By developing and leveraging the right relationships, and collecting strong data across our value-chain and projects, we can mitigate impacts to our project schedules and budgets, helping us to deliver predictable results. In our Q1 2023 Market Conditions report, we explore ways to learn from what we've seen over the past few years to prepare for what our industry can expect in the future.

Although news outlets and headlines forecast an economic downturn in 2023, the upcoming year could see some scaling back in construction, but we aren’t going to be facing a widespread market contraction. The number and scale of construction projects starting in 2022 and general industry optimism is a good indication of what is to come for 2023.

We’ve been riding a hot market wave over the last few years in several core markets; therefore it shouldn’t be too much a surprise this year to see some mild pacing of the market, but holistically, we are not seeing another significant recession for the building industry on the immediate horizon.

Even though some of the indicators—like changes in the housing market—appear to be similar to the years leading up to other recessions, we are not seeing a drastic drop in the market currently. Consumer spending is still at some historic highs and is not showing significant signs of retraction.

The U.S. economy is a tough thing to upend. Long-term forecast looking 5-10 years out may have a deeper risk of significant scaling back versus the immediate future.

While the construction industry has been recruiting and hiring at a significant rate, and continues to provide great sustainable work for people at competitive pay rates, the need for workers is still high. The Bureau of Labor Statistics cites over 300,000 open construction jobs.

The industry has focused energy into growing typically underrepresented groups in construction. Construction Dive reported that 14% of the workforce is made up of women now. That’s the highest percentage since tracking began, yet there is still work to be done.

Diversification of the workforce is one component to look at. Pay is another factor to consider when recruiting beyond typical borders. Certain tradespeople can earn double what other entry level minimum wage positions might offer. College degrees are not required to build these valuable skills of carpentry, iron-working and other specialized trades. Job-site training and trade apprenticeship programs can get people earning more, quicker, than other administrative, retail or hospitality type of roles.

According to “The 10 Highest-Paying Trade Jobs” list from Accredited Schools Online, of the five construction related positions in the Top 10, Construction Managers lead at #1. Since 1999, trade school enrollment has nearly doubled, and this could largely reflect the demand of skilled technical craftspeople. Trade schools get people working and earning faster than a four-year degree, and they are typically a quarter to a third of the cost of traditional universities.

Over the last year, Engineering News Record has tracked a 4.9% inflation in their Construction Cost Index (CCI) and a 8.4% increase in their Building Cost Index (BCI). Where CCI is a little heavier on the common/general labor component of construction, BCI is a more ground-up structure indicator as it focused more on skilled tradespeople such as carpenters and ironworkers.

Both CCI and BCI are likely to increase further moving into 2023, per ENR’s projections.

As DPR has mentioned in past publications, these indexes are good guideposts, but the true forecast of escalated construction cost must be looked at on a project-by-project basis. Different buildings in different locations will be affected differently, but all signs point toward a generally more expensive building cost in 2023 over 2022. However, the spikes of inflation over the last few years seem to be tapering and becoming a little more regulated and a little less dramatic.

As 2022 came to a close, we were encouraged to see improvements in the construction supply chain. Like others, we’ve been challenged by delays, shortages, and increased costs, but we are starting to see impacts ease and are optimistic that our supply chain, while not fixed, is improving. As the supply chain returns to a more normal state, it may not look exactly like it did pre-COVID, and it will require time to see it rebound completely.

Even as the supply chain recovery continues, there is increasing buzz of a possible recession, despite the positive signs within our industry that are typically indicators of strength. Architectural billings for design work have remained above average through most of the year, dipping only recently.¹ Construction employment is up 3.3% YOY and construction unemployment has shrunk 393,000 over past year, from 4.7% to 3.9%, tying 2018 as the all-time lowest for November. Average hourly earnings are up 6.1% YOY to $32.94 for craft and office nonsupervisory², and labor is in demand and tight (and a continuing point of concern for contractors). Additionally, inflation seems to be easing (the consumer price index, a measure of inflation, showed a 7.1% YOY increase for November, compared to 7.7% in October, according to the US Labor Department)³.

