Construction Trends: Construction Backlog and the Construction Worker Shortage

The 2019 Q2 Commercial Construction Index Report shows boosted construction backlogs, but revenues are plateauing. Listen to Dodge's Ben Johnson and Donna Laquidara-Carr discuss the 2019 Q2 CCI Report, including the impact from the construction worker shortage and the increased tariffs’ construction costs and other important construction trends. Below is a transcript of this construction podcast.


Ben Johnson:    

Hello and welcome to this episode of "A Podcast That Builds". I'm your host Ben Johnson. And joining me today is show regular Donna Laquidara-Carr. Welcome, Donna.

 

Donna Laquidara-Carr:

 Thank you, Ben. It's nice to be here. Again.

 

Ben Johnson:

Great to have you. So, the topic of today's show is the Q2 of 2019 the CCI report that, can you just quickly remind our listeners who haven't heard about it before, what the CCI is?

 

Donna Laquidara-Carr: 

Sure. So, every quarter we here at Dodge, we survey general contractors and trade contractors. The US Chamber of Commerce and USG put together a report based on that survey that shows how the contractors feel about their business. The centerpiece of that report is an index number and we create that index by asking the other contractors about three things, revenue, construction backlog and their confidence in their ability to be able to secure new business. We, you know, of course that's not a complete sum of what is involved to understand the health of the construction industry. So, we do survey a lot of other topics as well. Regularly, things like profit margins the ability to access financing, their concerns about the construction worker shortage. And then finally, every quarter we've decided to also look at a unique topic that we look at, you know, differently every quarter. So, this quarter is sustainability the other quarters we've done things like prefabrication productivity ways to attract people to the construction industry. And you know, it's, it keeps things relatively interesting.

 

Ben Johnson:

That it does. And as you said, a, every quarter it boils down to a number. So, what is the, what is the current index number and what does that reveal about current construction trends?

 

Donna Laquidara-Carr: 

Sure. The current index number is 74. It's two points up from what we experienced in Q1 and it, but it's really actually far more consistent with what we saw throughout 2017 and 2018. Q1 was kind of an outlier. Now I bought a dress that very quickly when we spoke about the Q1 report, we suggested the possibility that the timing of the survey influenced the lower number and we think the fact that it bounced right back up is a good sign that that was the case because it, the, the timing was that it came out during the government shutdown. Now what's interesting though is okay, so 74 consistent with everything else, a little bit dull, right? But actually, there's a lot going on with that number. So, I want to break it down into its component pieces. So first if we look at the confidence rating, well the confidence rating is 74 and that's up three points from Q1 for the reason I just discussed.

And it's pretty concise. This one is the one that's consistent with the previous findings. Contractors are just generally pretty optimistic about what's going on. They think that the market will provide them with enough new business in the next year and that's what that measure indicates a construction backlog. That piece is the ratio between the current construction backlog and what contractors identify as their ideal backlog. That way we can adjust for surveys where we have more large contractors and smaller contractors, et cetera. Rather than just looking at a hard backlog number, that ratio number is up to 82 this is the highest it's been since we've launched the survey and we've been seeing it other than that weird last quarter. We've been seeing that steadily creep up over many quarters, so we really think that this is a strong trend that contractors are seeing increasing backlogs.

The final piece of the overall index number is the revenue number and that has had that the exact opposite track of the construction backlog number. We've been seeing that steadily falling in Q3 of 2018 those who expected their revenue to increase in those who expected it to stay the same. They are both at right around half, right around 50% each. By this quarter. It's only about a third, 36%, who think that their revenue is actually going to increase in the next year and 60% who say, no, it's going to stay the same. Now I want to make this point very, very clearly. When I say the revenue numbers falling, it's looking at the way we calculate how they feel about their revenue. Revenues are not falling. Almost no one is saying that their revenues are actually falling, but instead of saying the revenues are increasing, we see a much bigger shift towards those who say, no, no, things are staying the same. We're not seeing any kind of increase in revenue construction trends.

 

Ben Johnson:    

So that does seem a bit surprising that backlogs keep increasing, but revenue is, is more or less leveling off or becoming static. Any thoughts on why that would be happening?

 

Donna Laquidara-Carr:

Well, it could be due to a lot of things. One thing that the study itself suggest, one data point that we've seen consistently is that we've seen a real concern among contractors about how the construction worker shortage is impacting their ability to meet schedules. This quarter it was 61% who said that the construction worker shortage is negatively impacting that ability. And in Q1 it was up to 70%. So, we do think that there's a good possibility that it's not that the increase in construction backlog may not actually be an increase in the volume of work per se. It might be an increase in how long it takes contractors to work through the existing projects they have based on the data we're seeing. And that would in fact leave revenues remain pretty flat.

 

Ben Johnson:    

What about the cost of materials? I know last year the tariffs’ construction costs were a growing concern, and definitely played a role. Is that still true?

 

Donna Laquidara-Carr: 

Well, since the start of 2019, we have seen high levels of concern that the high levels of concerns that we saw back in 2018 material costs become more moderate. You know, we've also seen that the concern about tariffs’ construction costs has really dropped when we first asked about tariffs specifically it was right before the tariffs came out and there was a lot of concern in the industry about the kind of impact they've had. Now they've really been living with these tariffs for a little while. So now we see about 31% who say that they're really seriously concerned about tariffs’ construction costs. Still about a third of the industry, so not inconsiderable, but certainly the contractors as a whole, the industry has learned how to live with and deal with that challenge. That said though, I really don't want to underplay and make it sound like they're not concerned about materials. 79% still expect we some moderate impact from cost fluctuations on their construction projects. And 71% are expecting materials shortages to have at least a moderate impact on their businesses. That's up from 60% in Q4 2018. So, this is still something that, you know, yes, it's more moderate. It's not as high, but contractors are definitely keeping an eye on these construction trends.

 

Ben Johnson:    

Well, that was a great look at this really fascinating series. Thanks again for joining us data.

 

Donna Laquidara-Carr: 

Sure. It's always a pleasure to be here, Ben

 

Ben Johnson:    

Thanks again for listening to this episode of a podcast that built the CCI report has mentioned, and today's show is available for free on construction.com and you can reach Dodge at construction.com or at (877) 784-9556. That's all for today's show. We'll see you next time when we'll be talking about the spotlight article from the Q2 2019 CCI report, which is on sustainability. We'll see you then.

 

Episode Links:

Q2 2019 Commercial Construction Index