Construction Overtime – A Common Miscalculation

4-7-18

Construction Overtime – A Common Miscalculation

You never get full production out of all overtime hours worked. A common miscalculation when applying overtime overlooks productivity losses.

Let’s say we have a project that has 100 manweeks of productive work (100mw x 40hrs = 4000 manhours) remaining on the schedule to completion, but that we absolutely must finish the job is less time. Also, let’s say we modify the work week from 5 days 8 hours = 40 hours/wk to Overtime (OT) 6 days 10 hours = 60 hours/wk. A simple calculation indicates that if we add 50% more hours per week (60hrs vs 40hrs), we could finish the job in 1/3 less time.

  • Original plan = 4000 manhours / 40 hrs/week/man = 100 manweeks
  • Revised plan = 4000 manhours / 60 hrs/week/man = 67 OT manweeks
  • Time saved = (100–67)/100 =33/100= 33% time saved, 33 mwks saved
  • Cost added would be +20%. See example of cost calculation below.

But, unfortunately, that would not be correct. That would have to assume no OT productivity losses. You won’t get 60 productive hours out of a man in a 6-10s 60-hour OT workweek. You will get only 50 productive hours.

Productivity loss graphic from Applied Cost Engineering, Clark and Lorenzoni, Marcel Dekker, Inc., 1985.

Overtime productivity

Yes, you still pay for all hours and the man is still on the job for 60 hours, but work progress slows as workers are kept on the job for longer periods. So how much time would be saved on the schedule?

Revised plan productivity 4000 manhours work / 50 productive hrs per week per man = 80 OT manweeks to completion.

Time saved = (100 – 80) / 100  = 20/100 = 20% time reduction or 20 mwks saved, not 33.

What did we get from this application of overtime compared to the original?

  • 20 mnwks LESS of normal 40hrs =20×40= 800hrs less at normal 1x rate
  • 80 mnwks at 20hrs/wk at OT, 1.5x rate =80×20= 1600hrs more at 1.5x rate
  • Net cost 1600 x 1.5 – 800 x 1 = 1600 equivalent extra cost hrs over base 4000.
  • Time saved (100-80)/100 = 20%
  • Cost increased 1600/4000 = 40%

This simple example shows the full hourly time savings is not realized due to lost productivity plus many of the hours worked are at a higher cost. Though the initial basic OT estimate forecast 33% time saved at 20% extra cost, that scenario actually saved only 20% time and added 40% cost, double the initial budget.

There’s a significant difference in the original un-adjusted OT estimate of time/cost versus the OT time/cost analysis for nonproductive hours. That would be a serious mistake in estimating and could have serious cost implications against the budget.

This will vary with the OT scenario selected or any other data set used, but generally the more days and longer hours worked, the higher the extra cost ratio. Of course, a better way to accomplish a tightened schedule might be to add a second shift rather than work men longer hours. However, in times of restricted labor supply that might not be feasible.

See this blog post for OT productivity loss rates Overtime Isn’t Always What It Seems – Lost Productivity Construction

 

 

2018 Construction Spending Forecast – Nonresidential Bldgs

3-28-18  Detail of Nonresidential Buildings construction starts, backlog and spending 2017-2018

2018 Construction Spending Forecast – Nonresidential Buildings

1st, we’ll start with a quick summary of 2017 results.

2017 Wrap Up – Spending,  Starts and Backlog

TOTAL construction spending in 2017 reached $1.236 trillion, an increase of 4.3% over 2016.

Total spending is up 57% from the 2011 low point and is now 6% above the previous 2006 high.

Spend Summary 2013-2020 Dec2017 3-28-18

Nonresidential Buildings spending in 2017 finished at $419 billion, up only 2.7% from 2016.

Nonresidential spending is up 47% from the 2011 low point but is still 4.5% below the 2008 high. By December 2017, the seasonally adjusted annual rate (SAAR) had reached $433 billion, near the all-time high, only 2% below the peak in 2008.

2017 spending finished below my forecast due to lower than expected performance in Educational and Office. Educational starts increased 6%+/year for the last three years, but spending increased only 4%/year the last two years. Office starts increased nearly 30% in 2016, but dropped 2% in 2017. Spending increased only 3% in 2017.

History shows total spending has been revised up 53 times in the last 60 months. I expect future revisions will smooth out spending in unusually low periods and increase total 2017 spending above this forecast. I suspect either big upward revisions to 2017 spending or large increases in backlog will boost 2018 spending in these two markets.

2017 New Starts

Dodge Data 2017 TOTAL construction starts increased only 2.6% from 2016. However, starts are always revised upward in the following year. I expect revisions will show 2017 starts increased by 6% to 7% over 2016. Revisions to date (to Jan & Feb 2017) have already increased the 2017 Total to 4.2% over 2016. Even if the Total reaches 6% growth over 2016, 2017 starts will still have posted the lowest growth since 2011.

Nonresidential Buildings starts, currently are up 9% for 2017, could finish up 14% after all revisions. Nonresidential Buildings new starts are up 55% in four years.

Although there was a 1% decline in 2015, starts averaged 12%/year growth for the last four years. The six months from Aug 2016 to Jan 2017 totaled the highest average starts since Jan-Jun 2008, also the year nonresidential buildings spending peaked. The six months Jul-Dec 2017 just surpassed both those previous peak highs. All of those new high starts will generate spending in 2018, so 2018 spending benefits from the two strongest six-month periods of starts on record.

Backlog incld Res Starts 2005-2018 3-15-18

  • Previous year starts always later get revised upwards. Therefore, current year starts ytd growth is always understated. This analysis compensates for that.
  • Nonres Buildings Starts increased at an average of 12%/year for the last 5 years.
  • Nonres Buildings Starts are at all-time highs.
  • New starts will generate record high 2018 starting backlog for every sector.

The pattern of nonresidential buildings construction starts for the last 30 months indicated spending increases in the 2nd half of 2017 and set up 2018 for the highest ever starting backlog and record spending. Spending started to show increases in November and is up 4% the last 3 months vs the previous 3 months.

2018 Starting Backlog

TOTAL All Construction starting backlog for 2018, currently at an all-time high, increased 30% in the last three years.

Starting Backlog is the Estimate-to-Complete (ETC) value of all projects under contract at the beginning of a period. Projects in starting backlog could have started last month or last year or several years ago.

  • Nonresidential buildings 2018 starting backlog is up 12%.
  • Starting Backlog is at an all-time high for nonresidential buildings.
  • 80% of all Nonresidential spending within the year will be generated from projects in starting backlog.

Nonresidential Buildings 2018 starting backlog is the highest ever, up 12% from 2017, 8% over the previous high in 2009. This will increase as more revisions to 2017 are posted.

Nonresidential buildings 2018 starting backlog is 55% higher than at the start of 2014, the beginning of the current growth cycle. Spending is UP 38% through 2017.  Starting backlog has increased for 5 years at an average 10%/year. Spending from starting backlog, up 10% in 2018, increased for 5 years at an average 9%/year. Nonres Buildings will reach a new high for spending in 2018.

Cash flow models of construction projects in backlog are indicating substantial acceleration in nonresidential spending over the next year. The share of spending within the current year from backlog is at an all-time high for nonresidential buildings.

2018 New Starts

Starts for 2018 are conservatively estimated at 3% growth. After revisions I expect that to increase to 6%. But 2018 starts generate only 20% of 2018 spending, so a difference of 3% in new starts would change 2018 spending by less than 1%.

Cash Flow

The following table shows predicted cash flow from backlog on record as of March 20, 2018 and predicted starts that will generate future backlog in 2018.

Backlog Cashflow 2017 and 2018 wo all revs 3-27-18

Duration for projects in backlog helps to better predict spending activity over time. Apply the expected duration to Starts data to produce a Forecast Cash Flow and that shows the expected pattern of spending. Since Starts data is a sampling of about 60% of all construction projects, and since starts get spent over an extended period of time, starts dollar values can’t be used to directly predict spending.

The rate of change in Starts Cash Flow gives an indication of the rate of change in future construction spending.

Cash flow indicates how much and when spending will occur. That allows a forecast of how spending from each month of previous starts will occur from all projects in backlog. Backlog could include projects that started two to three years ago, sometimes longer.  Cash flow totals of all jobs can vary considerably from month to month, are not only driven by new jobs starting but also by old jobs ending, and are heavily dependent on the type, size and duration of jobs.

This plot shows actual spending history compared to that predicted by starts cash flow. Sometimes they diverge but overall it’s a pretty good indicator of the slope of growth.

Starts CF 3-16-18

2018 Spending

TOTAL construction spending in 2018 will reach $1.330 trillion, an increase of 7.6% over 2017. Nonresidential Buildings make up most of the growth.

Nonresidential Buildings spending in 2018 is forecast to reach a new high, $459 billion, an increase of 9.6% over 2017, surpassing the previous 2008 high. Educational and Manufacturing make up 55% of the growth.

