By Donna Laquidara-Carr, Ph.D., LEED AP, Industry Insights Research Director, Dodge Data & Analytics
The quarterly findings for 2018 reported in the USG Corporation + US Chamber of Commerce Commercial Construction Index reveal that contractors working in the commercial and institutional sectors continue to see a steady flow of work, but that they are also facing challenges in finding skilled workers and becoming concerned about the impact of material prices on their businesses.
Backlogs Are Up, but Profit Margins Are Flattening
The Commercial Construction Index number for Q4 2018 is 75, showing an overall strong outlook on the market. That number is calculated based on the findings on the degree of confidence that contractors have that the market will provide them with new business opportunities, the ratio of their current and ideal average backlogs, and their expectations of revenue growth.
The findings throughout 2018 have made it clear that the commercial and institutional construction market is very active. The percentage confident that the market would provide opportunities has stayed in mid-seventies throughout 2018, finishing Q4 at 76%. This is a key factor in the overall positive CCI rating in Q4 and throughout the year.
The other factor supporting a positive CCI number in Q4 is the high ratio of current to ideal average backlog reported by contractors. In Q4, that ratio was 80, and the average overall backlog reported was 10 months, the second quarter in a row with ratios and backlog levels that high. Previously, in the first half of 2018 and throughout 2017, that average backlog was around 9 months. However, tempered expectations for revenue growth, which noticeably dropped in the second half of 2018, suggests that these may be smaller projects than those seen in early 2018 or throughout 2017.
Profit margin estimates are also declining. As the chart below reveals, the percentage of contractors who expect their profit margins to increase have been declining throughout 2018, from 39% in Q1 to 27% in Q4. It is important to note that the decline in those expecting an increase in profit margins has largely been matched by growth in the percentage expecting their profit margins to remain the same, which increased from 59% in Q1 to 67% in Q4. Thus, we are not talking about a shift toward reduced margins: instead contractors report less expansion and more steady levels of profit. Still, the pattern away from growth in profit is notable throughout 2018.
Concerns About Finding Skilled Workers Remain, and Concerns About Material Costs Have Emerged
Over half of contractors continue to report throughout 2018 that finding skilled workers is a major challenge for them; by Q4, 58% experienced a high level of difficulty in recruiting skilled workers. The data suggest that finding workers with adequate skills levels is at the root of this challenge, with 58% in Q4 reporting that they are highly concerned about skills in the workforce. And the shortage of workers with adequate skills seems to be growing worse: in Q1, only 31% of those who were concerned about the skill levels of their workforce said that the problem had worsened in the last six months, but by Q4, 40% have seen this problem worsen.
While the issue of skilled worker shortages has been evident since the CCI launched in 2017, in 2018, another issue emerged that contractors find challenging. Throughout 2017 and in the beginning of 2018, less than 20% of contractors believed that material cost fluctuations had a high impact on their business. In the second quarter of 2018, though, that percentage rose dramatically to 38%, and it has remained at an elevated level through the rest of the year.
There is no doubt that tariffs have contributed to this anxiety, but the data from the Q3 report revealed that concerns about material cost fluctuations were still going up as concerns about tariffs were going down, showing that there is a larger issue with rising material costs than just the influence of the tariffs. Certainly, it is not surprising to see prices inflate in a strong market, especially one that has been in an extended period of growth like the commercial construction market.
One area to keep an eye on for 2019, based on the trends revealed through the 2018 CCI data, is material shortages. Back in Q1 2018, while two thirds of contractors were moderately concerned about this issue, only 10% expected it to have a high impact on their business. By Q4 2018, that figure has steadily risen to 22%. That is still notably lower than those who expect a high impact from material cost fluctuations, but the pattern suggests that contractors are growing more concerned about seeing shortages affecting their ability to deliver projects in a timely and cost-effective manner.
The quarterly findings reported in the Commercial Construction Index report show that contractors are currently benefiting from high growth of work, but they are also becoming increasingly cautious about the challenges of finding skilled workers and dealing with the cost and availability of materials. They are growing less optimistic about seeing their bottom lines grow, despite the volume of work available. It remains to be seen, though, if that caution will continue to grow through 2019.
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Cailey Henderson | 104 West Partners | email@example.com
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