WHAT A DIFFERENCE A YEAR MAKES
BY KATIE KUEHNER-HEBERT
Contractors are far more upbeat about this year than they were at the start of 2021 — though tough challenges still exist. AGC experts, contractors and vendors, on a January webinar and in interviews with Constructor, share their insights on the opportunities as well as challenges for 2022.
“Contractors are overall very optimistic about the outlook for the year,” says Steve Sandherr, CEO, AGC of America. “They expect demand for most types of projects to increase, and as a result, most firms plan to add staff. Contractors also continue to invest in new technologies that are designed to make them more efficient and effective.”
Still, several significant challenges remain, including supply chain problems, rising prices and labor shortages, Sandherr says. Despite those challenges, contractors — responding to a survey jointly released by AGC and Sage Construction and Real Estate — expect the construction market to expand in nearly all categories of projects.
Here is a look at the top opportunities and challenges, as well as additional considerations, for 2022.
OPPORTUNITY: AMPLE CONSTRUCTION PIPELINE
Contractors are most optimistic about the market for highway and bridge construction, followed by transit, rail and airport projects, followed closely behind, water and sewer projects —especially because of the November passage of the bipartisan infrastructure bill, according to the survey. Contractors are also upbeat about demand for federal construction projects and power construction.
Opportunities also abound within the private sector, particularly for warehouses, hospitals and other healthcare facilities, followed by construction of apartments and manufacturing facilities. However, contractors overall were less bullish on projects for public buildings, K-12 schools, higher education facilities and lodging. Two categories — retail and office — didn’t fare so well in the survey.
Of course, opportunities vary by region, according to two contractors participating in the January webinar.
In North Carolina, highway projects are aplenty, as well as projects for K-12 and community college systems — not to mention a new Toyota battery plant and large office complexes for Apple and Google.
“We’re like the dog that finally catches the car,” says Charlie Wilson, president of C.T. Wilson Construction Company Inc. in Durham, North Carolina, a Carolinas AGC member.
McCownGordon Construction in Kansas City, Missouri, an AGC of Kansas Inc., and Kansas City Chapter member, is enjoying a strong backlog for 2022 off a record year last year, says Chris Stanton, vice president, preconstruction. The company, which works on projects from the Dakotas into north Texas, has projects in healthcare, higher education, K-12, corporate and manufacturing, as well as increasing opportunities in mixed-use and office as workers return.
OPPORTUNITY: TECHNOLOGY
Remote work during the pandemic accelerated the adoption of technologies, and now, contractors are becoming more strategic about technology as they try to remain competitive, Dustin Anderson, vice president, Sage Construction & Real Estate in Portland, Oregon, says.
“Any time access becomes more critical for construction firms, it is not surprising that we see key gains in the use of cloud-based technologies over the past few years.” Anderson says. “When it comes to the use of mobile software technology, the adoption numbers are even higher.”
Contractors that embrace advancements in technology are going to be more successful, says John Wallen, vice president and Wisconsin construction practice leader for Hub International Ltd., a member of multiple AGC chapters.
The construction industry lags other industries in technology adoption, and the resulting inefficiency costs the global economy $1.6 trillion each year, Wallen says. But due to the pandemic, more contractors are implementing technology across their entire process, including at the actual jobsite, increasing efficiency and reducing overall costs.
“For example, one of our clients, a large grading and excavating contractor, has equipment with GPS that automatically makes adjustments when leveling land,” he says. “This has reduced the contractor’s man hour costs by 40%.”
In 2022, smart corporate performance management technology will be essential for connecting separate systems of construction companies — from surveyors to builders to finance teams and beyond — and allowing these teams to appropriately plan for the future, says Chris Porter, director of vertical product marketing at Prophix Software in Mississauga, Ontario, Canada.
Another up-and-coming technology is connected logistics solutions for company fleets, says Tarun Nimmagadda, vice president of product strategy at Command Alkon in Birmingham, Alabama, a member of multiple AGC chapters. Companies are using tracking solutions to map the location of trucks in real time, as well as telematics devices to monitor truck performance.
“Once management understands the cause of nonproductive hours in their operations, they can revamp processes for greater efficiencies, including using route planning and mapping solutions to avoid traffic delays,” Nimmagadda says.
CHALLENGE: LABOR SHORTAGES
While the majority of contractors responding to the survey expect to expand headcount in 2022, nearly all say it’s going to be difficult in this era of the Great Resignation.
Labor shortages are made worse by the aging of the construction workforce, as roughly a quarter of immediate managers or laborers are mid-50s or older — “a shocking number and it’s not getting better,” Wallen says.
With the Baby Boomer generation retiring, the construction workforce needs “new blood,” but construction isn’t the only industry “desperate” to hire, Nimmagadda says. To compete for younger workers, contractors should offer flexible working schedules and sophisticated technology to enhance their jobs.
Fiore & Sons Inc. in Denver, a Colorado Contractors Association Inc. member, hired an in-house recruiter and engaged a wage-and-labor consulting company to help revamp its pay structure, says CFO Brady Burleson. The recruiter is emphasizing the contractor’s attractive benefits package, especially its health plan.
“We provide 100% paid health insurance for both individuals and their family,” Burleson says. “That is not readily apparent when comparing the dollar-per-hour offer.” The company also developed a career path matrix for its employees, including the necessary skills to obtain promotions.
Carolinas AGC is lobbying both states to increase funding for workforce development, Wilson says. Contractors are also volunteering in school classrooms to recruit young people in the construction industry.
In McCownGordon’s markets, construction professionals are in high demand, particularly for project management, preconstruction, safety and superintendent jobs — “a lot of companies out there are doing a lot of hiring, so we see a lot of people moving around,” Stanton says.