For 2018, Educational spending is projected to increase 14%, the best increase since 2007. Educational starting backlog increased 10%/year for the last three years.

Manufacturing spending is projected to increase 12% in 2018. Manufacturing posted several very large project starts in 2017. Two thirds of all 2018 spending comes from projects started in 2016 and 2017.

Nonresidential construction is comprised of two very different sectors, nonresidential buildings and non-building infrastructure. Infrastructure spending is quite erratic, while nonresidential buildings spending, with only slight variation, has been climbing at a strong steady pace for more than 4 years. Some analysts track nonresidential total spending, but these two sectors perform so differently it helps to break them apart to track trends.

Nonresidential Buildings spending for 2018 is forecast to increase 9%. Institutional accounts for 52% of 2018 Nonres Bldgs spending growth, Commercial 27% and Industrial 21%.

Spend Bldgs-Infra Jan13 to Jan19 3-25-18

You can find infrastructure Spending here 2018 Construction Spending Forecast – Mar 2018  and here Down the Infrastructure Rabbit Hole

Inflation

Outside of recession years, nonresidential buildings construction spending year over year growth dropped below 4% only SIX times in 50 years. The long term average inflation is close to 4%. Every time spending dropped below 4%, nonresidential buildings real volume declined that year.

Nonresidential buildings inflation forecast for 2018 is 4.5% to 5%. Spending needs to grow at a minimum of 4.5% just to stay ahead of construction inflation. Inflation in this sector has been at 4% or higher the last four years. A forecast of 2018 spending growth below 4.5% would suggest that nonresidential buildings construction volume is contracting.  Economic activity does not indicate a non-recession low spending for nonresidential building construction. I expect volume growth in 2018.

Constant $

Nonresidential buildings construction spending in constant $ (inflation adjusted $) reached $419 billion in 2017. For 2018 (adjusted to the baseline 2017$) it will be $439 billion.

Constant $ spending shows all years from 1995 through 2010 had higher volume than the 2018 forecast. Volume reached a peak $536 billion in 2000 and went over $500 billion again in 2008. In constant $, 2018 is still 18% below the 2000 peak.

Spending in current $ is almost back to the peak of $438 billion in 2008, but volume is lower than almost all years from 1985 to 2010 and is still 22% lower than the 2000 high.

Volume in 2011 dropped to the lowest since 1983.

Spend 1980-2020 Nonres Bldgs 3-28-18

Nonresidential spending increased 43% since 2010, but there was 30% inflation. Real nonresidential volume since 2010 has increased by only 12%. Nonresidential jobs increased by 27% during that period, 15% in excess of volume growth.

Nonresidential Buildings

Nonresidential Buildings spending in 2018 is forecast to reach a new high, $459 billion, an increase of 9.6% over 2017, surpassing the previous 2008 high. Educational and Manufacturing make up 55% of the growth.

Spend Nonres Bldgs 2013-2020 Dec2017 3-28-18

Nonresidential Buildings new starts are up 55% in four years. 2018 starting backlog is the highest ever, up 12% from 2017, up 24% in the last two years. Nonresidential Buildings 2018 starting backlog is 55% higher than at the start of 2014, the beginning of the current growth cycle. Spending is up 38% with 9% growth forecast for 2018.

80% of all nonresidential buildings construction spending in 2018 is already in backlog projects at the start of the year. Two thirds of all 2018 spending comes from projects that started in 2016 and 2017.

For 2018, Educational spending is projected to increase 14%, the best increase since 2007. Educational starting backlog increased 10%/year for the last three years. Manufacturing spending is projected to increase 12% in 2018. Manufacturing posted several very large project starts in 2017.

Backlog Nonres Bldgs EOCM 2014-2019 3-26-18

Educational new starts total from the last five months of 2017 posted the highest 5mo total in at least seven years, 13% higher than the next best 5mo. The highest and 2nd highest quarters were within the last 15 months, so both still contribute fully to 2018 spending. 2018 signifies a turn-round in Public spending which has not posted significant growth since the recession.

Educational starts are up 6% in 2017. Starts averaged YOY growth of 6%/year for the last three years and have had steady growth since 2012. The growth in starts will support growth in spending over the next three years. Starts for 2018 are predicted to go up 10% and this will push 2019 starting backlog even higher.

Educational backlog has been increasing for 5 years or longer. In 2016 and 2017 starting backlog increased 10%/year. 2018 starting backlog is up 8% from 2017. Backlog growth has been exceeding spending growth for the last four years. This should produce higher spending growth for the next few years.

Educational spending in the second half 2017, up 10% from the 2017 low point, is now at a post recession high.  We can expect to see another six to eight months of growth before spending levels off in mid-2018 at a sizable gain over 2017.

Educational spending previous highs of $103-$104 billion in 2007 and 2008 may be passed in 2018.  Both new starts and backlog have increased every year since 2012. A build-up of backlog is indicating that 2018 spending could increase dramatically. At peak, educational represented 30% of all nonresidential buildings spending. Now it’s only 22%. That’s expected to increase slightly for the next three years.

Educational construction spending in 2018 is forecast to reach a new high, $105 billion, an increase of 14% over 2017.

________________________________

Healthcare starts have quietly increased to a record high over the last two years, up 30% for the 12 months through August 2017 vs the previous 12 months. So while 2017 starts gained only 1%, most of 2017 is part of the fastest period of post-recession growth in years. All those starts contribute to 2018 spending. Starts have been increasing since 2012.

Healthcare starting backlog increased 10% for 2017 and 5% for 2018. Backlog has been increasing unevenly and grew 30% in 4 years. Spending followed a fairly similar pattern. Backlog is increasing in 2019. Backlog is indicating spending growth for 2018 and 2019.

Healthcare spending has been very slow to recover, experiencing declines as recently as 2013, 2014 and 2016, hitting an 8 year low in 2014, when all other nonresidential building markets had already returned to growth. From 2012 through 2016, Healthcare spending dropped 9%. 2017 posted a gain of 3.9%. Backlog will support spending gains for the next few years but gains could be uneven.

Healthcare construction spending for 2018 is forecast to reach $42 billion, an increase of 4.3% over 2017.

________________________________

Amusement/Recreation starts have been increasing at an average rate of 15%/yr for five years, up 30% in 2016 and 5% in 2017. Within the last six months, Aug 2017 to Jan 2018, there have been four very large billion dollar project starts. There has been a year’s worth of new starts in six months.

Amusement/Recreation starting backlog increased 20%/yr for the last four years at the same time that spending was increasing at a rate of 10%/year. This means backlog will continue to support increased spending at least for the next few years.

Amusement/Recreation spending hit an 8 year low in 2013 but we’ve had 3 years of excellent growth of 10%/yr or more since then. 2017 spending increased only 5%. But backlog is indicating 15%-20% increases for 2018 and 2019. This market is only 5% of nonresidential buildings spending.

Amusement/Recreation construction spending for 2018 is forecast to reach $29 billion, an increase of 23% over 2017.

Spend Mrkt Insti EHA 2013-2018 3-28-18

Commercial/Retail starts finished 2017 essentially flat, but that is compared to peak starts in 2016. Starts for the 12 months Aug 2016 – June 2017 posted 10% growth over the previous 12 months. Starts had been remarkably strong from the 4th quarter 2015 though the 1st quarter 2017. Commercial/Retail starts have been increasing every year since 2010.

In 2010, Warehouse starts were only 1/3 of Store new starts. In 2018, Warehouse starts will be 50% greater than Store starts. Warehouse starts have increased between 20%-40%/year for seven years and are now five times greater than in 2010. See this Bloomberg article Warehouses Are Now Worth More Than Offices, Thanks to Amazon

Commercial/Retail starting backlog for 2018 will drop slightly from 2017. In addition, some of the big projects from the period of strong new starts growth are ending. This will slow spending after 7 years of strong growth. 2018 backlog still produces a spending increase but current projections show spending slows even more in 2019.

Commercial/Retail spending dropped from the high of $90 billion in 2007 to $40 billion in 2010. It has been growing steadily since reaching bottom in early 2011, and has recovered to an annual total rate of $88 billion in 2017. Spending increased an average of  13%/year for six years from 2012 through 2017. Growth will be positive in both 2018 and 2019 but will slow dramatically since we are currently near the all-time high.

Commercial/Retail construction spending for 2018 is forecast to reach a new high, $91 billion, an increase of 4% over 2017.

________________________________

Office construction starts finished 2017 down 2%, but only because 2016 had reached a recent high, similar too the highs in 1998 and 2006-2007. Starts have been increasing since 2010 with the strongest growth period of new starts in the 12 months July 2016 – June 2017, the highest 12 months on record, 60% higher than the previous 12 months. That high-volume period of starts will elevate spending in both 2018 and 2019. Data centers are included in Office.

