December 2018
by Todd A. Feuerman, CPA, CCA, MBA, Ellin & Tucker
“Slow and steady wins the race” would be a fitting mantra for the construction industry moving into 2019. While the uptick of the economy and projected growth in construction contract revenues is promising, business owners and executive teams still face a number of challenges, like tight labor markets, concerned financial lending market and political climate changes, which may impact material pricing on job sites for items imported for construction.
The 30,000-Foot View
The momentum is in the numbers: according to a recent survey completed by Engineering News-Record’s Top 400 Contractors, the Top 400 contractors, as a group, generated $375 billion in contract revenue in 2017 vs. $366 billion in contract revenue in 2016. This is a calculated increase of 2.1 percent year to year. Recent reports issued by Dodge Data & Analytics also suggest that U.S. construction starts will increase by 3 percent with additional room for expansion.
There is, however, still a lot to be said for the state of construction backlogs. Though recent trends have indicated that the timing of work released into production per se is somewhat unpredictable and subject to delayed starts, the logs themselves are generally quite substantial in size and scope. For instance, the Hudson Yards project in New York City, which is slated to be the largest construction project area in U.S. history, is often delayed by regulatory agencies releasing work and funding needs.
The construction market has benefited in certain geographical regions during 2017 and 2018 from very large construction projects. The completed projects include new campus facilities for high-tech giants such as Google and Apple, as well as continued warehousing and distribution centers for Amazon, which recently selected both New York and Northern Virginia as the company’s two new Mid-Atlantic headquarters. As more of the giants continue to grow and expand in the market, the need for mega construction projects and related infrastructure projects should follow. Another key element that has provided a boom to the construction industry relates to hurricane rebuilding in the southeastern region of the United States, as well as other natural disaster rebuilding from the wild fires in the western region of the United States.
Additionally, certain sectors of the construction and development arena have been and will continue to be impacted going into 2019 more favorably than others. For example, solar and power construction should continue to improve and provide steady growth. While amusement and recreation construction spending have proven to be very “lumpy” and unpredictable. State highway funding may see some improvement even with uncertainty regarding federal funding for large projects. Airports and train infrastructure continues to show signs of significant improvement. Each of these sectors have been impacted by project funding and political scrutiny applied to the larger projects; however, once jobs are released there is generally a significant windfall of work that enters the market place.
Let us take a closer look at some the key areas the construction industry should pay close attention to in 2019:
Construction Concerns and Renewed Strategy
While there are very favorable signs of continued growth in the construction industry, there are still fears in the marketplace that have caused some to proceed with caution warnings. Risk factors that have caused some level of trepidation in the construction market include the following items:
- Political and regulatory uncertainty.
- National economic uncertainty.
- Local and regional area economic uncertainty.
- Rising material costs.
- Rising interest rates.
- Immigration employment protocol.
- Overall shortage of construction workers.
As the construction industry has improved over the past several years, construction firms have been able to re-think their approach to the market and re-focus resources to projects that will provide an acceptable financial return with a more controllable risk. As the quantity of opportunities continues to increase, so will the overall quality of projects available for bidding. Many construction firms have been able to favorably use the overall improved trends in the construction industry as a means to focus on what they do best as opposed to simply accept any project that comes along, regardless of the job’s ultimate strategic and financial risks.
Labor Shortage
One of the single biggest issues that the construction industry continues to face is the extremely tight supply of skilled workers and the perceived negative notion that younger workforce entrants face when entering the construction workforce. With the baby boomer generation set to retire within the next five to 10 years and with the intense federal pressure to limit and reduce the immigrant labor force for Mexico and Central America, the construction industry is faced with a monumental task of finding workers.
Industry lobbying groups and special interest groups continue to address these issues at the state and federal level in an effort to develop funding for trade education programs, apprenticeship programs and ways to create a softening approach to immigration protocol, which should all help to some extent. However, time is not a friend and training is critical to develop a workforce needed to complete construction backlog now and in the future.
Material Pricing Pressures
Building material costs, like all other sectors of the economy, have also continued to increase for many reasons, including but not limited to high demand from the general increase in the construction industry to specific trade products such as steel which continue to rise. Steel costs have become particularly problematic due to the political pressures levied on the tariff costs that will come into play with trading partners of the United States. In addition to steel prices, the varying fluctuation in the oil industry has continued to impact almost every component used in the construction industry. Based on the commodity nature of oil, this is likely to continue into 2019.
Technology Trends
Technology continues to become the norm in the construction industry. An industry that was once perceived as archaic is now looked upon as cutting edge. The use of BIM collaboration, cloud computing and mobile data has and will continue to be a major asset for construction companies to properly manage operations. In addition to office-related technology, construction firms have been effectively implanting technology in the field as it relates to personnel, equipment and job site viewing.
While GPS technology continues to be used in construction, visual job inspections and oversight has been impacted by the use of drones. Drones have become more prevalent in conducting site surveys, site inspections and general site management. Drones have proven to be invaluable in the key area of producing quicker and more accurate land surveys, while reducing the costs associated with inside and outside labor costs. Contractors have been able to more effectively manage multiple jobs and more complex and dangerous job sites through the use of drones.
The Bottom Line
The 2018 U.S. construction market continues to experience solid results and is expected to continue this trend into 2019. This progress can only be sustained by a stable economy, improved international relationships, political policy clarification and most importantly, finding the workers to complete the projects. An economy is only as good as the men and women that participate in its success, and the construction industry will be judged by this same thought.
Todd A. Feuerman, CPA, MBA, CCA, is a director in the Audit, Accounting and Consulting Department of Ellin & Tucker in Baltimore, Md., where he oversees audit, accounting, consulting and tax services for general contractors, specialty subcontracting and government contracting firms. Feuerman also serves as chairman of the firm’s construction services group. He earned his bachelor’s degree in accounting from Towson University and MBA in finance from University of Baltimore’s Merrick School of Business. Feuerman can be reached at (410) 727-5735, Ext. 3066, or tfeuerman@ellinandtucker.com.
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