Rising Costs Still a Problem for Contractors

By Katie Kuehner-Hebert | May 17, 2023

The profitability outlook for the U.S. construction industry remains a bit “cloudy” depending on the type of project, while virtually all contractors are still having to contend with rising labor and material costs.

The profitability outlook for the U.S. construction industry remains a bit “cloudy” depending on the type of project, while virtually all contractors are still having to contend with rising labor and material costs.

Contractors focusing on infrastructure projects are the most optimistic, according to a survey conducted by the Royal Institution of Chartered Surveyors in conjunction with AACE International. Its Q1 2023: USA Construction Monitor report shows that infrastructure activity continues to rise strongly on the back of policy initiatives, with momentum growing particularly in the energy and transportation sectors.

“Against a backdrop of the implementation of both the Infrastructure Investment and Jobs Act and the Inflation Reduction Act, it is not a surprise that the trend in infrastructure is robust,” the report’s authors wrote.

Another sector with some “intriguing” positive growth is residential construction, as new home sales in the first quarter beat expectations, rising in March “to their best level in a year.” However, “the prospect of a further period of challenge for the economy, and possibly a modest recession, on the back of the lagged impact of the monetary tightening could still result in a somewhat tougher environment for the housing sector—or at least restrain the recovery,” according to the report.

The one sector that shows a modest slowing in momentum is commercial construction, particularly for office and retail projects.

For practically all U.S. contractors responding to the survey, labor shortages remain a key problem¾both the availability of labor in general and those with specific skills. In fact, the greatest shortfall is for those in the skilled trades, followed by project managers.

“Meanwhile, an increasing area of focus is on financial constraints,” the authors wrote. “This reflects both the jump in the cost of securing finance for development and tighter lending standards in the wake of recent events in the banking sector.”

The profits picture is still “a little clouded,” according to the report.

Due to rising labor and material costs, the net balance reading for profitability is -27%—the weakest result since the middle of the pandemic, and noticeably worse than the +4% net reading in the fourth quarter 2022 survey.

“Looking forward over the course of the next year, respondents do appear a little more positive with a net balance of +10% more anticipating an expansion rather than a further contraction in profitability.,” the authors wrote. “This does, however, contrast with a positive projection of +21% taking this view last quarter.”

The USA Construction Monitor report is part of RICS-AACE’s Global Construction Monitor report for the first quarter. Its Global Construction Activity Index posted the firmest reading since the start of 2022, with the Asia-Pacific region driving the bulk of the improvement for the first quarter. In all regions, growth in infrastructure workloads continues to outstrip residential and commercial.

“Material costs remain the most frequently cited impediment to market activity across the globe,” the report’s authors wrote. “That said, the share of respondents viewing material costs as a barrier, although still very elevated, has eased back in each of the last four quarters. Alongside this, just over two-thirds of contributors report that financial conditions are hindering activity—which is unsurprising, given the ongoing tightening in monetary policy seen from the world’s largest central banks.”

About The Author

KUEHNER-HEBERT is a freelance writer based in Running Springs, Calif. She has more than three decades of journalism experience. Reach her at [email protected].  





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