Office starting backlog for 2017 was the highest in at least 8 years, more than double at the start of 2014 when the current growth cycle of office construction spending began. For 2018, backlog reached a new high, up 13% over 2017. Office starting backlog increased an average of 30%/year for the last 3 years. Backlog growth should support very strong spending increases into 2019.

Office spending dropped more than 40% from $68 billion/year in 2007-2008 to $37 billion from 2010 through 2013. From 2014 to 2016, spending increased by more than 20%/year, but in 2017 it slowed to only 3%. That was unusual and unexpected since starts and backlog had both reached 10 year highs. Possible explanations might be that a very large number of projects were canceled, 2016 starts were overstated or potential revisions to 2017 Office spending could be released in July.

Office construction spending in 2018 is forecast to reach a new high, $75 billion, an increase of 8% over 2017.

________________________________

Lodging starts in 2017 finished down 5%. From 2010 to 2016 starts averaged over 30%/year growth for six years. In 2018, Lodging starts could decline. But, even though new starts are down  in 2017 and expected down in 2018, those will still be two of the three highest years. Peak starts were in 2016.

Lodging starting  backlog is up 13% for 2018, having already averaged increases of 30%/yr since 2015. Lodging starting backlog jumped from $7 billion/yr in 2014 to $17 billion/yr in 2018. It has supported similar spending growth. Although 2016 was peak starts, it looks like 2018 will be peak backlog.

Lodging  spending recorded the largest drop of any market, falling 75% from $36 billion in 2008 to $9 billion in 2011. However it also recorded the strongest rebound of any market, climbing 20% to 30% per year for the 5-years 2012-2016. In 2011, Lodging dropped to only 3% of total sector spending. It has rebounded to 7% in 2017.

Lodging spending will increase by 5% in 2018. It’s still not back to the previous high of $36 billion in 2008. Beyond 2018, spending will decline, but this is after 6 years of growth totaling 300%.

Lodging construction spending for 2018 is forecast to reach $30 billion, an increase of 5% over 2017.

Spend Mrkt Comm COL 2013 2018 3-28-18

Manufacturing is the only nonresidential building market that did not finish 2017 with new starts totals at or near post-recession highs. Manufacturing reached record high starts in 2014 and record spending in 2015. Manufacturing posted a 100% increase in new starts in 2014 that drove starting backlog and spending to new highs in 2015 and 2016. New starts declined 25%-30%/year for the next two years after the high in 2014. 2017 starts increased 20%, but that is still 35% lower than 2014.

Manufacturing backlog remained equally high in 2015 and 2016, but then dropped 20% in 2017. 2018 backlog will see an increase of 8%. Starting backlog dropped 20% in 2017 and spending dropped 12%. That was expected. What was unexpected is that 2017 posted another very strong year of new starts and that pushed 2018 starting backlog back up, but not quite as high as 2015-2016. This will support a spending rebound in 2018-2019 after a drop of 18% in the last two years.

Manufacturing spending was forecast to fall 11% in 2017 after peaking in 2015 from massive growth in new starts in 2014. Based on cash flows from starts, from April 2016 through the end of 2017 spending was expected to decline in 17 of 21 months. It did decline in 14 of those months. The forecast is now for very little declines in the next two years.

Manufacturing spending for 2017 is $66 billion versus $75 billion in 2016 and $80 billion in 2015. Although 2017 dropped to $66 billion, that was still higher than any but those two highest years. The 2017 spending drop of 11% is the largest drop since pre-recession, but it is measured compared to the peak years. Manufacturing in some reports is referred to as Industrial. 2019 spending could surpass the 2015 peak.

Manufacturing construction spending for 2018 is forecast to reach $75 billion, an increase of 13% over 2017.

Spend Mrkt MNFG 2013 2018 3-28-18

Religious and Public Safety spending of $11-$12 billion/year represents only 2.5% of total nonresidential building spending. In 2008-2009 it was 5% of the total. The religious building market has been declining since 2002 and is down 55% since then. Public Safety peaked in 2009 and has declined every year since, now down 40% from the peak. I don’t track starts or backlog for these markets. I do track monthly spending and carry a forecast in the Table of Construction Spending.

Religious and Public Safety currently amounts to $11 billion/year. A 10% change in spending of $1 billion in a year would amount to only 0.2% change in all nonresidential buildings spending. This category doesn’t often change by 10% yr/yr, so it’s affect is small.

Public Spending

Public construction is a subset of Nonresidential Buildings and Non-building Infrastructure and includes about 1% of Residential.

Only about 25% of all Nonresidential Buildings spending, about $100-$110 billion, is publicly funded, mostly Educational. In total, this makes up about one third of Public spending.

  • Nonresidential Buildings is 25% public (mostly institutional), 75% private.
  • Educational, Healthcare and Public Safety are Public Nonres Institutional Bldgs
  • Public Institutional = $100 billion, mostly Educational ($70b).

Spend Public Share 2-25-18

The largest market contributing to public spending is Highway/Bridge, 32% of total public spending. Major Nonresidential Buildings markets that contribute to public spending are Educational, 26% of total public spending, and Office, Healthcare, Public Safety and Amusement/Recreation which each account for about 3%.

Educational is 80% public, Transportation 70%, Amusement/Rec 50%, Healthcare 20%, and Power is 10% public, along with few other smaller shares.

Public spending hit a low in June 2017. It has been increasing since then. Public Educational, in the second half 2017, up 10% from the 2017 low point, is now at a post recession high.  We can expect to see another six months of growth before spending levels off in mid-2018 at a sizable gain over 2017.

Educational alone accounts for about 30% of the Public spending growth in 2018. Educational new starts total for the last three months posted the highest quarter in at least seven years. The 2nd highest quarter was also within the last 12 months, so both will contribute fully to 2018 spending. 2018 signifies a turn-round in Public spending which has not posted significant growth since the recession.

Spend Public Infra-Insti 2015-2020 3-11-18

 

Click here for a formatted printable PDF 2018 Forecast – Nonresidential Buildings

For the 2018 Forecast Summary see 2018 Construction Spending Forecast – Mar 2018

The 2018 Outlook link Economic Outlook

Here’s how to use the Starts data and how it affects spending Construction Starts and Spending Patterns 9-26-17

Construction starts data in this report references Dodge Data & Analytics starts data

See these posts for additional info  

Starts Trends Construction 2018 Forecast – Fall 2017  11-8-17

Backlog Construction 2018 Forecast – Fall 2017  11-10-17

See also Publicly Funded Construction 2-28-18

For more on Public work see Down the Infrastructure Rabbit Hole 2-16-18

For effects of inflation see Constant Dollar Construction Growth 11-2-17

2018 Construction Spending Forecast – Mar 2018

3/15/18

Preliminary data is in for total year 2017 construction spending, 2017 construction starts and 2018 starting backlog. The following forecast is developed using the current data.

2018 Construction Spending Forecast – Mar 2018

A brief note on 2017.

2017 Spending Wrap Up

Total construction spending in 2017 now stands at $1.233 trillion, an increase of 4.0% over 2016.

Residential spending, up 10.5% for the fifth consecutive year above 10% growth, leads all construction spending in 2017 for the seventh consecutive year. Nonresidential Buildings finished the year up 2.3%. Only Non-building Infrastructure did not improve over 2016, down 3.8% for the year. However, Non-building Infrastructure had been at an all-time high for the previous two years.

2017 spending finished below my forecast due to performance in Educational, Office, Power and Highway, four of the five largest markets which together make up half of all nonresidential spending. All came in lower than forecast. However, some of these markets are prone to very large post-annual upward revisions and that has the potential to add to 2017 spending when those revisions are released in July 2018. For instance, in the July 2017 revisions, Power spending for the previous year, 2016, was revised up by 10%.

History shows spending has been revised up 53 times in the last 60 months. I expect to see future revisions smooth out spending in unusually low periods and increase total 2017 spending above this forecast. Both April and July preliminary spending appear statistically too low. The average post-annual total spending revision for the last five years is +2.8%. The post-annual revision to 2016 was only 2.2%. Revisions due for release on July 1, 2018, if even only a +1% revision to 2017, would adjust total 2017 spending up to $1,245 billion. This would slightly alter the 2018 forecast.

Spend ALL 2011-2019 3-11-18

2018 Spending Total All Construction

Total All 2018 construction spending is forecast to increase 7.6% to $1.330 trillion.

Nonresidential Buildings spending forecast for 2018, up 9%, will be supported by Manufacturing and Educational. Non-building Infrastructure returns to strong growth of 8%, with potential to hit a new all-time high due to very large projects in Power and Transportation. Residential spending in 2018 slows to growth under 6% after six years all over 10%/year.

Dodge Data 2017 construction starts increased 3% from 2016. However, starts are always revised upward in the following year. I expect revisions will show 2017 starts increased by more than 6% over 2016. Even with that revision, 2017 starts posted the lowest growth since 2011, weighted heavily by the slowdown in residential starts.

