Q&A talks about the outlook for the construction sector with David Breslin, chief estimator with S/L/A/M Construction Services in Glastonbury. (To read S/L/A/M’s analyses, go to www.slamcoll.com/news.htm)
Q: Your company’s Labor and Material Analysis for the first quarter of 2013 makes this proclamation: “The market is slowly recovering with increases in material cost, labor hourly rates and profit margins.” Obviously the latter is good but why are higher material costs and labor hourly rates good things for business?
A: Over the past few years, general contractors, subcontractors and vendors would offset labor and material increases with their overhead and profit to win work. Obviously, any increase is not a good thing for business. Wages and benefits have been held down but employers are being to award wage rate and benefit increases to keep their skilled dedicated staff and workers.
Q: S/L/A/M forecasts that construction bidding will remain competitive into the summer with inflation kicking in for the third and fourth quarter. Can that be interpreted to mean lock in construction contracts now?
A: Forecasters are predicting a spike in (cost) escalation, so it is prudent to contract sooner than later to get one’s best value for capital investment. As projects are completed, firms are actively pursuing new work to replenish their backlog, keeping the current market competitive.
Q: Interest rates continue to stay low as does the cost of living and inflation. Why are costs rising faster than inflation in the construction business?
A: The construction industry, generally, is the last into a recession and last to recover. Construction escalation normally is double inflation. Increases in both labor rates and material costs contribute to escalation.
Q: Construction unemployment is trending downward, according to the Federal Reserve Board, yet it hasn’t been below 10 percent since October 2008. If that’s the case, with overall unemployment predicted to stay above 6.5 percent until 2015, why are labor hourly rates increasing? It seems as if there is no shortage of labor.
A: The downward trend is mainly contributed to people leaving the industry for careers in other industries. There are many factors contributing to rate increases — i.e. yearly union and prevailing wage increases, inflation/cost of living increases, health insurances, income taxes. There is a growing concern that there will be a shortage of skilled labor and professional staff since fewer people are seeking construction industry careers.
Q: Why is construction industry confidence at a high? Will it get tempered at all by political gridlock in Washington?
A: Generally optimism is higher in the first quarter then the rest of the year (see chart in report). As the market moves from a buyer’s market to a seller’s market, confidence to win new work is always higher. As stated in the report:
• Industry Confidence is at a record high indicating that the market is stable and will grow over the next three to nine months. There are sectors of the market (non — building construction / sequestered funded projects) that will not rebound this year.
• Political uncertainty and bickering may temper any real gains.
Q: How much of your research is applicable to the Connecticut market? What factors are affecting the local construction industry that might not be factors across the country? Are we better off locally?
A: The majority of SLAM estimating research is national but has a Connecticut influence since we are based in Connecticut. Here in Connecticut, we are faced will similar national factors. Delaying expansion investment is due to uncertainty. As uncertainty becomes defined and a clear path to expansion is realized, investment will return. The Connecticut market is lagging behind other sections of the country, but state government seems committed through new public work projects to “prime the pump” to recovery.
