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New Construction Starts is powerful data if used properly. Understand how to use the data and you have an excellent forecasting tool.
New Construction Starts is incorrectly used when the data is referred to as construction spending. It cannot be used to look at the year over year (yr/yr) or month over month (mo/mo) trend in values to predict % change in construction spending. This misrepresents how to use New Starts data.
Care must be taken to use Starts properly. It is sometimes misinterpreted in common industry forecasting articles. Starts dollar values represent a survey of about 50% to 60% of industry activity, therefore Starts dollar values cannot ever be used directly to indicate spending. Also, Starts do not directly indicate changes in spending per month or per year. Projected starts data cannot be used to directly forecast expected construction volume.
Only by including an expected duration for all Starts and producing a forecast Cash Flow from Starts data can the expected pattern of spending be developed. Finally, it is the rate of change in Starts Cash Flows that gives an indication of the rate of change in spending.
Cash flow is the best indicator of how much and when spending will occur. Cash flow from starts gives a prediction over time of how spending from each month of previous starts will change from all projects in backlog. Cash flow totals of all jobs can vary considerably from month to month, are not only driven by new jobs starting but also old jobs ending, and are heavily dependent on the type, size and duration of jobs.
New Starts for the month or the year is the total value of new project revenues that came under contract in that period. Since the values reported for Starts are a sampling survey of about 60% of the industry totals, the total dollar volume is not comparable to actual spending. However, the percent change in values is very useful.
The entire value of a project enters backlog when the contract is signed and work begins. That’s a new start. Projects booked on or before December 31st, that still have work remaining to be completed, are in backlog at the start of a new year.
Simply referencing total new starts or backlog in the year does not give an indication of spending within the year or next calendar year. Projects, from start to completion, can have significantly different duration. Whereas a residential project may have a duration of 6 to 12 months, an office building could have a duration of 18 to 24 months and a billion-dollar infrastructure project could have a duration of 3 to 4 years. New starts within any given year could contribute spending spread out over several years. Total Cash Flow in the Year, or Spending, could include spending from projects that started years ago.
Backlog at the start of the year could include revenues from projects that started in December or several years ago. For a project that has a duration of several years, the amount in starting backlog at the beginning of the year is the amount remaining to complete the project or the estimate to complete (ETC). And all that ETC may not be spent in the year following when it started, dependent on the duration remaining to completion.
The only way to know how much of total starts or total backlog that will get spent in the current year and following years is to prepare an estimated cash flow from start to finish for all the projects. The sum of the amounts from all projects ongoing in each month gives total cash flow in that month, or monthly spending in that year. Spending in any given month could have input from projects that started many months ago. The sum of the cash flow is what shows the expected change in spending.
The following table clearly shows there is not a correlation between starts in any year with spending in the following year. The practice of using construction starts directly to predict spending in the following year can be very misleading in an industry that relies on data for predictive analysis to plan the future. Not only does it not predict the volume of spending in the following year, it does not even consistently predict the direction spending will take, up or down, in the following year. It’s a false indicator and it’s not a good use of data.
Construction spending is strongly influenced by the pattern of continuing or ending cash flows from the previous two to three years of construction starts.
Current month/month, year/year or year-to-date trends in starts often do not indicate the immediate trend in spending.
Power market starts and spending provides a good example.
Power starts peaked in 2015 at an all-time high, up 140% from 2014 and more than the prior two years combined. Yet Power spending was down 6.5% in 2015 and down 1.5% in 2016. This happened because Power starts were also at an all-time high in 2012, just below the 2015 level, and those starts drove 2014 spending to an all-time high, but then tapered off in 2015. Those peak starts from 2015 will still be contributing spending for several years to come, long beyond typical jobs, and that drives typical spending growth because it adds more than typical number of months that contribute spending.
Power starts gained only 1.5% in 2016, dropped 7% in 2017 and are expected to finish 2018 down 12%. The pattern of cash flows from starts is indicating growth in spending for 2018 and 2019. Starts from 2015 and 2016 with longer than average duration contribute spending out to 2020 & 2021, breaking the average balanced cycle of one month of old jobs ending for every new month of jobs starting. That drives the pattern in spending.
The following example shows what happens to monthly spending growth when a long duration job first influences spending past the typical duration and then when it ends. In the example table presented below, starts grow at 1% per month and have a typical duration of 5 months. But one unique month has an unusually large project start that will last for 10 months.