Total starting backlog for 2018, currently at an all-time high, has increased on average 10%/year the last three years. 80% of all Nonresidential spending within the year will be generated from projects in starting backlog. Public share of new construction starts are up only 10% in 3 years. But due to long duration job types, 2018 starting backlog is up 30% in the last 3 years.

None of this spending forecast includes any projections for potential work from future infrastructure stimulus.

Spend Summary 2013-2020 Dec2017 3-11-18

Current$ vs Constant$

Construction spending reached a new current $ high in 2017 at $1,236 billion. The previous high in current $ was $1,161 in 2006. Spending first surpassed that in 2014 and has been increasing since. But that is in current $, which includes inflation.

Comparing current $ spending to previous year spending does not give any indication if business is increasing. The inflation factor is missing. If spending is increasing at 4%/year in a time when inflation is 6%/year, real volume is declining by 2%.

Although 2018 current $ spending will reach $1,330 billion, after adjusting for 4.5% to 5% inflation, 2018 constant $ volume will increase to only $1,270 billion. When comparing inflation adjusted constant dollars, 2018 spending will still be lower than all years from 1998 through 2007. In 2005 constant $ volume reached a peak at $1,450 billion. At current rates of growth, we would not eclipse the previous high before 2022.

While spending in current $ is 7% higher than the previous high spending, volume is still 14% lower than the previous high volume.

For more on Inflation Adjusted spending see Construction Spending is Back

Spend current vs constant 2018 3-4-18

Jobs and Volume

The period 2011-2017 shows both spending and jobs growth at or near record highs.

A spending forecast of 7%+ in 2018, or nearly $100 billion in construction spending, demands a few words on jobs growth. Construction requires about 5000 workers for every added $1 billion in construction volume. Construction jobs have never increased by 500,000 in one year. However, $100 billion in added spending is not the same as $100 billion in volume, and jobs growth is based on volume.

Although spending will increase 7%-8%, construction inflation has been hovering near 4.5% to 5% for the last five years. Real volume growth in 2018 after inflation is expected to be near 3% or $40 billion. That would mean the need, if there are no changes in productivity, is to add only about 200,000 additional workers in 2018, a rate of jobs growth that is well within reach. That is less than the average jobs growth for the last seven years.

Construction added 1,339,000 jobs in the last 5 years, an average of 268,000/year. The only time in history that exceeded jobs growth like that was the period 1993-99 with the highest 5-year growth ever of 1,483,000 jobs. That same 1993-99 period had the previous highest 5-year spending and volume growth going back to 1984-88.

Construction added 185,000 jobs in the last 4 months, Nov17-Feb18. That’s happened, for any 4-month period, only 5 times since 1984. The last time was 2005-06, during the fastest rate of spending increases since 1984.

Jobs vs Volume 2011-Jan2018 3-16-18

Total all spending increased 55% since 2010, but there was 30% inflation. Real total volume since 2010 has increased by only 25%. Jobs increased by 30%, 5% in excess of volume growth. But the results are much different for Residential than Nonresidential.

Nonresidential spending increased 43% since 2010, but there was 30% inflation. Real nonresidential volume since 2010 has increased by only 12%. Jobs increased by 27%, 15% in excess of volume growth.

Residential spending increased by 110% since 2010, but after inflation, real residential volume increased by only 57%. Jobs increased by only 37%, 20% short of volume growth.

For more on Jobs see Construction Jobs and Residential Construction Jobs Shortages

Residential Buildings Spending

Total Residential spending in 2017 finished at $523 billion, up 10.6% from 2016. This is the 5th consecutive year that residential spending exceeded 10% annual growth. Average spending growth the last six years is 13%/year.

Residential spending in 2017 was 50% single family, 13% multi-family and 37% improvements. In 2011, improvements was 48% of residential spending.

Census does not include flood damage repairs (house shell remains intact but gut renovate) in improvements but does include full flood damaged structure replacements (structure rebuild permit classified as new) in improvements.

Residential spending is more dependent on new starts within the most recent 12 months than on backlog from previous starts. Total starts for the last 6 months are the highest since 2006, but % growth has slowed considerably. New starts in 2017 posted only 2% growth, but I expect that to be revised up to at least 4%. Similar growth of 6%-7% is expected for 2018. Slower growth is now expected after 5 years (2012-2016) of new starts increasing at an average 20%/year.

Spend Sector 2015-2018 3-11-18

Residential 2018 spending growth is forecast to increase only 6% after five years over 10%. Total residential spending in 2018 is forecast at $552 billion.

Residential spending will reach a 12-year high in 2018. Residential spending reached its current $ peak of $630 billion in 2005. Current 2018 pending is still 13% below that peak. In constant $, adjusted for inflation, all years from 1998 through 2007 were higher than 2018. In constant $, 2018 spending is still 27% below the 2005 peak.

Residential buildings construction spending in constant $ reached $523 billion in 2017. Previous spending adjusted to equivalent 2017$ shows that all years from 1996 through 2007 had higher volume than 2017. Volume reached a peak $748 billion in 2005. Only the years 2004-2006 had higher spending in current $. The 2005 current $ peak of $630 billion is still 17% higher than 2017, but 2017 volume is still 30% lower than peak volume.

Spend 1985-2020 Residential 3-15-18

Nonresidential Buildings Spending

Nonresidential Buildings spending in 2017 finished at $419 billion, up only 2.7% from 2016.

2017 spending finished below my forecast due to performance in Educational and Office. Educational starts increased 6%+/year for the last three years, but spending increased only 4%/year the last two years. Office starts increased nearly 30% in 2016, but spending increased only 3% in 2017. I suspect either big upward revisions to 2017 spending or large increases in backlog will boost 2018 spending in these two markets.

Spend Nonres Bldgs 2013-2020 Dec2017 3-28-18

Nonresidential Buildings new starts are up 60% in four years. 2018 starting backlog is the highest ever, up 15% from 2017. Nonresidential Buildings 2018 starting backlog is 50% higher than at the start of 2014, the beginning of the current growth cycle.

Backlog incld Res Starts 2005-2018 3-15-18

Starting backlog has increased for five years at an average 10%/year. Spending from starting backlog, up 10% in 2018, increased for five years at an average 9%/year.

For 2018, Educational spending is projected to increase 14%, the best increase since 2007. Starting backlog increased 10%/year for the last three years. Manufacturing posted several very large project starts in 2017. Spending is projected to increase 12% in 2018.

Nonresidential Buildings spending in 2018 is forecast to reach a new high, $459 billion, an increase of 9.5% over 2017, surpassing the previous 2008 high. Educational and Manufacturing make up 55% of the growth.

For the Full Expanded 2018 Construction Spending Forecast – Nonresidential Bldgs 

Nonresidential buildings construction spending in constant $ (inflation adjusted $) reached $419 billion in 2017. In 2018 it will reach $439 billion. Constant $ spending shows all years from 1996 through 2010 had higher volume than the 2018 forecast. Volume reached a peak $536 billion in 2000 and went over $500 billion again in 2008. In constant $ 2018 is still 18% below that 2000 peak.

Spend 1985-2020 Nonres Bldgs 3-15-18

Non-building Infrastructure Spending

Total non-building infrastructure spending in 2017 dropped to $293 billion, down 3.7% from 2016.

Non-building Infrastructure spending, always the most volatile sector, dropped to yearly lows from June through September, the lowest since November 2014. However, this short dip was predicted. Cash flow models of Infrastructure starts from the last several years predicted that dips in monthly spending would be caused by uneven project closeouts from projects that started several years ago, particularly in Power and Highway markets.

Spend Infra Jan15 to Jan19 3-11-18.JPG

Current backlog is at an all-time high and spending is expected to follow the increased cash flows from the elevated backlog. Environmental Public Works (Sewage/Waste disposal down 14%, Water Supply down 9% and Conservation/Dams & Rivers down 7% in 2017) posted the largest declines in 2017 and accentuated the declines in the infrastructure sector. The sector was expected to increase in the last quarter 2017. All three markets posted increases in the 4th quarter, up 8% over the 1st nine months of 2017.

Non-building Infrastructure 2018 starting backlog is the highest ever, up 10%+ each of the last 3 years. Transportation terminals new starts in 2017 jumped 120%. Rail project starts increased more than 100%. Starting backlog for all transportation work is the highest ever, up 100% in the last two years. Transportation spending is projected to increase 20-25%/year for the next two years.

No future growth is included from infrastructure stimulus and yet 2018 spending is projected to increase by 8%.

Spend Nonbldg Infra 2013-2020 Dec2017 3-11-18 

Non-building Infrastructure will reach a new high for spending in 2018. Spending reached an all-time high in 2015 and stayed within 0.3% of that high for 2016. A 3.5% decline in 2017 was more of a decline than expected, but there may still be upward revisions to the preliminary total.

