Predicting the financial climate of the construction industry
According to the Associated General Contractors of America (AGC), contractors are adjusting their expectations, facing shifts in demand across various project types, with public-sector projects like water, sewer, and transportation infrastructure receiving a more optimistic outlook than certain private-sector segments. Their cautious optimism is set against a backdrop of ongoing labor shortages, the impacts of higher interest rates, and a supply chain that, while improving, remains unpredictable.
The AGC also reports that contractors have moderated their expectations for new federal investments in infrastructure and other construction projects. The most notable decline in growth expectations has been observed in the highway, street, and other transportation construction segments. This adjustment reflects concerns over regulatory and procedural obstacles that could limit the benefits of federal funding, highlighting broader economic concerns that could influence demand and project success.
This complex backdrop underscores the necessity for strategic foresight and flexibility for construction professionals, marking a year where substantial obstacles affect the industry’s outlook.
Forecasting the cost of building materials in 2024
Global real estate consultancy firm Jones Long LaSalle (JLL) expects the cost of building materials to rise by 2% to 6% in the United during 2024.
This anticipated increase is considerably less severe than what was experienced during the pandemic and subsequent supply chain disruptions. For example, Lindsey Smith from Pepperdine University highlights that prices for steel and electrical supplies skyrocketed by over 75% from May 2020 through 2021.
The sharp price increases over the past few years were attributed to COVID-19-related global supply chain interruptions, caused by government shutdowns, elevated production costs, and labor shortages. The impact was particularly felt in the construction sector, which often relies on internationally sourced products and parts. Notably, shipping container costs from China to the U.S. East Coast surged by more than 500% at the height of the disruptions.
While JLL anticipates a relatively modest rise in construction material prices for 2024, it's important to note the complexity and unpredictability involved in predicting material cost changes. Accurate forecasts require a deep understanding of global market dynamics, precise demand projections, and extensive data analysis. Furthermore, unforeseen developments in the global economy could significantly alter these projections.
Wages of construction works and labor market challenges in 2024
The labor market in the construction industry faces significant challenges in 2024, with JLL predicting a continuation of labor shortages that have plagued the sector over recent years. These shortages are anticipated to further slow the growth of the construction labor force. As a result of these pressures, JLL forecasts a wage increase of 3% to 5% for U.S. construction workers.
Wages for construction workers have experienced a notable increase, with average hourly earnings for production and nonsupervisory employees climbing by 5.1% in 2023 compared to the previous year, as reported by the AGC. This wage premium, which was nearly 19% higher than the average for all private-sector production employees in December 2023, highlights the industry's efforts to attract and retain talent.
Moreover, the industry's demand for labor is expected to surge, with estimates from Associated Builders and Contractors suggesting that over half a million additional workers will be required to meet the demand.
Feedback gathered from more than 1,200 contractors in an AGC survey on the 2024 outlook reveals that 63% are concerned about the ongoing shortage of workers and subcontractors, marking it as their primary concern for the year. This shortage is adversely affecting project timelines and escalating costs.
Despite these efforts, falling productivity levels and ongoing shortages are compelling the industry to explore new strategies, including technological investments and alternative production methods. While advancements in AI and robotics offer some relief, they currently serve more to optimize existing processes rather than replace the human labor force entirely.
Economic conditions in 2024
The economic landscape of 2024, influenced by global and local factors, will have a significant impact on construction costs. These factors include inflation, interest rates, and exchange rates, which directly impact costs related to materials, labor, and financing.
The AGC’s survey reveals that rising costs led 53% of responding firms to delay or cancel projects in 2023, with 38% attributing these postponements and cancelations to rising interest rates. 64% of respondents identify escalating interest rates and financing costs are their primary concern for 2024, while 62% stated their biggest worry is an economic slowdown or recession.
Additionally, the AGC reports a decline in optimism among contractors at the beginning of 2024 compared to the same time last year. There's a noticeable adjustment in their expectations regarding significant federal investments in infrastructure and construction.
Anirban Basu, Chairman and CEO of Sage Policy Group, emphasizes the substantial influence of financing costs on project viability. He advises, "Pay close attention to what Federal Reserve policymakers are saying about inflation early in 2024, and assess how that will affect interest rates, which are already so high that they foreclose the possibility of many projects moving forward because they simply don’t pencil out anymore.”
Nevertheless, forecasting economic conditions remains a complex task. While some analysts foresee a potential economic downturn in 2024, others predict a period of growth and stability.
The likelihood of decreasing construction costs in 2024
“When will construction costs go down?” is a question that is difficult to answer.
If the predictions from JLL are accurate, then we can expect the cost of building materials and wages of construction workers to edge up by 2% to 6% and 3% to 5%, respectively, resulting in total construction costs increasing by 2% to 4% in 2024.
However, the situation may worsen if material prices remain high, the labor market remains tight, and unforeseen global events further strain the supply chain, potentially sustaining high construction costs or even pushing them higher.
The AGC’s report, "A Construction Market in Transition: The 2024 Construction Hiring and Business Outlook," offers detailed insights into the evolving market dynamics and their implications for construction costs in 2024. This document is beneficial for those looking to get a clearer picture of the construction cost environment in the upcoming year.
If you’re a construction professional eager to deepen your understanding of financial management and strategic planning in this fluctuating economic environment, our series of blogs on cost costing and finance management is an invaluable resource. These articles are designed to provide you with the knowledge and strategies needed to understand the current economic landscape.
