Following a year of booming demand, severely restricted supplies, and a lingering labor shortage, construction professionals in particular have unfortunately become very familiar with soaring materials prices.
Between stimulus checks, shifting demand, supply chain shortages, and other factors, the economy has experienced a 7.5% rise in CPI — things cost more across the board, and consumers and construction professionals are feeling the squeeze.
Federal relief is coming — the recently passed federal infrastructure bill will pump over $1 trillion into the construction industry and provide a welcome boost to the recently slowing industry.
But systemic obstacles like the construction labor shortage aren’t expected to end any time soon, prompting some experts to suggest the federal spending might not be the windfall many are hoping it will be, and could actually worsen the industry’s issues.
Many will benefit from federal spending — but at what cost?
Unlike some industries, the construction sector flourished in 2021. Driven largely by a boom in residential housing demand, construction spending rose 8.2% last year. But by December, spending had stalled: Federal spending on public projects dropped by 5.4%, causing the market to miss economists’ forecasts of continued growth.
This drop in federal spending is expected to be temporary. As reported by Levelset’s Isaac Barzso, over $1 trillion in federal infrastructure spending will hit the market in the coming months and years, and it’s projected to spur a wave of new projects across the country.
With tens or even hundreds of millions up for grabs across different construction sectors, contractors will see increased opportunities to bid on sizable public projects and generate new streams of revenue.
But contractors aren’t out of the woods just yet. According to Anirban Basu, Chief Economist of the Associated Builders and Contractors, the construction industry’s problems aren’t going anywhere for now, and an influx of federal cash might just add fuel to the fire.
“The principal challenge for contractors remains a lack of sufficiently skilled labor, a structural issue that will not go away soon and a circumstance contractors have dealt with for years,” said Basu. “The situation is likely to deteriorate further as federal infrastructure dollars begin affecting the economy more forcefully in the near future.”
An increase in federal spending will result in an explosion of demand across the industry as state and local governments seek contractors for bridge, waterway, and road improvements. If labor and materials remain in short supply across the construction industry, what will happen to the already sky-high prices?
Last year illustrated part of this problem: With the residential housing market exploding by 60% amidst a global supply shortage, the price of construction materials ballooned by a staggering 17.5% — the sharpest increase since 1970.
Unless supply chain issues can be resolved soon, it’s difficult to see how a massive increase in public projects, even while driven by over $1 trillion of federal spending, could avoid putting further pressure on the supply-restricted market.
Will federal dollars make it to the local level?
About half of the total infrastructure budget will flow directly to state governments. The rest will be up for grabs by local governments on a competitive basis.
Local governments will need to apply for the funding, but even the application process may be too much for local administrations to handle after decades of budget cuts.
Local governments have lost almost 4% of administrative workers since the pandemic began. While this may not seem like much, it can add significant stress to a complicated bureaucratic process.
For example, $500 billion in COVID aid was issued to local governments, one in five communities in Michigan were left out of early payments because administrators didn’t know how to file the paperwork.
“Nobody is ready because nobody has needed to be ready until now,” said Perry Wood, executive director of the Erie County Gaming Revenue Authority.
Whether or not other similar local governments will be able to handle another $500 billion directed towards infrastructure improvements remains to be seen.
Contractors are cautiously optimistic about the future
In the face of the significant challenges the industry faces, recent ABC survey data suggests that contractors are optimistic about the future.
“Despite the Omicron variant, ongoing supply chain issues, elevated energy and materials prices and rampant staffing shortages, the average nonresidential contractor remains upbeat,” said Basu.
Basu noted that contractors may ultimately be able to “pass along enough price increases to project owners to countervail the rising costs of construction service delivery.”
While contractors certainly have room for optimism, it’s important to consider the possibility that relief may still be a ways away.