Non-building Infrastructure spending in 2018 is forecast to reach $319 billion, an increase of 8.6% over 2017.

My forecast for 2018 is predicting every infrastructure market will post gains, but it is the Power and Transportation markets that account for most of the growth in 2018. Transportation new starts in 2017 grew 120% due to massive new air terminal and rail projects. Spending growth in the Power market is not quite so apparent. Combined Power new starts are down for both 2016 and 2017, but the spending gains are coming from projects that started in 2015, a year in which starts were up over 120%.

Adjusted for inflation, spending in 2018 will be nearly equal to the all-time highs reached in 2015 and 2016.

Non-building Infrastructure construction spending in constant $ reached $294 billion in 2017. Recent highs were posted in 2015 and 2016 at $305 billion and $304 billion and 2018 is expected to reach $319 billion. Previous spending adjusted to equivalent 2017$ shows that 2008 and 2009 were both just slightly higher than $300 billion. Constant $ volume reached a peak $313 billion in 2016. Spending in current $ hit new highs in 2015 and 2016. This is the only sector that has current $ and constant $ at or near all-time highs.

Spend 1985-2020 NonBldg Infra 3-15-18

Public Infrastructure and Public Institutional

Only 60% of all Non-building Infrastructure spending, about $170 billion, is publicly funded. That public subset of work averages growth of less than $10 billion/year.

Only about 25% of all Nonresidential Buildings spending, about $100 billion, is publicly funded, mostly Educational.

  • Infrastructure = $300 billion, 25% of all construction spending.
  • Infrastructure is about 60% public, 40% private. In 2005 it was 70% public.
  • Public Infrastructure = $170 billion. Private Infrastructure = $130 billion.
  • Power and Communications are privately funded infrastructure.
  • Nonresidential Buildings is 25% public (mostly institutional), 75% private.
  • Educational, Healthcare and Public Safety are Public Nonres Institutional Bldgs
  • Public Commercial construction is not included.
  • Public Institutional = $100 billion, mostly Education ($70b).

Spend PubPriv 2017 totals detail 3-13-18

Public Infrastructure + Public Institutional = $270 billion, 23% of total construction spending.

Public Infrastructure + Institutional average growth is $12 billion/year. It has never exceeded $30 billion in growth in a single year.

See also Publicly Funded Construction

See also Down the Infrastructure Rabbit Hole

Spend Public Share 2-25-18

Public Spending

Public construction is a subset of Nonresidential Buildings and Non-building Infrastructure and about 1% of Residential.

The two largest markets contributing to public spending are Highway/Bridge (32% of total public spending) and Educational (26%), together accounting for nearly 60% of all public construction spending. At #3, Transportation is only about 10% of public spending. Environmental Public Works combined makes up almost 15% of public spending, but that consists of three markets, Sewage/Waste Water, Water Supply and Conservation. Office, Healthcare, Public Safety and Amusement/Recreation each account for about 3%.

2017 spending was down 1%, but has been at or near the all time high for three years.

Total public spending for 2017 finished flat at $284 billion with most major public markets down for the year. By far, the largest Public spending declines in 2017 are Sewer and Waste Disposal which is 7% of public markets, it was down 16% and Highway/Bridge, down only 3.5%, but Highway is 32% of all public spending.

Public spending hit a low in June 2017. It has been increasing since then, Public Educational, in the second half 2017 up 10% from the low point, now at a post recession high.  We can expect to see another six months of growth before spending levels off in mid-2018.

Spend Public-Private 2013-2020 Dec2017 3-11-18

Due to long duration job types, 2018 starting backlog is up 30% in the last 3 years. In 2018, 40% of all spending comes from jobs that started before 2017. Leading 2018 growth are Educational (+15%) and Transportation (+35%), with a combined total forecast 20% growth in public spending.

Current levels of backlog and predicted new starts gives a projection that Public Non-building Infrastructure spending will reach an all-time high in 2018 and again in 2019.

Total Public spending in 2018 is forecast to reach $307 billion, an increase of 8% over 2017, the best growth in 10 years.

Educational and Transportation will contribute equally and together account for almost 60% of the Public spending growth in 2018. Transportation new starts in 2017 grew 120% due to massive new air terminal and rail projects. Educational new starts total for the last three months posted the highest quarter in at least seven years. The 2nd highest quarter was also within the last 12 months, so still contributes fully to 2018 spending. 2018 signifies a turn-round in Public spending which has not posted significant growth since the recession.

Spend Public Infra-Insti 2015-2020 3-11-18

Public spending is 10%, $30 billion, below 2009 all-time highs, most of the deficit coming from declines in Educational, Sewage/Waste Water and Water Supply. In 2018, Highway and Transportation are at all-time highs.

 

 

Click here for a formatted printable PDF Construction Spending Forecast – Summary Mar 2018

See these posts for additional info

2018 Construction Spending Forecast – Nonresidential Bldgs  

Starts Trends Construction 2018 Forecast – Fall 2017  11-8-17

Backlog Construction 2018 Forecast – Fall 2017  11-10-17

For more on Jobs see Construction Jobs / Workload Balance 11-7-17 

For effects of inflation see Constant Dollar Construction Growth 11-2-17

 

 

 

Construction Economics Brief Notes 3-10-18

3-10-18

Jobs and Volume

The period 2011-2017 shows both spending and jobs growth at or near record highs.

Construction added 1,339,000 jobs in the last 5 years. The only time in history that exceeded jobs growth like that was the period 1993-99 with the highest 5-year growth ever of 1,483,000 jobs. That same 1993-99 period had the previous highest 5-year spending and volume growth going back to 1984-88.

Construction added 185,000 jobs in the last 4 months. That’s happened, for any 4-month period, only 5 times since 1984. The last time was 2005-06, during the fastest rate of spending increases since 1984.

Nonresidential spending increased 43% since 2010, but there was 30% inflation. Real nonresidential volume since 2010 has increased by only 12%. Jobs increased by 27%, 15% in excess of volume growth.

Residential spending increased by 110% since 2010, but after inflation, real residential volume increased by only 57%. Jobs increased by only 37%, 20% short of volume growth.

Construction Jobs

Residential Construction Jobs Shortages

Construction Spending is Back

 

Inflation

Times of rapid spending growth are usually accompanied by higher rates of inflation.

Historical 20-year average total composite construction inflation, without including recession years, is 4.2%. When including the recession years, the average is 3.5%.

For the last 4 to 5 years average inflation for nonresidential buildings is 4.5% to 5%.

For the last 4 to 5 years average inflation for residential buildings is 5.5% to 6%.

Inflation in the highway sector averaged only 2.5% for last seven years. The power sector has experienced 5% deflation over the last 4 years.

Inflation in Construction 2018 – What Should You Carry?

 

Current$ vs Constant$

Construction spending reached a new high in 2017 at $1,236 billion in current $. The previous high in current $ was $1,161 in 2006. Spending surpassed that in 2014 and has been increasing since. But that is in current $, which includes inflation.

Comparing current $ spending to previous year spending does not give any indication if business is increasing. The inflation factor is missing. If spending is increasing at 4%/year in a time when inflation is 6%/year, real volume is declining by 2%.

After adjusting all spending to equivalent 2017$, we see that all years from 1997 through 2008 had greater volume than 2017.  In 2005 volume reached a peak at $1,450 billion. While spending in current $ is 7% higher than the previous high spending, volume is still 15% lower than the previous high volume.

Construction Spending is Back

 

Spending

Total All 2018 construction spending is projected to increase 8% to $1.330 trillion.

Spending measured in current 2018$ will reach an all-time high, however, measured in constant inflation adjusted dollars, will still come in 14% below the 2005 high. When comparing inflation adjusted constant dollars, 2018 spending will still be lower than all years from 1998 through 2007.

Nonresidential Buildings new starts are up 60% in four years. 2018 starting backlog is the highest ever, up 15% from 2017. Spending for 2018 is projected to increase 9%. For 2018, Educational spending is projected to increase 14%, the strongest growth since 2007. Starting backlog increased 10%/year for the last three years. Manufacturing posted several very large project starts in 2017. Spending is projected to increase 12% in 2018.

Non-building Infrastructure 2018 starting backlog is the highest ever, up 10%+ each of the last 3 years. Spending reached an all-time high in 2015 and stayed within 0.3% of that high for 2016. Spending for 2018 is projected to increase 8% to an all-time high. Transportation terminals new starts in 2017 jumped 120%. Rail project starts increased more than 100%. Starting backlog for all transportation work is the highest ever, up 100% in the last two years. Spending is projected to increase 20-25%/year for the next two years.

Public construction is a subset of both Nonresidential Buildings and Non-building Infrastructure. Due to long duration job types, 2018 starting backlog is up 30% in the last 3 years. In 2018, 40% of all spending comes from jobs that started before 2017. Leading 2018 spending growth are Educational and Transportation with a combined total forecast 20% growth. Expect 2018 public spending to increase 6% to 8%, the best growth in 10 years.