CHALLENGE: SUPPLY CHAIN ISSUES
Virtually all the contractors surveyed saythey have had significant supply chain problems, with a majority turning to alternative suppliers for materials and nearly half specifying alternative materials or products.
“We’re working with design teams, making sure products can be procured, incorporating products that are available,” Stanton says. “Also, it’s no longer just checking with our subcontractors whether or not a product is procured — it’s now checking on what port, when it’s going to arrive, who’s shipping it.”
Indeed, shipping issues will continue to put a strain on the industry, says Daniel Pomfrett, national director of forecasting and analytics at Seattle-based Cumming Group, an AGC of California and Nevada Chapter AGC member. However, there may soon be “some respite,” as the Port of Los Angeles and others are now shifting to a 24-hour work schedule to help with the backlog.
The continued volatility of the raw material market is exposing the risks of relying on an “on-demand” method for material purchases, buying per job, or when needed, Porter says.
“In 2022, we will see an increasing number of construction companies developing individual, future-oriented inventory and supply chain strategies to combat material shortages, price fluctuations, and other repercussions of a pandemic-addled supply chain,” he says.
CHALLENGE: INFLATION AND RISING PRICES
Another top concern is the cost of materials, as inflation has caused soaring prices, Wallen says. In May 2018 the U.S. construction material price index was 150.2, and by May 2020 after the lockdowns, it was 153.5, only a 1.9% increase. But then in June 2021, it was 251.7, a more than 65% increase over a two-year period — “which is an absolutely unprecedented never-seen threat in the modern construction era,” he says.
“One of my clients was awarded a warehouse project, but from the time the contractor bid the project to the start of work, material prices of piping had risen by over 100%, and the contractor lost money on the job even with the client absorbing some of the cost increase,” he says.
Contractors have had to adjust, changing bid expirations to as soon as five days from bid date, Wallen says. The good news is that pricing has come back down a fair amount, “but it’s not even close to pre-Covid levels.”
However, inflation is now causing the “next wave” in material price increase, namely for insulation, roofing and anything related to plastic and chemical production, Pomfrett says.
Jamie Hodges, executive vice president of Industrial Constructors/Managers (ICM) in Denver, an AGC of Colorado Building Chapter Inc. member, consults with other contractors on projects at the onset on how best to swap out materials.
“For example, we’ve been switching out structural steel for concrete since it’s less expensive and more readily available,” Hodges says. “Concrete is also good because it can be substituted without compromising the strength or design intent of a project.”
Other strategies that ICM employs include choosing less in-demand material sizes, buying materials as soon as possible, and if possible, simplifying the project design and changing the building sequence, he says.
Fiore & Sons’ fleet burns roughly 1.6 million gallons of fuel per year, so each $1 increase in fuel cost has the potential to reduce its margin by 1.5%, Burleson says.
“We have to stay ahead of the game, strategically pricing our work, and buying futures contracts for fuel.”
The contractor is also ensuring that contracts with project owners allow for repricing certain materials, using contract language from one of ConsensusDocs’ templates to include pricing escalators for materials.
As interest rates start rising, the housing market might slow, negatively impacting a good segment of the contractor’s current business — civil contracting and management services for large residential and commercial projects, he says. To offset any decline, the contractor will pivot and bid at some of the public works projects in the recently passed federal infrastructure act.
ADDITIONAL CONSIDERATIONS: SUBCONTRACTOR VIABILITY
Many contractors have been helped by the Paycheck Protection Program and a few other government initiatives during the pandemic, Wallen says. Not all the money was used in ways that was intended, so it buoyed up a number of contractors that might have otherwise been struggling by now.
“Now that their cash is dissipating, they may not have the capacity to take on too much work,” he says. “Therefore, general contractors must prequalify subcontractors, including their credit risk and viability, because some will likely begin to have troubles down the road. That could lead to job delays, increased pricing, more change-orders and ultimately less profitable jobs.”
McCownGordon prequalifies subcontractors, particularly those with PPP funds “lingering on their balance sheets,” Stanton says. The contractor checks to see if they’re carrying higher inventories, which can impact their cash flow.
“As a general contractor, we need all of them to be successful, and we want to make sure that happens,” he said.
REGULATIONS AND LEGISLATION
The Biden administration has updated how coal-fired power plants dispose of “wet ash,” a byproduct of burning coal, Hodges says.
“Since the existing practices for disposal don’t meet the EPA’s new regulations, several plants are developing new wet bunker systems that properly dispose of the materials, helping to prevent them from contaminating groundwater or air quality,” he says. “While this has begun in Colorado, it will soon be replicated by roughly 50 other coal-fired power plants across the nation.”
The industry should keep an eye on the uptick in the green initiative legislation at all levels, Pomfrett says. New York City has adopted new legislation recently, and other cities like Chicago are expected to see requirement changes for sustainable buildings and construction in the near future as well.
AGC is urging public officials to take steps to help the industry recover in 2022 and avoid measures that will undermine the sector, Sandherr says. For example, the administration’s plans to increase tariffs on Canadian lumber and maintain existing ones on other key construction materials will make it harder for firms to accurately bid upcoming projects and complete them on schedule.
AGC will also continue to push for new federal investments in workforce development and make sure Congress keeps its promise to boost funds for infrastructure, he says. In addition, the association will continue to encourage construction workers to get vaccinated, and in January released new Spanish-language public service ads on the subject to accompany a series of ads encouraging vaccinations AGC created last year.
“Our ultimate goal is to make sure that contractors’ optimistic outlook for 2022 becomes a reality,” Sandherr says.
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