Just when we thought nothing could be worse than 2020, 2021 hit, bringing us rising material costs, workforce shortages and unpredictable fluctuations in construction spending. While we still have high hopes for 2022, industry challenges will likely remain well into the year.
"With global supply chains in disarray and employers suffering the ongoing difficulty of filling openings, industry challenges will persist in 2022," said ABC Chief Economist Anirban Basu.
A "snowball effect" would be the best way to describe what is happening in the construction industry. Material shortages are just the beginning. After nearly a year of limited work, material prices skyrocketed as our industry went back to work. According to an ABC analysis of the U.S. Bureau of Labor Statistics' Producer Index, prices for lumber, iron, steel and natural gas more than doubled year-over-year from 2020 to 2021.
In addition to the rising material shortages and costs, fuel has caused the price of transportation to drastically increase. Fuel prices are up over 50 percent year-over-year according to the U.S. Energy Information Administration. This rise has caused the transportation of materials to increase again, adding to that snowball effect. The continuing surge of costs will cut contractor profit margins. According to ABC's Construction Confidence Index, contractors' profit margin expectations have worsened in recent months.
Nonresidential spending experienced a steady decline throughout 2021. Several reasons contributed to the decline, but a large one is the supply chain disarray. This alone has kept material prices high, causing companies to cancel or pause current and future projects. According to Basu, another decline in nonresidential construction spending is the uncertainty of federal funding.
Another hesitation in construction spending are the skilled worker shortages. At the beginning of 2021, ABC reported that there were 430,000 construction jobs that needed to be filled. A total of 1 million workers would be required through 2022. Federal vaccine mandates will likely exacerbate worker shortages as many employees in the industry have indicated that they would rather find other employment opportunities than receive the vaccine or subject themselves to regular testing. Vaccine mandates and OSHA's rules will also increase compliance costs and cause regulatory burdens for all employers.
With all of these headwinds and uncertainty, Basu warns the construction industry to be careful with respect to their contractual obligations as spending and prices continue being unpredictable. "Contractors should always be careful with respect to their contractual obligations," said Basu, but the current period is one that requires a greater amount of care and caution than usual. Input prices are likely to remain volatile, and shortages of key materials and equipment will continue to result in project delivery delays.
For more information, contact David Helveston at (225) 753-2590 or dhelveston@abcpelican.com.