2014 Forecast: More Projects to Bid On, Spending to Rise By 10%

The new year is bringing positive news for contractors, with more projects to bid on in 2014 than the past five years and total construction spending expected to rise by 10% despite a slight decline in public construction, according to Ken Simonson, chief economist of the Associated General Contractors of America (AGC). However, while materials costs “should remain tame,” skilled labor availability will become an increasing concern.

The new year opened with an upbeat report on construction spending from the Census Bureau last week. The agency reported that spending in November was the highest since March 2009 at a seasonally adjusted annual rate (a statistical technique to remove distortions due to normal weather or monthly variations). For the first 11 months of 2013 combined, year-to-date spending rose 5% from the same months in 2012.

But the pickup was very unevenly distributed. Private residential spending soared 18% year-to-date, powered by a 45% leap in multi-family construction, a 28% jump in single-family homes and a 2% uptick in improvements (additions and major renovations to both types). Private nonresidential construction was unchanged, on balance. Public construction slipped 3%, dragged down by an 8% contraction in public educational spending, which more than offset a tiny rise in highway and street construction. These two segments account for more than half of public construction.

The overall flatness of private nonresidential construction masked extreme differences in some segments. The top performer through the first 11 months was lodging construction, which climbed 26% as hoteliers modernized older properties and began putting up new big-city hotels and extended-stay properties in areas receiving an influx of oil and gas-related workers. At the other end of the spectrum were communications construction, down 13%, and power, down 11%. However, the apparent plunge in power construction was driven by a surge in construction of wind facilities in late 2012 to beat a year-end deadline to qualify for the wind production tax credit. In 2013, the credit applied to projects begun by year end, so there was no comparable spike in spending.

For 2014, the two biggest private nonresidential segments—power and manufacturing—should both post double-digit increases, along with lodging and warehouse construction. Office and retail construction should continue to make modest gains, although they will remain far below pre-recession levels. But private hospital and educational construction will remain in the doldrums, said Simonson.

Overall, private nonresidential construction should increase 5% to 10%. Private residential construction will grow another 10% due to continued double-digit growth in apartment construction, although single-family homebuilding will probably stall later in the year. Public construction will slip again, though perhaps not as much as the 3% drop in 2013. Adding up the pieces, total construction spending will rise close to 10%, a significant improvement over last year’s 5% growth.

As for prices, the Bureau of Labor Statistics (BLS) reported last month that its producer price indexes (PPIs) for new nonresidential building construction rose 3% to 4% between November 2012 and November 2013. These indexes measure what contractors say they would charge to construct industrial, warehouse, school, office and healthcare buildings. While moderate, those increases are larger than contractors had reported for several years and also are larger than the PPIs for materials used in construction (including items consumed by contractors, such as diesel fuel). The materials index rose just 1% over the last 12 months.

Materials costs should remain tame in 2014. Diesel prices may actually fall slightly. Steel prices have begun to climb, after slumping 8% in 2012 and finishing 2013 roughly unchanged. However, there should not be large spikes like those in 2004-2008. Similarly, copper and concrete prices may rise modestly, and gypsum prices are likely to start the year higher. But there should be ample supplies of all products, and by December, the materials price index is not likely to increase more than 3% from the December 2012 level.

Labor costs and, especially skilled labor availability, will be bigger worries. The unemployment rate for construction workers tumbled from 18.8% (not seasonally adjusted) in November 2010 to 8.6% in November 2013 as 890,000 former employees left the ranks of the unemployed. Unfortunately for contractors, the industry added only 327,000 employees in that span. That means most of those experienced workers left the industry, at least for now.

To get them back, contractors will likely have to spend more on wages, benefits and bonuses, explained Simonson. Firms that can’t find the additional workers they need will increase their payment of overtime wages. As a result, employers’ costs for employee compensation, BLS’s overall measure of wages, salaries, benefits and required payments such as unemployment and workers’ compensation, will probably go up 3% to 4% in 2014, compared with a 2.1% rise from the third quarter of 2012 to the third quarter of 2013. Even then, more contractors will likely experience difficulty finding skilled craft workers, supervisors and estimators.