CBRE’s Industrial Occupier Survey reported that 81% of third-party logistics providers plan to expand their footprint over next three years,⁴ presumably to make room for additional inventory. Even the long lasting COVID-related lockdowns in China have caused world markets to adapt through shifting their manufacturer base to other APAC countries.⁵ Homebuilders’ sales models have been seeing less customer traffic.⁶ As homebuilding is impacted by the recent increase in interest rates, sales could slow until rates flatten. In more normal times, a slowing homebuilding market could be an early signal that a commercial real estate slowdown is coming, but demand for infrastructure, manufacturing, and electric utility construction is expected to be strong for several years, much of it driven by federal and state legislation.⁷

GCs’ bid prices have trailed cost increases, squeezing contractors between late 2020 through mid-2022.⁸ Transformers,⁹ generators, some mechanical equipment, and semiconductors continue to have lead time issues with continued price increases.

Electrical manufacturers and distributors have told us there is currently a $1.5 billion order backlog of switchgear, and we will see shortages in metal sockets and bus plugs due to high demand caused by infrastructure projects and semiconductor lead times. But help is on the way, as many chip providers are working to expand production in the US, and Taiwanese chipmaker TSMC, the world’s largest semiconductor foundry, said it would more than triple its planned investment at its new Arizona plant to $40 billion.¹⁰ It’s scheduled to open in 2024 and should help ease long lead times for items requiring semiconductors.

The recent attacks on infrastructure, like electrical substations in North Carolina¹¹ and the Pacific Northwest,¹² and internationally at the Nord Stream gas pipeline that delivers gas from Russia to Europe,¹³ impact both consumers and manufacturers by interrupting critical energy sources and adding additional demand for products to the supply chain.

Concrete shortages have been reported in 43 states, caused, in part, by cement and fly ash shortages.¹⁴ The fly ash shortage also constrains wallboard manufacturing east of the Mississippi River, and we’ve learned from drywall manufacturers that it may take five to seven years to fully address this issue. Glass continues to be an at-risk item caused by sand shortages,¹⁵ manufacturing constraints, and competing demand from other industries like solar and automotive manufacturing. Other items still experiencing extended lead times include polyiso insulation, TPO membrane roofing, dock levelers, lab casework, access controls, security cameras, ductile iron pipes, and stainless-steel tubing.

The SEC set disclosure guidelines to encourage transparency for public companies on events impacting their supply chain specific to (1) the COVID-19 pandemic, (2) the Russia-Ukraine conflict, and (3) climate-related risks.¹⁶

Globally, the world is adjusting to China’s past “Zero Covid” policies, resulting in China losing manufacturing and export market share in key sectors to Asian neighbors.¹⁷

The impact of the Russia-Ukraine conflict on key natural resources is well known, but we’ve recently seen a reduction of impact notices from our suppliers, which further suggests that things are beginning to improve. Companies like GM are reporting improvements as well, further validating the good news.¹⁸

The chart below shows the number of impacts received per month by DPR from its manufacturers and suppliers. Impact notices began increasing as businesses returned to work after COVID-19 shutdowns, and then increased exponentially with the Russia-Ukraine conflict (which began in Feb 2022). In recent months it has started to decline, indicating an easing in supply chain impacts.

Fuel

Gas prices have eased in recent weeks, currently up 14% this year, but diesel is running about 50% higher, to $5.35 per gallon (as of December 2022). Reasons include refining capacity and the Russia-Ukraine conflict (that is, Russian exports of diesel). Potentially impacting this further is that the US administration is seeking to stop sales from the Strategic Petroleum Reserve mandated by Congress so it can replenish the reserve, which is now at about 65% of where it was on January 1, 2022. This would likely drive fuel prices up again, but it is unclear to what extent. While these impacts will ease over time, it is not likely to see improvement in the near term.

Road

In trucking, California is considering banning all diesel trucks at ports by 2035, and statewide by 2045, with new vehicles being powered by clean fuels starting in 2024. Starting in 2025, the state may ban internal combustion trucks that have more than 800,000 miles on them from operating at ports and rail yards. In addition, as of the start of 2023, all trucks with 2009-and-older engines are prohibited in the state. There is a shortage of charging stations and infrastructure to currently support this plan, most electric trucks currently only have a range of between 100 and 200 miles between charges, and many APAC imports for the US come in through California ports, so this plan could impact cost and delivery locations and schedules.

