Impact of Tariffs on Construction Costs: Commercial Construction Index 2018 Q2 | Construction Podcast

What impact will the construction labor shortage have on the industry? What about the impact of tariffs on construction costs? Listen to “A Podcast That Builds” host Ben Johnson and Dodge’s Donna Laquidara-Carr discuss the findings from the 2018 Q2 CCI Report, which focuses on the construction labor shortage and steel and aluminum tariffs. Below is a transcript of this construction podcast. 

 

 

Ben Johnson:    

Welcome to "A Podcast That Builds", construction industry experts keeping you in the know with news, trends and analysis that will shape the future of building. I'm your host, Ben Johnson, and the topic of today's episode is the 2nd quarter of 2018 CCI report (Commercial Construction Index). And again, we have Donna Laquidara-Carr joining us here today, the author of said report. Welcome, Donna. Thank you very much. It's a pleasure to be here again. Great to have you back. So first, just as a reminder to our listeners, what is the CCI report?

 

Donna Laquidara-Carr:  

Well, every quarter we surveyed GC's and trade contractors for the US Chamber of Commerce and USG. About how those contractors feel about their business. We take certain questions that we asked them and use them to create an index. And those questions ask about revenue backlog and their confidence and being able to secure new business. In addition to that, we do survey them about other issues that affect those three factors strongly so that we can understand the findings better. What's going on with the index. We ask about things like profit margins, access to financing and their concerns about labor shortages. And then finally, we do always include a unique topic or trend to capture how the industry is evolving. And this quarter that'll be sustainability, which I believe we'll talk about at a future date, but all of this is combined together in that short report that is available online.

 

Ben Johnson:    

Great. And as an, as an index, there's always a number associated with each report. So, what, what is the current index number and what does it reveal?

 

Donna Laquidara-Carr:  

The current index number is 73. What's interesting is that it's not that interesting. It's been really consistent. It's been true for this at the last five quarters that we've been doing it. It's been in the mid-seventies, you know, with the couple of points up and down at times, but not really changing. And if everyone thinks about the market they've been experiencing, that is a pretty good reflection of what's going on. We've had a consistently strong market where we're contractors have been able to find work and that's really what this reflects.

 

Ben Johnson:    

So, what are the respondents particularly concerned about, if anything in this report?

 

Donna Laquidara-Carr:  

Well, they are concerned about two things. Workforce shortages and material prices.

 

Ben Johnson:    

So, we've talked about workforce shortages before. Are there any changes this quarter?

 

Donna Laquidara-Carr:  

Well, you know, they have been very consistently concerned and this has been, again, one of those things that we've seen for five quarters now. So, we know it's an ongoing problem in the industry. And so really what's interesting isn't what's changed, but in fact how little it's changed that, you know, contractors really do have this concern going forward. And so, some of the that we've seen is that more than half are still expecting to employ more workers in the next six months. And almost all of the rest of them are planning to keep on the same number of workers, which probably with people shifting around include some hiring. So, the fact that there is a construction labor shortage is really is still a major concern because of the level of hiring going on in the industry. Right now, that does not still seem to be translating directly into higher costs for labor.

Only about one third, you know, roughly 38% report that there's a high level of concern about the cost of skilled labor. But on the other hand, the types of skills, the degree of skills that they're seeing out there, there is a high level of concern about half of the contractors say that they're, you know, really quite concerned that the skill levels aren't what they need to be.

 

Ben Johnson:    

So, tell me what you’ve seen as far as impacts of tariffs on construction costs?

 

Donna Laquidara-Carr:  

Unlike the workforce one where we really just seen it at being a persistent problem, this impact of tariffs on construction costs is now just emerging this quarter. So, we saw that we ask a question about contractors and the degree to which material cost fluctuations will have an impact on their business. And for the last quarter, the five quarters since we first started doing the study, that was always in the low teens, the percentage who said, oh, we're really concerned about those cost fluctuations having a high impact this quarter.

We've seen that impact more than that, the percentage of say a high impact more than double to 38%. It's just such a dramatic change. Also, across the last five quarters, about one third had said that they were most concerned about cost fluctuations in steel. Now 63% of all contractors say that they're worried about steel and 82% of general contractors report this concern at a high level. So, this is a pretty universal issue. This really has contractors upset. However, it's funny, I actually want to pause on what seems like a less impressive figure. 42% of the trade contractors say that steel is one of their top three concerns. But to me that data point is particularly telling because it not 42% of our contractors are not buying steel that trade contractors, it's just not happening. So, you know, we have too wide of a diverse group of trade contractors who participate in this study.

Therefore, what this is about, and I think this goes to the general contractors to is not, oh my particular job is going to be more expensive or my profit margin might be slightly lowered. They're really worried about the impact of these steel tariffs, construction costs may go way up. We had some comments that were made in some of the open tech sessions that support that assumption, but I think it's clear just on that 42% figure that contractors think that as prices go up significantly it's going to decrease the overall construction market because the owners just are not going to be able to afford to do as many projects this quarter. We added an additional question about tariffs and construction costs. So, we, we wanted to, because we knew that this tariff issue was going on, we knew we might gather some interesting data and we wanted to see the degree to which we could really measure tariffs as the cause of these levels of concern.

So, in that question we asked them about to rate their level of concern about the impact on their businesses. Several items, you know from low concern to high concern. We asked three items that they had rates specifically related to tariffs, steel and aluminum tariffs, then other new construction material and equipment tariffs. And then finally the larger issue of trade conflicts with other countries. Then we included two additional items that they had rated the same time just to see how they compare. And the one in particular I want to point out is the skilled labor shortage. We also looked at rising interest rates, but as I've already stated to you, a bed the, we know a skilled labor shortage has been a consistent persistent concern. And so knowing how they would measure it directly you know, rating at the same time, the tariffs against that will really give us an indication of the seriousness of the tariffs right now in that study that was conducted in early April, even more contractors, 58% expected a high degree of business impact from the new steel and aluminum tariffs than those who were expecting a high degree of business impact from the construction shortage, which was at 56%.

Now that is neck and neck. But the point is, is that they're as concerned right now about this new issue as this one that they've been worried about for such a long period of time. And that it is also worth noting that nearly half 49% are concerned about the possibility of other new construction material and equipment tariffs.

 

Ben Johnson:    

So, Donna, do you expect this level of concern to stay the same?

 

Donna Laquidara-Carr:  

Well, you know, we don't know yet that everything is still so new. We're all still trying to figure out what's going to happen with the tariffs, what impact it's going to have on the markets. And the contractors are no different from the rest of us struggling with that. We conducted this survey as I mentioned in early April, and that's when there really was a lot of uncertainty about the terrorists. And I think uncertainty amplifies concerns. So, you know, as contractors see the impact of tariffs on their markets, this, the concerns themselves might modulate a bit. So, but we will be doing the survey in July next month, so it's, we will get a sense, at least with those questions about material cost fluctuations will really get a sense of what's going on, what contractors think will happen in the future. So, you know, we should have a good answer for that when I talk to you again in a few months.

 

Ben Johnson:    

Yeah, it will be very interesting to see where this goes with time. So, thank you so much for joining us with your insights, Donna. Always a pleasure.

As always, a free copy of the report referenced in today's episode is available at construction.com and you can reach Dodge at construction.com or by calling 877-784-9556. Thanks again for joining us on "A Podcast That Builds". We'll see you next time.