January 18, 2022
2021: The Rollercoaster Year That Changed Construction Forever
By: Dan McCarthy, President & CEO of Dodge Construction Network
It’s no secret that across the world, there are supply chain issues. From grocery stores to auto parts, and yes, even construction, sourcing supplies for basic needs is proving more difficult than many have ever experienced. It's clear we need to build serious resiliency into how we source and construct new buildings. Equally important, we urgently need an industry wide initiative to attract, train, and retain new construction professionals if we expect to sustain strong growth at every level.
Collectively, these supply chain issues make the jobs of current construction professionals considerably harder. Coming out of 2020, construction in 2021 largely consisted of playing catch-up. Backlogged projects filled calendars, ramping up construction for a recovery. But, as the entire world navigated shortages of even the most basic materials, “recovery” looked different than many had hoped.
Throughout the year, Dodge benchmarks the construction economy using two measurements: the monthly starts value, and the Dodge Momentum Index (DMI). Construction starts measure the value of projects across the US each month. The DMI is a monthly measure of the first (or initial) report for nonresidential building projects in planning, which have been shown to lead construction spending for nonresidential buildings by a full year. Together they tell the story of the construction industry as a whole.
Nascent Recovery, Hints of Advanced Supply Chain Issues
Entering 2021, many hoped for a quick and immediate rebound from the drop-off every industry experienced in the throws of the pandemic. The DMI hinted at an initial rebound with a 3.1% increase over January. But starts showed that, while building was occurring, projects were smaller with a 4% value decrease.
Exiting Q1, Dodge polled civil contractors about the challenges they were experiencing as a result of the pandemic. In March, less than half (43%) of civil contractors believed high material costs had impacted or would impact their projects. At this point, as many were finding some consumer goods returning on shelves more regularly, construction was still experiencing issues sourcing materials — 71% of civil contractors experienced issues sourcing materials, and 76% were concerned with material costs. Q1 would be a mere preview of the two issues that would continue to plague commercial construction for the rest of the year.
Entering Construction’s Decline: People and Product
Moving into Q2, both the DMI and starts value showed declines — as we neared the year’s halfway point, fears of shutdowns amidst fears of the Delta COVID-19 variant. This decline collided with an increase in work across the civil contractor industry.
A Dodge study found that in Q2 of 2021, the volume of work for civil contractors increased — 40% of contractors reported an increase in their backlogs, compared to just 25% in Q1. Beyond an increase in work and increasingly complex supply chain issues, a new shortage was complicating construction: skilled labor. According to a Dodge survey of contractors, 60% reported a high need for skilled workers.
The same contractors believed that the trend would continue; 69% reported that they expected a high degree of difficulty when sourcing skilled workers. With a high need for labor and a small pool of laborers, 81% of contractors believed the cost of skilled workers would greatly increase over the year. The labor shortage further challenged the construction industry by stretching the timeline to complete projects; 65% of polled contractors reported challenges to meet schedule requirements due to the labor shortage.
Hope in the Decline: White House Infrastructure Deal
As we moved out of the first half of the year and into the second, we saw declines in both benchmarks across July and August. The pressures caused by high material and labor costs raised flags that perhaps what many saw as a recovery was a false hope, and that construction’s growth may stall in the latter half of the year.
In July, Biden officially endorsed the infrastructure bill and brought it to a formal vote. This bill held promise for the construction industry — it outlined a large number of projects, involving every level of the construction value-chain. As promising as the endorsement was, without its passing and as companies still dealt with the fallout resulting from high costs for labor and supplies, the bill did not translate into a surge in the measurements.
However, as fears around the Delta variant subsided, both measurements experienced growth in September 2021 by more than 10%. This gain carries construction into the end of the year with high hopes for the industry. However, supply and labor issues remain at the forefront of commercial construction.
Nearly all civil contractors (92%) have had projects impacted by fluctuations in the cost of construction materials in 2021. And 89% expressed concerns about cost increases for materials over the next six months, including prices for steel, piping, paving materials, lumber and aggregates. This data shows that even in promising times, 2020 recovery will span several years, causing a volatile building market.
Closing out 2021, Entering 2022
As we close the year out, we see an increase in starts values, a decrease in the DMI and the same concerns that permeated throughout the year. These numbers, however modest, increase expectations for 2022. On Nov. 15, 2021, President Biden signed the infrastructure bill into law — this portends a healthy rise in nonresidential building projects for the coming year.
During our OUTLOOK conference, Dodge’s Chief Economist Richard Branch shared that the dollar value of construction starts could increase by as much as 6% in 2022. He emphasized that while residential construction will continue to play a large role in next year’s growth, a more balanced recovery in the nonresidential sector will begin — particularly as funding from the infrastructure package begins to enter the market.
The past year has taken the construction industry through hills and valleys — and the waves may well remain for the foreseeable future. The data continues to anticipate a healthy level of construction in 2022. As the industry, and world at large, continues to navigate both labor and supply shortages, all growth is anticipated to be modest. However, construction teams will not be free of the challenges of 2021: high material costs, unpredictable supply issues, aging construction labor force, volatile weather patterns, rapid adoption of new innovations transforming how we design, source and build things. And, as we continue to navigate the global health crisis, predicting case numbers and the Omicron variant’s impact is much like predicting the weather: we can predict it, but we cannot control it.
Construction is changing forever — but that’s not necessarily a bad thing. As our industry grows and becomes more and more digitally literate, adopting new tools and technologies, we can actively work together to navigate these new challenges. The most important aspect of successful construction is successful relationships; if we can connect ourselves to one another, we are sure to overcome these challenges and enter a new era of modern construction.
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