Construction optimism centers on public sector demand in 2023

Contractors say they are less optimistic about many private-sector segments than they were a year ago, but their expectations for the public sector market are bullish

We’re living in tough economic times that are challenging many construction sectors, but contractors appear to be pinning their hopes on the prospect of infrastructure projects in the coming year.

That’s according to the latest survey results released by the Associated General Contractors of America and Sage in the report High Hopes for Public Sector Funding Amid Workforce and Supply Chain Challenges: The 2023 Construction Hiring & Business Outlook.

Overall, contractors say they are less optimistic about many private-sector segments than they were a year ago, but their expectations for the public sector market are bullish. 

“The bottom line is contractors have high hopes for public funding in 2023, even as they expect to cope with continued supply chain challenges and workforce shortages,” said Stephen E. Sandherr, the association’s chief executive officer.

“The changing outlook reflects the fact that higher interest rates and evolving work and shopping patterns are impacting office retail, hospitality and multifamily residential demand. 

“The prospect of an economy that is slowing and perhaps heading into recession has dimmed the short-term outlook for warehouses, data centers and manufacturing facilities,” he explained. “At the same time, many contractors hope to finally see the benefits of a flurry of new federal investments in infrastructure and construction. This includes funding from the Bipartisan Infrastructure Law, the CHIPS Act, and the Inflation Reduction Act.”

Highway and bridge construction show the most promise

The net reading - the percentage of respondents who expect the available dollar value of projects to expand compared to the percentage who expect it to shrink - is positive for 14 of the 17 categories of construction included in the survey.

Respondents are most optimistic about infrastructure categories. There were net positive readings of 42% for both highway and bridge construction and transportation projects. Contractors are almost as upbeat about sewer and water construction, with a net reading of 38%. The net reading for federal projects is 37%.

Despite this optimism, only 5% of respondents say they have worked on new projects funded by the law, while 6% have won bids but have not started work. A total of 5% say they have bid on projects but have not won any awards yet, whereas 21% plan to bid on projects but say nothing suitable has been offered yet.

The highest expectations among predominantly private-sector categories, with net readings of 28% each, are for power projects and other healthcare, such as clinics, testing facilities and medical labs. There is also a generally positive outlook for hospital projects and public buildings, with net readings of 23% each. Contractors on balance were optimistic, as well, about the education sector. The net reading for both kindergarten-to-12th-grade schools and higher education construction is 16%.

The net reading for manufacturing construction is 14%, compared to 27% in the 2022 survey. The net is 12% for data centers, down from 31% a year ago, and 10% for warehouses, down from 41%. There is a net positive reading of 1% for multifamily residential construction.

“There are three segments that contractors are generally pessimistic about: lodging construction, which has been shrinking sharply ever since the pandemic hit... and overwhelmingly contractors expect a decline in spending on private offices and retail construction,” noted Ken Simonson, chief economist with AGC, pointing to survey results that show a net negative reading of -4% for lodging construction; -21% for private office; and -22% for retail construction.

“We’ve been doing this survey for over a dozen years and even when we’ve had recessions or slow growth expectations for the economy, contractors are by nature optimists, so it’s not surprising to me that more categories wind up positive than negative, but it is notable that nearly all of these categories, particularly on the private side, show lower net positive readings or deeper negative readings than they did in previous years,” Simonson said. 

The steepest downturn in expectations occurred with multifamily and warehouse construction, both of which recorded declines of 31 percentage points from the net readings in the 2022 survey. 

Labor shortage affects majority of contractors

More than two-thirds of the respondents expect to add to their headcount, compared to only 11% who expect a decrease. While just under half of firms expect to increase their headcount by 10% or less, nearly one-quarter anticipate larger increases while 18% of respondents say their headcount will grow by 11% to 25%, and 5% of respondents anticipate an increase in headcount of more than 25%.

However, an overwhelming 80% report they are having a hard time filling some or all salaried or hourly craft positions, compared to only 8% who say they are having no difficulty. (The rest have no openings.)

In addition, the majority - 58% - of respondents says either hiring will continue to be hard or will become harder. Only 15% say it will become easier or remain easy to hire, while 27% expect no change.

Workforce shortages likely explain why nearly three-quarters of firms increased base pay rates more than in 2021, compared to 62% that boosted pay more in 2021 than in 2020. Additionally, one-third of firms provided incentives or bonuses. And more than one-fourth of the firms increased their portion of benefit contributions and/or improved employee benefits.

