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Construction’s Skilled Labor Crisis. Construction employment carries with it a perception that the work does not pay well or is more likely to be affected by economic downturns than other fields. These fears are reinforced by the fact that contractors have historically sought to control costs in part by relying on lower base salaries, particularly for entry-level positions, and making up for it with bonuses. Contributing to the perception are layoffs that occur during downturns such as the recession that began in late 2007. Such business cycles add to recruiting challenges as some who exit the industry do not come back. These circumstances do not play well with the current generation of workers who are looking for economic stability.
Nonetheless, those who work with clients in the construction industry believe the industry’s reputation as low-paying is not entirely deserved. For construction management graduates in particular, research has shown that the industry offers competitive pay compared to other sectors. In addition, skilled positions have been able to demand higher wages in today’s competitive talent market. For example, drywall contractors looking for people can’t just take someone from off the street, they have to be trained and paid accordingly.
The shortage of skilled labor is not just about pay. During the pandemic, many companies adjusted operations to accommodate more flexible ways of working, including fully-remote and hybrid work. Such changes have affected recruiting efforts as people have become more focused on work/life balance and environments that place less emphasis on in-person elements. Some students see the prospect of spending time on job sites as a positive. Although flexibility is still something the industry is trying to figure out, the incentive to pursue it exists among employers, particularly because employees in their early 20s often place less value on retirement benefits, profit sharing and other areas that contractors have traditionally advertised to candidates. Even before the pandemic, millennial employees as a group demonstrated a preference for jobs with flexible work hours. That can be particularly important during a pandemic, when workers need to take care of elderly parents, children or other dependents.
Construction Costs to Continue Increasing. Jones Lang LaSalle (JLL), a global provider of real estate and investment management services, believes the cost of construction materials will continue to rise during the second half of 2021 and the first half of 2022. They believe that as materials and labor availability continue to constrain industry recovery, cost and labor conditions will worsen as nonresidential work finally starts to pick up. “At some point over the next 12 months, this trend is expected to stabilize and reverse itself, and nonresidential construction will return to month-over-month growth,” said Henry D’Esposito, JLL Research Manager, Construction. “Based on the latest data available for new project starts that have occurred this year, overall construction volume is expected to begin growing in the spring of 2022.”
Mr. D’Esposito points out that the construction industry has mostly recovered, based on the industry’s strong demand for architectural work, new construction growth, and employment nearing pre-pandemic levels. In August, the construction unemployment rate was 4.6%, compared to 7.6% in 2020. However, while the numbers appear to be improving, the lack of available labor has affected wage growth. The inability to meet the demand for increased wages or finding crews of skilled laborers has led to more project delays in 2021 than a lack of materials, and conditions are expected to worsen over the coming year. In 2020, nearly 85% of project delays and cancellations were caused by either owner-led decisions or government-ordered construction shutdowns. Although much of the shift was to be expected, it is notable that despite all of the headlines around problems with materials, both labor and materials created nearly the exact same level of delays, at 23% and 22%, respectively.
While the industry continues to overcome these challenges, two additional issues persist:
1. Supply chain delays and record high-cost increases continue to put pressure on project execution and profitability; and
2. The delta variant and future waves of the pandemic have the potential to slow economic growth, weaking the construction rebound and calling into question some of the brighter predictions for 2022.
Based on these issues and recent numbers, D’Esposito believes cost growth by year-end will likely surpass 6%. Similarly, cost escalation in the range of 4-7%, is also expected into 2022. Although unemployment rates are improving and wages are escalating, next year construction labor costs are expected to grow at a rate similar to that of the last six months, with wage increases in the 3-6% range. Material costs are more difficult to forecast due to the wide range of inputs and uncertainties regarding global supply chains. As a result, price changes will vary significantly, with an average increase across all materials expected to be in the 5-11% range. Overall, the fate of these industry factors relies heavily on the outcome of public and government spending on infrastructure. With the passage of the Infrastructure Bill by Congress, much of the spending, and therefore the cost impacts, will occur in next 2-6 years rather than right away.
Cummins Announces 13% Increase in North American Sales. Cummins Inc. recently reported its third quarter results, including a 13% increase in North American sales compared to the same period in 2020. Third quarter revenues of $6 billion were up 17%, reflecting the growth in domestic sales, as well as a 22% increase in international revenues driven by strong demand across all global markets outside of China. The company’s net income for the third quarter was $534 million, or $3.69 per diluted share, compared to $501 million, or $3.36 per diluted share, in 2020.
“Demand remained strong in the third quarter as the global economy continued to improve, driving strong sales growth across most businesses and regions outside of China, which is moderating in line with expectations,” said chairman and CEO Tom Linebarger. “Economic trends such as order activity, freight rates, and used equipment prices remain robust across a number of our key end markets which points to strong demand extending into 2022 and beyond,” Linebarger said. “Despite this strong demand, supply chain constraints continue to impact our business as well as our customers’, resulting in rising material costs, elevated logistics expenses, and other manufacturing inefficiencies, and capping revenue below our expectations three months ago.”
Other key third quarter developments announced by Cummins are as follows:
Cummins announced that it will bring to market a 15-liter natural gas engine for heavy-duty trucks as an important part of its path to zero emissions. This will help achieve Cummins’ PLANET 2050 environmental goals which include lowering emissions from newly sold products by 30% by 2030 and achieving carbon neutrality by 2050, consistent with the Paris Climate Accord targets.
