The New Year Finds the Construction Industry Strong but Facing Material Challenges and Rising Costs

For many years, the commercial construction sector experienced historic growth. After years of pent-up demand were unleashed following the Great Recession, owners and developers were finding easier and more favorable financing, and architects and contractors were busier than they’d ever been.

In the first quarter of 2020, the U.S. Chamber of Commerce’s Commercial Construction Index was at a strong score of 74 out of 100. The quarterly economic index is designed to gauge the outlook for, and resulting confidence in, the commercial construction industry. Contractors across the country are surveyed each quarter to better understand their levels of confidence in the industry and top-of-mind concerns, so it is a good finger on the pulse of the commercial construction industry.

And then came COVID-19. Since the arrival of the virus in early 2020, we have been in uncharted territory. As the overall economy plummeted in 2020, many wondered if construction might find itself in a position similar to where it was in 2008 in the wake of the financial crisis.

Fortunately, that hasn’t been the case. In general, construction showed itself to be solid and resilient through 2020 and 2021. While the Commercial Construction Index score dropped to 56 when pandemic shutdowns took effect, the score has been rising again. It was back to 65 in the fourth quarter of 2021, which—while still below pre-pandemic levels—indicates steady positive growth.

“At the start of 2021, the pandemic slowed things down and there were some geographic regions that had shutdowns but, even with this, construction did significantly better than other industries because the work is outdoors,” says Joseph Natarelli, CPA, national construction services leader for Marcum LLP, a national accounting and advisory services firm.

New Year, New Challenges

As we enter a new year, the construction industry is looking at a mixed bag. Some good, some bad. COVID is back and the industry is facing a new set of obstacles. Underlying conditions remain strong, but now owners, architects and contractors must contend with instability in the cost and availability of materials, as well as a lack of qualified labor to bring everything together.

Forecasters and industry professionals see a year ahead with activity on the rise, but on a rockier path than we’re used to. The latest Commercial Construction Index states that 45 percent of contractors report turning down work because they can’t find enough skilled workers, and 62 percent of contractors report high levels of difficulty finding skilled workers. In addition, 97 per- cent of contractors indicated cost fluctuations have had a moderate to high impact on their businesses. That’s up 23 points year-over-year.

“Overall, I think the commercial construction market is in good shape, given all the pressures that are being put on it and that have been put on it for the last two years,” says Curtis Dubay, senior economist with the U.S. Chamber of Commerce. “It’s in a better place than it has been through- out the pandemic and is getting better. That said, it could be better. The challenges plaguing the larger economy are also impacting commercial construction. These include a lack of workers, supply-chain issues and inflation.”

“The main negatives facing the construction sector can be boiled down to ‘the three Ps,’ which are prices, people and productivity,” says Richard Branch, chief economist at Dodge Construction Network. “Material prices have risen sharply over the course of the past year, leading to project delays and cancellations. Meanwhile, the shortage of skilled labor has left businesses scrambling to get jobs done in time. In addition, construction has lagged other industries in introducing new technology to improve on the job site, as well as back-office productivity.”

“If material prices continue to rise and construction companies are unable to access materials in time, it will become very difficult for any construction company to accurately bid a job,” Natarelli explains. “Estimating teams are left guessing what the price point is for any given material. When you add the labor shortage, companies are having to utilize more overtime than anticipated. With these extra costs, you will see profit margins continue to shrink at an exponential rate.”