Something new in the latest results is the similarity between expectations among union and open shops.

“Union and open shop firms have similar expectations about expanding their headcount,” Simonson stated. “That is roughly two-thirds of respondents from both types of firms expect to add workers in 2023, specifically 64% of union firms and 69% of open shop firms. Previously, union firms had less trouble in past years in filling open positions than open shop firms, but that difference has narrowed significantly. These workforce shortages likely explain why 72% of firms increased base pay rates from 2021.”

Supply chain issues are universal

Only 9% of firms report they did not have any significant supply chain problems in 2022. To cope with these problems, more than two-thirds of respondents reacted by accelerating purchases after winning contracts. A majority turned to alternative suppliers. Almost half specified alternative materials or products, while close to one-quarter stockpiled items before winning contracts.

Most contractors have experienced project delays or cancellations. Only a third report no projects have been postponed or canceled. A substantial share of respondents report a project was postponed in 2022: 39% report a postponed project was rescheduled, while 36% had a project postponed or canceled last year that has not been rescheduled. A total of 13% of firms have already experienced a canceled or postponed project that was set to begin in early 2023.

“The main reason for cancellations and postponements was rising costs - for construction, financing, insurance, etc. - which was cited by nearly half of contractors,” said Simonson. 

“The awarding contracts are much larger than they would have typically been, due to inflation,” commented Mac Caddell, president and COO of Caddell Construction in McHenry, AL, a panelist on the press conference during which the survey results were released. “As a result, many general contractors and subcontractors that we do business with have record backlogs and it’s actually straining their bonding capacity. I anticipate some of that to get better on the subcontractor side, because subs work off their back log faster than contractors do. Midway or so into 2023 I expect hopefully that subs will have more flexibility and that will make things more competitive on certain projects.”

Chris Long, president and COO of Kaufman Lynn Construction in Delray Beach, FL, also a panelist, backed up Caddell’s statements, noting a trifecta of challenges is working against construction projects in his region of south Florida.

“The cost of money, the inflationary cost of the project, and of course, the lack of talent... those three things have caused projects to be postponed, delayed, and really stressed that market in spite of continued demand. We’re optimistic as always but concerned about when it reaches a tipping point where developers tap the brakes and stop putting that money out,” Long said. 

Technology offers a solution 

Officials with Sage noted that despite rising costs and other challenges, construction firms will continue to invest in technology. The majority of firms surveyed said that their investment in 15 different types of technologies will either remain the same as last year or increase, with only 1% to 2%  indicating that their investment would decrease in any of the technologies.

“Technology plays a critical role in delivering successful and profitable projects,” said Dustin Stephens, vice president of Construction and Real Estate, Sage. “Utilizing the right technologies can help lessen the impact of current challenges and put construction firms in the best position to thrive.”

When it comes to plans to increase technology spending, between a quarter and a third of firms plan to increase their investment in the assorted technologies in 2023, Stephens said.

“The top category for increased spending is document management software, with nearly one third of respondents planning to increase spending,” he noted. “Project management software came in a close second, cited by 30% of firms, and roughly one quarter of firms plan to increase investments in accounting software, estimating software, tool and asset management or tracking, and human resources software.”

Stephens added that as with the past few years, the survey revealed the greatest IT challenge is finding the time to implement and train on new technologies. However, it is vital that firms make the time, as utilizing new technologies, particularly cloud-based solutions with an open API, can alleviate other challenges. It can help to start slow and prioritize technology that can have the biggest and most immediate impact, then implement new technology in stages.

Construction officials call on Washington

Association officials called on Washington leaders to resolve the significant uncertainties that exist around the Buy America provisions within the Bipartisan Infrastructure law, noting the administration has not settled on a uniform interpretation of those requirements. They also called on the Biden administration to act on the permitting reform measures that were included in the 2021 Bipartisan Infrastructure Law. And they called on Congress to pass immigration reforms and boost investments in career and technical education programs.

“We are supporting the industry as it works to overcome the challenges it faces,” Sandherr said. He noted the association was partnering with its chapters to run digital workforce recruiting campaigns and has signed up over 800 firms to participate in the association’s Culture of Care program, which helps firms better attract and retain talent, particularly diverse talent.

Sandherr said the association would also continue to be a vigorous advocate for the industry in Washington and with public officials across the country. “We will do everything in our power to make sure that 2023 is a successful one for the industry, our members and the tens of thousands of men and women that they employ,” Sandherr said.