The company also announced it will launch a set of software features to integrate its powertrains with Automated Driving System technologies.
Cummins received two awards, totaling nearly $7 million, from the U.S. Department of Energy for continued work on enhancing the economic viability of fuel cell powertrain solutions for heavy-duty applications, including on-highway tractor-trailers and buses. The program will drive the scale and investment needed to allow for faster adoption of hydrogen fuel cell technologies.
Five Ways Biden’s Infrastructure Bill Could Impact Construction. On November 5, Congress came to an agreement on the Infrastructure Investment and Jobs Act (the “Act”). This legislation is focused on repairing physical infrastructure, creating jobs, and making America more competitive globally. Over the next five years, the $550 billion plan hopes to deliver new federal investments to repair and rebuild American roads, bridges, water systems, and more. Five ways in which the Infrastructure Investment and Jobs Act could impact the construction industry are as follows:
1. It Could Achieve Historic Infrastructure Developments. The Act includes a proposal to repair the country’s roads, bridges, ports, and transit systems. The legislation could modernize 20,000 miles of roads, main streets, and highways, as well as rebuild and repair 10 significant bridges and 10,000 smaller ones. It could also repair hundreds of transit stations, new airports, and expand transit and rail connections. These construction projects create an opportunity for small businesses to participate in the design and development of this infrastructure.
2. It Could Invest Billions in the Construction Industry. Of the more than $550 billion of new federal investments in this plan, some of the ways that money could be allocated to construction projects include:
• $110 billion to modernize bridges, roads, main streets, and highways,
• $55 billion to replace the country’s lead pipes and service lines, plus upgrade drinking water, wastewater, and stormwater systems, and
• $50 billion to improve infrastructure resilience
3. It Could Create New Jobs. A major part of the Act is infrastructure job creation. According to a report by the Georgetown University Center on Education and the Workforce, the plan could create and/or save 15 million jobs, including construction and extraction occupations. Construction and extraction make up about 11% of the legislation’s infrastructure-related occupations, or 1.6 million jobs. The construction industry has been rebuilding its workforce following the loss of jobs in the earlier stages of the COVID-19 pandemic. This plan could support continued growth and hopefully staff more skilled workers to tackle related projects.
4. It Could Expand Unions. In addition to creating new jobs, the Act puts an emphasis on giving workers a chance at obtaining good-paying jobs and being part of a union. The legislation strives to retain well-paid union jobs while creating more positions necessary to build sustainable infrastructure.
5. It Could Expand Green-Energy Advancements. The Act strives to address climate change concerns, along with the country’s aging electric grid, by investing in infrastructure resilience and modernizing the power grid. The construction industry could benefit from a potential $65 billion investment in clean energy transmission. This plan could upgrade power infrastructure by building thousands of miles of new transmission lines to facilitate the expansion of renewable energy. Contractors who want to compete for these projects should consider integrating green-development techniques into their operations as soon as possible.
The Infrastructure Investment and Jobs Act could be the most significant and comprehensive investment in infrastructure history. Under this plan, the construction industry could see repairs to critical infrastructure, expanded green construction, new forms of infrastructure, job creation, union expansion, and billions of dollars invested in the industry.
Flexbase Launches Credit Card for Construction. Flexbase, an automated payment platform for contractors, has launched a credit card tailored to construction companies. Targeting small- and mid-sized firms, the Flexbase Card is available nationwide, offering up to 60 days of interest-free credit. The company aims to help these smaller firms overcome hurdles associated with slow payments and cashflow problems, said Zaid Rahman, CEO of Flexbase. “With our card offering, we are going to democratize access to capital for construction companies of all sizes, and bring equal opportunity to everyone,” he said. This is the industry’s first card requiring no personal guarantee and no security deposit.
In May, Flexbase received $2.5 million in fundraising in part from Suffolk Technologies, the venture capital arm of Boston-based contractor Suffolk. Launched in October 2020, the company aims to improve the speed of cash flow in the construction industry by enabling contractors to send invoices and paperwork to customers rapidly. On average, Flexbase claims, its customers get paid 63% earlier. Access to financing has taken on a critical role for contractors of all sizes since the COVID-19 pandemic, which has slowed payments, according to a study conducted by construction software firm Levelset.
Trends in Used Equipment Values
In August, U.S. construction spending rose 8.9% compared to August 2020, due primarily to spending in the private residential sector. As a result, demand in the secondary market for construction equipment continues to be solid for most asset categories. This is not unexpected since strong auction results experienced during the pandemic gave rise to positive projections for construction equipment sales. Used equipment sales began to improve during the second half of 2020 with the highest values seen for assets with lower hours of service and in short supply. As of the middle of this year, the pricing of standard yellow iron and construction equipment has been particularly high because of the supply shortage and the growth in construction. In addition, the demand for used equipment has benefitted from the fact that many contractors have been hesitant to invest in new equipment as some manufacturers have had to increase their prices due to the substantial rise in the cost of raw materials.
The recent passage of the Infrastructure Legislation by Congress is likely to have a profound impact on constriction starts and the related demand for both new and used construction equipment. Resulting efforts to build highways, dams, railways and roads as part of infrastructure development projects in the areas of energy, mobility and government could drive the volume and pricing of both new and used construction equipment sales for the foreseeable future.