New York City-based attorney Barry B. LePatner is the CEO of Insights + management consultancy and a nationally recognized construction advisor to corporate, commercial and real estate developers and lenders. Opinions are those of the author.
The country’s construction industry, along with professional architects and engineers, plays a vital role in the economic well-being of the US economy. Construction accounted for 4.3% of our GDP, according to Federal Reserve Bank statistics during the last 12 months. Despite the slowdown in construction activity during the COVID-19 pandemic, contractors are facing decades of unprecedented growth.
The pandemic has significantly delayed or stopped significant construction work. Most of these delayed projects will resume when the economy reopens during the remainder of this year. In addition, the reports from Florida attest to the structural collapse of the Champlain Towers Condominiums in our nation are in tremendous need to rehabilitate tens of millions of square feet of our built environment as the average age of US commercial buildings is almost 53 years old.
In the coming decades, many of these buildings will be substantially overhauled or demolished or replaced by new buildings spanning billions of square meters. Add to that the likelihood of a multimillion dollar infrastructure initiative being driven by the Biden administration, and it’s easy to see why the design and construction world should have better days ahead.
However, countering these rosy predictions are significant obstacles that threaten to hinder the usual benefits of a lengthy growth period. The greatest challenges are:
Weak pricing: As the construction market is slowly returning to pre-pandemic levels, construction companies continue to show a traditional propensity to take on at or below cost work just to keep their workers busy. By adopting this strategy – which strangles the cash flow it needs – the industry risks generating low profits through 2022 and beyond, inevitably delaying a recovery for a year or two, even if the overall market heats up.
Skilled workers shortage: The widespread shortage of workers in the skilled trades has been a burden for the industry for several years. After a Affiliated builders and contractors analysis the US Census Bureau data and a forecast of expected construction growth in 2021 by a business consultancy Landmark Advisor, the construction industry will need an additional 430,000 new workers in 2021 to meet the demand than were employed in 2020.
The industry has failed in recent years to find ways to attract new workers or to create incentives to train new apprentices for professions that are in dire need of recruitment for a variety of high-paying jobs. If construction spending increases at a higher rate of growth due to the backlog in the post-COVID era, that number could be closer to 1 million. Without meeting these bottlenecks and reaching the whole country to develop a new generation of workers, the industry will not be able to meet the increasing new demands for the remainder of the decade and beyond.
Increased material costs: The prices for many building materials have risen dramatically since the beginning of the pandemic. From April 2020 to February 2021, the cost of purchasing goods and equipment through contractors increased by nearly 13%. According to the Association of General Contractors, the cost of other materials increased even more over the same period, including:
- Diesel fuel: 114%.
- Lumber and plywood: 62%.
- The copper and brass mill index: 37%.
- Steel mill products: 20%.
The cost of timber for residential property has risen into the three-digit number but is showing a steady decline that is likely to continue for the rest of the year. Finding new resources or just passing these increases on to public and private owners has not been an easy task for the industry.
Supply chain problems: Before the pandemic, up to 30% of all materials and products were purchased abroad in many projects. As the pandemic broke out, shipments of overseas products came to a virtual standstill due to lockouts of workers from ports around the world, shutdowns of supply routes and a shortage of container ships. As a result of more than two decades of searching overseas for cheaper labor costs around the world, the pandemic has severely affected the ability to source these materials and left a serious dent in the supply chain essential for the timely construction of U.S. projects is crucial.
Many manufacturers, who have benefited from cheap overseas labor procurement, plan to build new factories in the United States. When completed in the next few years, our domestic supply chain will be more reliable, but product costs are likely to increase at least 20% above existing prices.
technological reluctance: Contractors are the slowest adapters of advanced technology in any industry in the world. This is noteworthy as the performance of construction workers is pathetic and costs public and private owners who have to pay for this inefficiency.
The industry’s low profitability of 1% to 4% per year means that most organizations have been unable to allocate funds to invest significantly in hardware, software, and training to improve productivity advances. This obstacle, like any other factor, may not improve until a new generation of leaders take over the reins over the next 10 years.
The United States is on the cusp of a new and much-needed construction boom. It is up to us if we are only willing to make the decisions and investments necessary to get there.