Construction Industry Improves Despite Lukewarm Economic Conditions

Words: Dan Kamys The nonresidential construction sector continues to grow at a solid pace, reflecting 18 months of improving activity despite rising costs of construction materials and labor and a slight decline in regional economies where most construction activity is taking place, according to the FMI Nonresidential Construction Index Report (NRCI) for Q2 2015. The Index reflects the observations and sentiments of a sampling of construction industry executives nationwide. FMI’s NRCI for Q2 2015 came in at 64.9, essentially unchanged from the previous reading of 64.8 in Q1. The index paints a mixed picture of the current state of the nonresidential construction sector. On one hand, the NRCI component for the overall economy dropped 1.9 points to 76.9 points this quarter. While down from its peak of 81.1 a year ago, this component still indicates that panelists contributing to the index remain bullish about the economy. Similarly, indicators for the economies where panelists do the most business stood at 76.7, suggesting continued growth on a broad scale. Business Improving Despite Rising Costs in 2015 Highlights from the NRCI point to diverse forces driving the industry as we enter the midpoint of the year:

Panelists’ Construction Business. Panelists’ business is now improving with the overall economy indicating deeper, more sustainable growth.
Nonresidential Building Construction Market. The nonresidential building construction market where panelists do business is up 1.9 points to a solid 76.4. This NRCI component is in line with overall economic growth, auguring for continued health in the industry.
Expected Change in Backlog. The measure of expected change in backlog improved 3.2 points this quarter to reach 71.7, while current backlog remains at a solid 10 months.
Cost of Construction Materials and Labor. The index component for the cost of construction materials dropped one point to 21.4. The component drops as prices increase. The cost of labor components dropped sharply by 5.2 points to 12.5. Both labor and material cost increases reduce the overall NRCI score.
Productivity Flat. The productivity component continues to hang around 50.0, or little improvement. It is currently at 51.0.
Green Construction. Owners’ views concerning “green construction” indicate that the most important factor characterizing the green construction category is lower energy costs. Only 17% of panelists have more than 50% of their projects in the “green” category.

“While the current and future outlook for nonresidential construction appears stable if relatively unchanged, things could become more dynamic,” said Phil Warner, Research Consultant for FMI. “In fact, improvements in profitability would happen faster if costs of materials and labor weren’t rising faster than construction pricing. There is also an increasing amount of evidence that more contractors are capacity-limited.” Green Construction and Delivery Method Trends Active Many panelists noted that green construction is now mainstream and considered more the norm than a fad. However, few owners are willing to pay more to build “green,” according to panelists. In 2008, NRCI panelists predicted that green construction would grow from just 13 percent of their then-current backlog to 38 percent in five years. A little over seven years later, panelists report that green construction makes up just 28.6 percent of their backlogs on average. On the topic of construction delivery method trends, responses surrounding current and future trends for construction project delivery methods indicated a return to more collaborative methods. This indicates a shift toward alternative delivery methods and away from the more traditional approach of design-bid-build popular during the recession as a way to ensure the lowest initial price for projects. However, the expected rate of change over the next three years suggests a slow transition from design-bid-build and CM at-Risk to more design-build and the newer concept of Integrated Project Delivery (IPD). The FMI Nonresidential Construction Index Report (NRCI) for Q2 2015 report can be accessed at http://www.fminet.com.

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