Strong Construction Market Continues to Challenge Companies
The continued strong demand for construction services and the high number of new projects being started has opened the door of opportunity for many companies. The chance to bid and work on multiple large projects has been welcome by business owners. While the skylines of many Indiana, Ohio and Kentucky cities are bustling with new construction, just beneath the surface there are a variety of business challenges brewing. The increase in construction has left companies with more opportunities than qualified labor (both skilled and unskilled) to complete the work. This has forced them to implement new recruiting strategies, expand training programs, increase compensation and benefits as well as finding other ways to attract and retain needed labor. Given the changing economic situation which includes rising interest rates, many expect new construction projects to slow into 2019 and 2020. According to the 2019 Dodge Construction Outlook, the construction market will remain strong with demand shifting from residential and commercial construction to manufacturing, institutional and public works projects. In other words, the opportunities and challenges are continuing.
Construction Survey Findings & Outlook
- Residential Construction – According to the report, it’s expected that residential construction will remain steady for single family housing with a slip of 6% for multi-family housing. The leveling out of single-family homes is being driven by the increase in interest rates, increasing prices of homes and reduced tax benefits associated with homeownership. Multi-family housing is expected to slide because of the limited growth of occupancies and rental income.
- Public Works – This is an area of expected growth due to the provided federal government funding which was allotted in 2018. It’s anticipated there will be a 4% growth of both transportation and environmental related projects. At the same time, it’s also expected there will be a 3% decrease in the amount of electric, utility and gas plant construction projects.
- Institutional Construction – The survey also assessed new institutional construction starts such as educational facilities, healthcare centers (including hospitals and medical centers) and airport terminals with supporting facilities. Overall institutional construction will experience a 3% increase representing small growth over prior years. Educational facility construction is expected to experience continued growth being fueled by taxpayer money and school bonds. Finally, airport and related municipal projects are expected to remain on track with prior year demand.
- Manufacturing Construction – This is one area where the Tax Cuts and Jobs Act of 2017 (tax reform) is expected to have an impact. According to the survey, there is expected to be a 2% jump in new construction starts following the large 18% increase in 2018. The tempered growth is suspected to be driven by the corporate tax saving incentives and changes outlined in tax reform.
- Commercial Construction – Unlike the other areas of construction, commercial construction will have an expected reduction of 3% after experiencing a small gain in 2017 and 2018. The study found that while the market for construction is strong, the anticipated economy changes will result in reduced construction starts. It’s also expected that retail and new store construction will also experience a slowdown.
What about Backlog?
Beyond new construction startups there is also project backlog to consider. The Associated Builders and Contractors (ABC) uses a backlog indicator to identify the amount of work, measured in dollars, that construction companies are already under contract to complete in the future. The higher the number, the greater the demand for resources. According to a report issued in September, the backlog has reached a record 9.9% nationally. However, in the middle states including Ohio, Indiana and Kentucky, backlog experienced a -.7% drop over the prior year. This reduction provides some relief to companies stressed by the market.
The continued demand for construction constitutes an opportunity for industry companies. However, with opportunity comes challenges and industry companies need to be prepared to meet them. If you have questions about your company’s financial health and vitality or need assistance with an accounting, audit or tax issue, Barnes Dennig can help. For additional information please call us at 543-241-8313 or click here to contact us. We look forward to speaking with you soon.