Residential spending is more dependent on new starts within the most recent 12 months than on backlog from previous starts. Total starts for the last 6 months are the highest since 2006, but new starts in 2018 are projected at only +7%. Residential spending in 2018 is projected to increase only 6% after five years of increases over 10%.

2018 Construction Spending – Briefs 1-26-18

 

Infrastructure and Public Work

Only 60% of all Infrastructure spending is publicly funded. That public subset of work averages growth of less than $10 billion/year.

The two largest markets contributing to public spending are Highway/Bridge (32%) and Educational (26%), together accounting for nearly 60% of all public construction spending. At #3, Transportation is only about 10% of public spending.

Infrastructure construction spending is near all-time highs and has been for the last several years. Public spending is 10% ($30bil) below all-time highs, the largest deficits coming from Educational, Sewage/Waste Water and Water Supply.

Current levels of backlog and predicted new starts gives a projection that Public Non-building Infrastructure spending will reach an all-time high in 2018 and again in 2019.

Publicly Funded Construction

Down the Infrastructure Rabbit Hole

 

For the latest info see 2018 Construction Spending Forecast – Mar 2018

 

 

Construction Spending is Back

3-9-18

We’ve all seen headlines like, “Construction Spending is back to previous level”, or “Construction Spending back to a new high.” Here’s how even true information can be deceiving.

It’s true, construction spending in current $ reached a new high in 2017 at $1,236 billion. The previous high in current $ was $1,161 in 2006. Spending surpassed that in 2014 and has been increasing since. But that is in current $, which includes inflation.

Let’s say a store will sell a bushel of apples, cost $100 in 2014, $110 in 2015, $120 in 2016 and $130 in 2017. If we look at the current $ spent on apples each year, it looks like business is booming, up 30% in 3 years. But the reality is, with the exception of inflation, the apple business has not changed at all. Only one bushel of apples sold every year. The year to year change in un-adjusted current $ is the increase in cost, not the increase in volume.

Comparing current $ spending to previous year spending does not give any indication if business is increasing. The inflation factor is missing. If spending is increasing at 4%/year in a time when inflation is 6%/year, real volume is declining by 2%.

Total construction spending in constant $ (inflation adjusted $) reached $1,236 billion in 2017. After adjusting all previous spending to equivalent 2017$, we can see that all years from 1997 through 2008 had higher volume than 2017.  In 2000-2001 volume was just over $1,400 billion and in 2005 volume reached a peak at $1,454 billion. While spending in current $ is 7% higher than the previous high spending, volume is still 15% lower than the previous high volume.

Spend 1970-2020 Total 3-9-18

Nonresidential buildings construction spending in constant $ (inflation adjusted $) reached $419 billion in 2017. Previous spending adjusted to equivalent 2017$ shows that all years from 1995 through 2010 had higher volume than 2017. Volume reached a peak $536 billion in 2000 and went over $500 billion again in 2008. Spending in current $ is almost back to the peak of $438 billion in 2008, but volume is lower than almost all years from 1985 to 2010 and is still 22% lower than the 2000 high volume.

Spend 1970-2020 Nonres Bldgs 3-9-18

Non-building Infrastructure construction spending in constant $ reached $294 billion in 2017. Recent highs were posted in 2015 and 2016 at $305 billion and $304 billion and 2018 is expected to reach $319 billion. Previous spending adjusted to equivalent 2017$ shows that 2008 and 2009 were both just slightly higher than $300 billion. Volume reached a peak $313 billion in 2016. Spending in current $ hit new highs in 2015 and 2016. This is the only sector that has current $ and constant $ at or near all-time highs.

Spend 1970-2020 NonBldg Infra 3-9-18

Residential buildings construction spending in constant $ reached $523 billion in 2017. Previous spending adjusted to equivalent 2017$ shows that all years from 1996 through 2007 had higher volume than 2017. Volume reached a peak $748 billion in 2005. Only the years 2004-2006 had higher spending in current $. The 2005 current $ peak of $630 billion is still 17% higher than 2017, but 2017 volume is still 30% lower than peak volume.

Spend 1970-2020 Residential 3-9-18

This has several implications besides misleading headlines that claim construction is at a new high. Just look at the period 1996-2007 on the residential plot. Spending in current $ increased 130% from $270 billion to $620 billion. But this was during a period that recorded some of the highest residential construction inflation on record. Inflation was 90%. Follow the guidelines up to constant$ and see that real volume increased only 40% from $530 billion to $750 billion.

If you are hiring to meet your needs and you see that spending (revenue) has increased by 130%, do you hire to meet revenue? No. Hiring requires a knowledge of volume growth. Residential jobs during this time frame increased by 55%, more than real volume growth, but no where near the 130% spending growth.

The above plots were developed using current and historical Census construction spending and inflation indices were developed from construction industry resources, documentation which can be found here on this blog.

See also

Residential Construction Jobs Shortages 2-3-18

Constant Dollar Construction Growth 11-2-17

Inflation in Construction 2018 – What Should You Carry? 2-15-18

ESCALATION / INFLATION INDICES

 

Construction Jobs

3-8-18

What data are analysts comparing to show construction jobs shortages?

There are numerous articles circulating in the industry regarding the difficult growth of construction jobs. Some compare the percent growth in jobs to the percent growth in construction spending, often citing that spending has increased far more than jobs.

Well yes, that’s true. BUT…

In the 5 years 2013-2017 jobs increased by 1.3mil or 23%. Spending increased by 45%. The industry, for 5 years, has been saying it is difficult to find skilled workers to fill jobs. And yet total construction jobs added in last 5 yrs = 1.3 million, near all-time high growth.

Only 3 times since 1970 have 5-year jobs totals increased by more than the most recent 5-year period 2013-2017. All of the top jobs growth occurred between 1994-2000.

Only 5 times has 3-year jobs growth exceeded the most recent 3-year period. The period 2004-2006, with the highest 3-year jobs growth, also represents 50-year peak construction volume, although closely rivaled for both jobs growth and peak volume from 1999-2001.

But, comparing jobs growth to spending growth is an invalid comparison. Jobs must be compared to volume. Spending is not volume.

Construction spending includes inflation. Inflation does not support jobs growth. If spending is increasing 6%/year and inflation increases 4%/year, then real construction volume is increasing only 2%/year. Balanced jobs growth would then increase 2%/year.

Spending is measured in current $, always current to the year, which includes inflation from year to year. Volume is reported in constant $, constant to the baseline year, which adjusts for inflation. Jobs should be compared to constant $ volume growth.

Spend current vs constant 1993 to 2017 2-6-18

 

For the 5-year period 2013-2017, although spending increased 45%, inflation was near 4%/year for all 5 years. Real construction volume increased only 22%. Jobs, up 23%, just slightly exceeded volume growth during this period.

Jobs vs Volume 2011-2017 2-1-18

I’ve written a series of articles on jobs vs spending/volume, comparing growth back to 2001. Links to the entire series can be found at the bottom of this post. Several things seem apparent from the analysis, among them, potentially hiring to match spending growth and hiring lags spending growth.

A benefit of the series is that it shows, although jobs/volume growth is nearly even, severe jobs imbalances exist within sectors. Nonresidential and Non-building show excess jobs while residential shows a severe jobs deficit.

Jobs vs Volume 2011-2017 NonResidential Bldgs 2-3-18

Nonresidential buildings has had the largest jobs growth in excess of volume growth. This raises the question, are jobs being added in response to spending growth, which is almost 4%/year higher than real volume growth.

Jobs vs Volume 2011-2017 NONbuilding 2-3-18

Non-building Infrastructure recent growth is similar to Nonres Bldgs, but it started 2011 with a large deficit.

Jobs vs Volume 2011-2017 Residential 2-3-18

Residential comparisons uncover some hidden factors. In this Residential plot, spending increased by 100% since Jan 1 2011, but after inflation volume increased by only 57%. Jobs lag 20% behind at only 37%.

But, are all residential jobs being counted? Several studies suggest that a large portion of residential construction jobs may be held by uncounted immigrant or day labor. So it’s possible the residential jobs deficit may not be as large as shown.

In addition to uncounted immigrant labor, some labor is mis-classified. Take for example, a high-rise multi-use building with commercial retail, office and residential space. Census definitions of spending classifications break out spending into the 3 market sectors, but the building is built by high-rise contractors (probably normally classified as commercial), not a residential contractor. This then is residential space built using labor classified as non-residential commercial. BLS writes this: “Establishments are classified into industries on the basis of their primary activity… For an establishment engaging in more than one activity, the entire employment of the establishment is included under the industry indicated by the principal activity”

The series of articles explains much more detail including productivity (annual $ put-in-place), jobs/workload balance and hiring patterns.

