inflation Reduction Act will lead to more projects in clean energy, as one example. These are just a few examples of how opportunities loom on the horizon.
Going forward, FMI’s index suggests heavy civil construction companies plan to be more selective or less aggressive in their bidding, to increase alternative procurement opportunities and to continue to hire and reduce capital investments in facilities. How are you proceeding in these times?
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