Rail

On December 2, a bill was signed into law averting an imminent rail strike, but many of the supply chain issues that we’ve experienced have been aggravated by a steady decline in rail service over recent years, despite the record 2021 earnings seen by Union Pacific (UNP), Norfolk Southern (NSC) and Berkshire Hathaway’s (BRKA) Burlington Northern Santa Fe. The railroads have used precision scheduled railroading (PSR), which is essentially streamlining to manage costs and boost profits. US freight trains grew 25% in length between 2008 and 2017 (up to 3 miles in length).  Profits for rail carriers have grown, but consistent delivery has declined. Only 67% of trains now arrive on time, down from 85% pre-pandemic. PSR has resulted in disgruntled employees and unhappy customers.

Water

Shipping containers have become much more affordable recently but were problematic throughout much of 2022 due to tight capacity and high rates. In 2023, freight forwarders will have significant negotiating power and spot rates will continue to fall. In fact, some smaller container ships are being scrapped and others are taking longer routes to their destination to take on additional containers prior to crossing oceans. Climate change and drought have caused low water levels in rivers such as the Mississippi and Rhine which resulted in slowdowns on related barge freight.

In 2022, DPR rounded out the supply chain team with specialists dedicated to help transform our supply chain relating to supplier relationship management, quality, strategic sourcing, procurement, and logistics.

This expertise was used to support our project teams by assessing at-risk materials on project pursuits, overcome supply chain disruptions on delayed materials, expand and formalize manufacturer relationships, and evaluate risk of manufacturers and suppliers. We continue to evaluate new vertical integration opportunities and expanding manufacturer-direct sourcing on key materials.

In 2023, we will begin offering logistics and storage options as a service to our project teams and will develop a network of quality inspection providers able to perform factory inspection worldwide to allow us to assess readiness and availability of manufactured products more rapidly, helping us to ensure on-time project delivery.

We are working to expand our material cost forecasting and utilize the information to provide more intelligence to our preconstruction teams and customers, thereby enabling earlier action for at-risk materials.

This chart is based on the average result of DPR’s forecast for five (5) periods from June of 2021 through and including June of 2022 (information not inclusive of last quarter due to timing of BLS PPI information release).

Our forecasts are developed through dozens of discussions each quarter with suppliers and manufacturers, whose results are averaged by trade.

For this analysis, we took each forecast independently, and averaged how accurate our results were compared to the actual PPI changes from the Bureau of Labor and Statistics over the next four quarters (3, 6, 9, and 12 months out). Once we had those results, we grouped and averaged each of the 3, 6, 9, and 12 month results to see how accurate the forecasts were. Overall, the forecast accuracy was good, with the main outliers being what our suppliers predicted for aluminum, copper, coil related steel products, and PVC. On each of these, we believe the suppliers and marketplace anticipated higher impact from events than what were actually seen, with PVC being related to chemical shortages and weather events, and aluminum, copper, and coil related steel products being related mostly to the impact of raw materials coming from Ukraine and Russia, and the impact of the ongoing conflict there.

While the easing of supply chain issues is positive, DPR has been actively working to control our destiny and prepare for the future in managing our supply chain. Our aim is to ensure a reliable supply chain that keeps our projects on track, hitting critical milestones, and minimizing the effect of outside events.

As we look towards 2023, we wanted to review earlier Market Conditions Reports to ensure we are holding ourselves to the highest standards, and providing honest and fair insights that you can trust.

• How did assertions made in the early part of COVID play out?
• Was the data correct?
• Where did we miss the mark and why?

If you're not keeping score, it's just practice.

A pandemic layered with social unrest drastically altered the economy.

High demand and low or no availability, together with political changes, led to a volatile year.

The storm of inflation and supply chain impacts has subsided but remains in flux. Is this the new normal?

Photos: Chip Allen and David Ranaghan