Residential Construction Jobs Shortages 2-3-18

Construction Jobs / Workload Balance 11-7-17

Jobs vs Construction Volume – Imbalances 8-8-17

Construction Jobs Growing Faster Than Volume 5-5-17

A Harder Pill To Swallow! 4-8-17

Is There a Construction Jobs Shortage? 3-10-17

Behind The Headlines – Construction Jobs 2-16-17

Construction Spending vs Jobs 2-9-17

Saturday Morning Thinking Outloud #5 – Jobs Growth 12-3-16

Saturday Morning Thinking Outloud #3 – Construction Jobs 11-19-16

Construction Jobs – Behind The Headlines 10-13-16

Construction Jobs Show 3rd Qtr Growth 10-7-16

 

Publicly Funded Construction

2-28-18

 

  1. What types of construction might get funded by Infrastructure stimulus?
  2. How big is the Infrastructure construction market?
  3. What share of Infrastructure is Public work?
  4. What other types of work are publicly funded?
  5. How much new stimulus work can be added to current backlog?

 

  • Total all construction spending in 2017 will be about $1.240 trillion.
  • Infrastructure = $300 billion, 25% of all construction spending.
  • Infrastructure is about 60% public, 40% private. In 2005 it was 70% public.
  • Public Infrastructure = $170 billion. Private Infrastructure = $130 billion.
  • Power and Communications are privately funded infrastructure.

 

  • Nonresidential Buildings is 25% public (mostly institutional), 75% private.
  • Educational, Healthcare and Public Safety are Public Nonres Institutional Bldgs
  • Public Commercial construction is not included.
  • Public Institutional = $100 billion, mostly Education ($70b).

 

Total Public Infra + Institu = $270 billion, 23% of total construction spending.

The potential target markets for an infrastructure stimulus plan could range from the $170 billion public civil infrastructure market up to a total $270 billion market that includes public institutional work. All of these types of projects may not get funded. Then again, Communications, which is 99% private and not included here, has been considered to receive some stimulus funding (rural broadband).

Spend Public Infra-Insti 2015-2020 2-28-18

Total All Construction spending, all public + private construction, has average growth of $50 billion/year. Adding $100 billion of spending in a single year, from all sources public and private, is the maximum level of growth for the entire construction industry.

Public Infrastructure + Institutional average growth is $12 billion/year. It has never exceeded $30 billion in growth in a single year.

Public Infrastructure best growth (highest for at least 3 consecutive years, and in almost all cases was from 2005-2007) over the last 15 years, averages 10%/year. For Sewer, Water, Conservation and Communications that’s equivalent to adding only $1 bil to $2 bil per year. For Transportation it’s $4 bil/yr and for Highway it’s $8 bil/yr. For Public Institutional, Educational it’s $8 bil/yr. and other institutional about $2 bil/yr. If all these could hit best ever averages at the same time then Infrastructure spending would grow $25-$30 billion/year.

Spending growth from work already in record backlog for public infrastructure + institutional is predicted to increase by $10-$20 billion/yr. in each of next several years. Transportation alone for the next two years is increasing by more than $10 billion/year. Adding $15-$20 billion/year more in spending for an infrastructure expansion plan would push total public work well above record levels, at least for the next three years. That is probably not sustainable.

Public infrastructure and institutional, only 23% of the entire industry, can probably only absorb another $10 billion of new growth per year on top of the predicted growth. That would push growth to $20-$25 billion/year, near record growth in each of the next three years.

For every $10 billion a year in added infrastructure spending, that also means adding about 40,000 new construction jobs per year.

Average post-recession growth in public infrastructure + institutional jobs is about 35,000 jobs per yr. Max growth was 50,000 jobs/yr. Historical maximum jobs growth would seem to limit spending growth to a total of about $15 billion/year. That is the amount of spending already predicted from work in backlog, without adding any more work from an infrastructure stimulus plan.

Because the potential markets to which stimulus might be applied are relatively small in comparison to all construction, and because those markets identified are already at record backlog, both historical maximum spending growth and jobs growth identify potential limits on infrastructure stimulus growth. Those limits are much lower than generally thought.

This article has more on the same topic Down the Infrastructure Rabbit Hole 2-16-18

Read more Details Behind The Headlines – Infrastructure 3-23-17

PPI Construction Materials Inputs Index

2-20-18

Producer Price Index of Materials Inputs to Construction.  The 1st two plots are PPI Final Costs. All other plots are PPI Input costs. Changes in PPI Input costs at the producer level may not reflect changes in actual pricing to contractors or changes in final cost as installed to building owner. Cost do not reflect retail markup or mark down and do not reflect overhead and profit markups that may change according to market activity.

PPI for Construction Inputs IS NOT an indicator of construction inflation. It does not represent selling price, the final cost of materials put-in-place which includes cost of labor, overhead and profit.

More commentary will be added soon.

PPI Final Bldg 2-20-18

PPI Final Trades 2-20-18

PPI Nonresidential Building Types

PPI Nonresidential Building Construction Sector — Contractors

Specific Building and Contractor PPI Indices are Final Demand or Selling Price indices. They are plotted above.

Bureau of Labor Statistics Producer Price Index measures PPI cost of materials price at producer level. The PPIs that constitute Table 9 of the BLS PPI Report measure changes in net prices for materials and supplies typically sold to the construction sector, but do not represent the final cost installed. They are known as PPI Inputs. They are plotted below.

PPI Materials and Supply INPUTS to Construction Industries

Here’s a brief summary of some of the PPI statistics tracked here:

  • One year (2017) change
  • biggest increases > Diesel fuel, Scrap Steel, Copper and Aluminum Mill Shapes, Steel Pipe, Lumber & Plywood
  • smallest increases > Insulation, Brick, Sheet Metal, Asphalt Roofing, Ornamental Metals, Structural Steel
  • only declines > Fabricated Steel Bar Joists and Rebar, Asphalt Paving

 

  • Two year (2016+2017) changes
  • biggest increases > Diesel fuel, Steel Scrap, Copper and Aluminum Mill Shapes, Steel Pipe, Lumber & Plywood, Gypsum Products
  • smallest increases > Asphalt Roof Coatings, Brick, Precast Concrete, Insulation, Sheet Metal, Steel Bar Joists & Rebar, Flat Glass
  • Only decline > Asphalt Paving

 

  • Three year (2015>2017) changes
  • biggest increases > Cement, Readymix Conc, Flat Glass, Gypsum Products
  • smallest increases >  Sheet Metal, Structural Steel, Steel Joists & Rebar, Brick
  • biggest declines > Asphalt Paving, Steel Scrap, Steel Pipe, Asphalt Roofing, Diesel Fuel

Most stable pricing over last 5 years, these items did not change by more than 4%/yr in any given year during the last 5 years and net the smallest total change for 5 years:  Asphalt Roofing -1% in 5 years, Fabricated Structural Steel +3.4%, Sheet Metal+2.7%, Building Brick +7%.

PPI Inputs to Industries 2-20-18

PPI Materials Brick Block 2-20-18

PPI Materials Cement 2-20-18

PPI Materials Glass Roof 2-20-18

PPI Materials Gyp Wood 2-20-18

PPI Materials Metals 2-20-18

PPI Materials Steel 2-20-18

The indices plots above are generated by indexing the December to December percent changes in the table below. All data updated to include Dec 2017 published January 2018.

PPI Materials Percents 2006-2017 2-20-18

Watch this AGC page for monthly updates to the PPI

Down the Infrastructure Rabbit Hole

2-16-18

Down the Infrastructure Rabbit Hole. A twitter thread on construction capacity.

The infrastructure sector is only 25% of all construction spending, with the largest share being the Power market. Power accounts for 33% of all infrastructure spending. Highway represents 30% and Transportation about 15%. However, Power is 80% private, Transportation 30% private.

Only 60% of all Infrastructure spending is publicly funded. Highway is about half of all publicly funded Infrastructure construction. That public subset of work in the last 25 years has grown by $20 billion/year only once and averages growth of less than $10 billion/year.

Most public work is Infrastructure or public works projects, about 60%, but some public work is nonresidential buildings, about 40%. Public Safety is 100% public. Educational projects are 80% public. Amusement/Recreation Facilities (i.e.’ Convention Centers, Stadiums) is 50% public. Healthcare is 20% public.

The two largest markets contributing to public spending are Highway/Bridge (32%) and Educational (26%), together accounting for nearly 60% of all public construction spending. At #3, Transportation is only about 10% of public spending.

Sewage/Waste Water and Water Supply add up to another 10% of the market. All other markets combined, Conservation and all other various nonresidential buildings, none more than 4% of the total, account for less than 20% of public spending.

Spend Public Share 2-25-18

It is rare that Nonbuilding Public Infrastructure construction spending increases by more than $10 billion in a year. Once, only once, it increased by an average of $10 billion/year for three years. Excluding recession, average annual growth is $4 billion/year.

It is rare for Total All Public Infrastructure to increase by $20 billion in a year. It has done so only ever twice. Excluding the two worst recession years, the average annual growth since 2001 is $7 billion/year.

