The pandemic economy is affecting the construction industry in both positive and negative ways. The 2021 edition of the “Sterling Seacrest Pritchard Risk Sentiment Index of the Construction Industry,” asked nearly 90 construction industry leaders to name the top challenges currently facing their businesses.
On the positive side, construction leaders are seeing consistent profit margins and more business in their pipelines. But they negatively report material costs and delays, as well as staffing challenges, presenting huge hurdles for the industry.
The construction businesses surveyed were mostly mid-sized prime contractors with an annual revenue of more than $10 million. Survey participants were asked to choose three top risk issues for their company. Top concerns included:
Highlights from the Risk Sentiment Index
Businesses surveyed felt they were least prepared to handle the issues of staffing as well as material costs and delays. The construction industry is feeling the strain of increased costs for materials and delays in shipping. The fluctuation in costs has made it very difficult for companies to predict budgets and bid work. It has also made it difficult to stay on budget as material costs increase to record levels and shipping delays result in work slowdowns.
Just over 50% of the companies surveyed have had to change the way they work to complete projects on time. Three-quarters of the companies surveyed reported the increased price of materials has negatively impacted their bottom line with 73% of survey participants experiencing project delays.
Over the last few years, material costs have been stable and predictable. Contractors were able to accurately anticipate costs for their clients. That changed last year. Lumber, the key material in residential and multi-family construction, is a great example of the problem.
In April 2020, the cost of yellow pine was about $324 per million board feet. But fast forward to May 2021 and southern yellow pine was $1,515/MBF. By late August, those costs had dropped to $389/MBF. That’s a price drop of about 75%. But availability and cost of material uncertainty remains a challenge.
Supply chain issues go hand in hand with material cost issues. The uneven economic recovery, battered by a resurgence of COVID-19 cases caused by the Delta variant, is causing staffing shortages all along the supply chain. That means deliveries that normally take days or weeks are sometimes taking months. Some experts believe waves of infections could affect the supply chain for the next two years.
There is good news on the job front. Almost 70% of those asked are seeing a rebound in available jobs and projects. However, finding qualified employees continues to be an ongoing issue for the industry as the skilled labor force has been decreasing for years. The survey did find more than half of the companies surveyed (60%) have increased employee compensation in the past year in an effort to recruit and retain skilled workers.
The construction industry notes the rate of retirement far exceeds the number of apprentices looking to fill the job. For example, Georgia had a shortage of more than 61,000 workers reported in 2019. That’s continued through the pandemic.
Several industry groups have created programs, including Georgia’s Construction Ready, to educate young people about career opportunities in construction and the skilled trades. These programs seek to:
These STEM and STEAM initiatives help students apply academics while learning safety with tools, how to build and other skills related to the trades.
In all, the Risk Sentiment Level in 2021 rose slightly from the last survey in 2019 to 4.92 from 4.91. Sterling Seacrest Pritchard launched its Risk Sentiment Index in 2015 to determine how prepared construction companies are to manage their risk. Risk levels peaked in 2015 with a level of 5.15 (on a scale of 1-10). It dropped in 2016 (4.43) but jumped again in 2017 (4.99).
This year’s risk sentiment seems to be in a good place especially after the many unexpected twists and turns of the past 18 months. Look for a return to normalcy in the next year will allow companies to experience record growth and well managed risk.
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