For every $10 billion a year in added infrastructure spending, that also means adding about 40,000 to 50,000 new construction jobs per year.

Infrastructure construction spending is near all-time highs and has been for the last several years. Public spending is 10% ($30bil) below all-time highs, the largest deficits coming from Educational, Sewage/Waste Water and Water Supply.

Either an infrastructure spending plan is used to create new work or it becomes a funding source to pay for work already planned, in which case it does not increase spending or jobs projections.

As proposed, states and municipalities would be required to come up with 80% of the funding for any new infrastructure project to qualify for 20% of funding from the federal government, potentially shifting the bond funding tax burden to states.

Alternatively, states could solicit private partnership funding, in which case what would normally be considered public assets could become privately controlled assets. This raises a whole new list of issues for discussion, not engaged here.

Infrastructure currently has the highest amount of work in backlog in history. Public work is at its 2nd highest starting backlog only to 2008. Starting backlog accounts for 80% of spending in the current year and 60% of spending in the following year.

Current levels of backlog and predicted new starts gives a projection that Public Nonbuilding Infrastructure spending will reach an all-time high in 2018 and again in 2019.

Total All Public Infrastructure in 2018 also reaches an all-time current$ spending high. However, in constant$, inflation adjusted, volume of work is still well below previous peak.

The non-building infrastructure construction sector does not have the capacity to increase spending over and above existing planned (booked and projected new starts) work by another $10 billion/year, nor does it have the capacity to add an additional 40,000 jobs per year.

Total All Public Infrastructure construction, including public works and Nonresidential public buildings, already has a growth projection near historic capacity. It cannot double that volume by another $10-$20 billion/year and add an additional 40,000 – 80,000 jobs per year.

Below is the timeline of my articles series on Infrastructure. Some of the numbers have changed slightly over the past year, but not enough to change the premise of the articles.

2-28-18 Publicly Funded Construction

2017/12/03  spending-summary-construction-forecast-fall-2017

2017/11/11  backlog-construction-forecast-fall-2017

2017/10/10  is-infrastructure-construction-spending-near-all-time-lows

2017/03/23  behind-the-headlines-infrastructure-spending-&-jobs

2017/03/06  calls-for-infrastructure-problematic

2017/03/05  infrastructure-public-spending

2017/01/30  infrastructure-ramping-up-to-add-1-trillion

2016/10/29  Saturday-morning-thinking-outloud-Infrastructure

Inflation in Construction 2018 – What Should You Carry?

2-15-18, updated 3-10-18

When construction is very actively growing, total construction costs typically increase more rapidly than the net cost of labor and materials. In active markets overhead and profit margins increase in response to increased demand. These costs are captured only in Selling Price, or final cost indices.

General construction cost indices and Input price indices that don’t track whole building final cost do not capture the full cost of inflation on construction projects.

To properly adjust the cost of construction over time you must use actual final cost indices, otherwise known as selling price indices.

ENRBCI and ENRCCI are prefect examples of commonly used indices that DO NOT represent whole building costs, yet are widely used to adjust project costs. An estimator can get into trouble adjusting project costs if not using appropriate indices.

CPI, the Consumer Price Index, tracks changes in the prices paid by urban consumers for a representative basket of goods and services, including food, transportation, medical care, apparel, recreation, housing. This index in not related at all to construction and should never be used to adjust construction pricing. Historically, Construction Inflation is about double the CPI, but for the last 5 years construction inflation averages 3x the CPI.

Producer Price Index (PPI) Material Inputs costs to all construction (which exclude labor) are up +4.2% in 2017. More specific input costs for nonresidential structures in 2017 are up 4.3%. Infrastructure cost are up over 5% and single-family residential inputs are up 4.3%. But material inputs accounts for only a portion of the final cost of constructed buildings.

Labor input is currently experiencing cost increases. When there is a shortage of labor, contractors may pay a premium to keep their workers. Unemployment in construction is the lowest on record. The JOLTS ( Job Openings and Labor Turnover Survey) is at or near all-time highs. A tight labor market will keep labor costs climbing at the fastest rate in years.

 

Click Here for Link to a 20-year Table of 25 Indices

Inflation can have a dramatic impact on the accuracy of a construction budget. Usually budgets are prepared from known current costs. If a budget is being developed for a project whose midpoint of construction costs is two years in the future, you must carry an appropriate inflation factor to represent the expected cost of the building at that time.

The level of construction activity has a direct influence on labor and material demand and margins and therefore on construction inflation. Nonresidential Buildings and Non-building Infrastructure backlog are both at all-time highs. 75% to 80% of all nonresidential spending within the year comes from starting backlog. In 2018 spending from nonresidential backlog will be up nearly 8%-10%. In the last three years nonresidential buildings spending from backlog is up more than 25%, non-building infrastructure up only 10%.

Most spending for residential comes from new starts. Residential new starts in Q1-2017 reached an 11 year high. For Q1-2018 starts are up another 4% over Q1-2017. Spending from new starts is up 100% in the last 6 years, 30% in the last 3 years.

Current indications are that 2019 backlog will be up 6%-8% across all sectors.

Taking into account the current (Jan 2018 12 mo) CPI of 2% and the most recent 5 years ratio of Construction Inflation to CPI, along with accelerated cost increases in labor and material inputs and the high level of activity in construction markets, I would consider the following forecasts for 2018 inflation as minimums with potential to see higher rates than forecast.

Residential construction saw a slowdown in inflation to only +3.5% in 2015. However, the average inflation for five years from 2013 to 2017 is 5.8%. It peaked at 8% in 2013. It climbed back over 5% for 2016 and reached 5.8% in 2017.

Anticipate residential construction inflation for 2018 at least 5% to 6%.

Nonresidential Buildings indices have averaged 4% to 4.5% over the last five years and all have reached over 5% in the last three years. Nonresidential buildings inflation totaled 18% in the last four years. My forecast shows nonresidential buildings spending in 2018 will reach the fastest rate of growth in three years, which historically has led to accelerated inflation.

Recent news of a steel tariff needs to be addressed as an added factor to inflation. In another article on this blog, (see steel cost increase), I calculated the 25% tariff on steel would cost nonresidential buildings 1%. Some Infrastructure could be much more, i.e., bridges 4-5%. Residential impact would be small. A 25% increase in mill steel could add 0.65% to final cost of building just for the structure. It adds 1.0% for all steel in a building. If your building is not a steel structure, steel still potentially adds 0.35%. 

Anticipate construction inflation for nonresidential buildings during the next two years, excluding steel impact, of 5% to 5.5%, rather than the long-term growth average of 4%. Adjust for steel impact.

Inflation Range 2000-2019 plot 2-15-18

Non-building infrastructure indices are so unique to the type of work that individual specific infrastructure indices must be used to adjust cost of work. The FHWA highway index increased 17% from 2010 to 2014, dropped 2% in 2015-2016, then increased 2% in 2017. Inflation for refineries and petrochemical facilities has dropped 5% in the last 4 years.

Input costs to infrastructure are down slightly from the post-recession highs, but most costs have increased in the last year. Input cost to Highways are up 4.7% and to the Power sector are up 5.8% in 2017. Work volume in Transportation and Pipeline projects is increasing rapidly in 2017 and 2018. Expect inputs in these markets to show large increases in 2018.

Infrastructure indices registered 2% to 4% gains in 2017. Anticipate a minimum of 3% to 4% inflation for 2018 with the potential to go higher in rapidly expanding markets. Tariff impact adds to this. Refer to Infrastructure Indices.

Watch for unexpected impacts from steel tariffs, potentially adding 5% to bridges. Also impacted, power industry, pipeline, towers, transportation. 

  • Long term construction cost inflation is normally about double consumer price inflation (CPI).
  • Since 1993 but taking out 2 worst years of recession (-8% to -10% total for 2009-2010), the 20-year average inflation is 4.2%.
  • Average long term (30 years) construction cost inflation is 3.5% even with any/all recession years included.
  • In times of rapid construction spending growth, construction inflation averages about 8%.
  • Nonresidential buildings inflation has average 3.7% since the recession bottom in 2011. It has averaged 4.2% for the last 4 years.
  • Residential buildings inflation reached a post recession high of 8.0% in 2013 but dropped to 3.4% in 2015. It has averaged 5.8% for the last 5 years.
  • Although inflation is affected by labor and material costs, a large part of the change in inflation is due to change in contractors/suppliers margins.
  • When construction volume increases rapidly, margins increase rapidly.
  • Construction inflation can be very different from one major sector to the other and can vary from one market to another. It can even vary considerably from one material to another.

BCI 1992-2019 2-12-18

The two links below point to comprehensive coverage of the topic inflation and are recommended reading.

Click Here for Link to a 20-year Table of 25 Indices

Click Here for  Cost Inflation Commentary – text on Current Inflation

 

 

 

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