A typical month of spending has cash flow from 5 months of starts, but the long duration project creates 6 months of cash flows for the period beyond typical duration. Notice what happens and when it occurs.
When the large project starts it has no unusual effect on spending. But when it first extends beyond typical duration, it has a massive +20% growth effect on spending, even though starts had only been increasing at 1%/month for the previous 5 months. When it ends it has a similar downward effect, again, even though starts had been increasing at 1%/month.
Spending growth (or declines), both when an extra-large job causes it to increase and then when the extra-large job ends, is almost entirely influenced by the long duration project, not by normal monthly starts growth rate. This same example can be over months or over years.
Spending patterns are far more influenced by projects with unusual duration. Construction spending is strongly influenced by the pattern of continuing or ending cash flows from the previous two to three years of construction starts. Cash flow is the best indicator of how much and when spending will occur.
All construction starts data in this report references Dodge Data & Analytics Starts data.
New Construction Starts for July in the latest report from Dodge Dodge July 2018 Construction Starts are down 9% from June, but June starts reached an all-time high Seasonally Adjusted Annual Rate (SAAR) of $899 billion. July posted at $817 billion. May was $804 billion. The May-Jun-Jul three month average SAAR construction starts is $840 billion, all-time high.
The Dodge July construction starts report posted $78 billion of new starts and highlights 19 projects valued over $200 million, one of those at $2.4 billion and 17 projects valued between $100-$200 million. The Dodge June construction starts report posted $98 billion of new starts and highlighted 7 projects over $1 billion (totaling $16.5 billion), 17 more projects over $200 billion and 15 projects between $100-$200 billion. The starts report is a sampling of about 2/3rds of all projects.
New construction starts in the 1st half 2018 reached an all-time high.
The new high in construction starts is measured in current $. When adjusted for inflation (constant $), total starts are still about 20% below 2003-2004, when all sectors reached their previous highs. A closer look at constant $ starts adjusted for inflation shows nonresidential buildings about 8-10% below the previous high, non-building infrastructure about 6-8% above the previous high, but residential is still 40% below the previous high.
Residential starts average for the 6 months Jan-Jun 2018 is the highest since 2006. The 1st 6 months of 2018 is up 8% from the prior 6 months.
Dodge Outlook Midyear Update is forecasting 2018 single family starts to gain 6% and multifamily to gain 3%. Year-to-date through July, single family starts are up 7% and multifamily up 6%.
Non-building infrastructure starts for July are level with June and level with the average of the 1st six months. Starts may finish the year slightly down from 2017. However, 2017 was the best year of starts on record. The growth in Infrastructure starts will drive Non-building spending to record highs in 2018 through 2020.
Transportation, in Census spending reports, includes all airport work, air-side and terminals. It also includes rail work, track and terminals and dock work. In Dodge Data starts data, terminals are included in Other Institutional and rail work is included in Other Public Works. Terminals and rail work are included in this analysis in Transportation Infrastructure so that starts can be compared with Census spending data..
Terminal starts are down YTD, 50% lower than 2017. But 2017, which included the start of six major airport terminals, was so high, up 120% over 2016, that even though 2018 is down it will be the 2nd strongest year of starts on record. Rail work also doubled in 2017 and will remain close to even for 2018. Starting backlog for transportation projects doubled from the start of 2017 to the start of 2018. Backlog is on track to increase another 25% to start 2019. No other market will realize the gains in construction spending that we will see from transportation for 2018 and 2019.
Power generation plant starts cause erratic bumps in Power work. In the last year there have been a dozen or more project starts valued over $500 million each, six of those over $1 billion. Also included in Power, Pipeline starts represent half of all Power work started YTD. Cash flow may be adversely impacted by the delay of large projects that started previously. A multi-billion dollar nuclear power plant stopped work and large pipeline project delays have reduced the previous forecast for cash flow.
Highway starts hit an all-time high in 2017 and are forecast to surpass that by a few percent in 2018. Highway starting backlog increased 30% in the last 3 years and will increase 6% leading into 2019.
Nonresidential buildings starts in July reached $318 billion, down 22% from June, but June reached $402 billion, nudging up against the all-time high from 2008.
Manufacturing starts are down 60% from June, but June was the highest month ever recorded, three to four times the average monthly starts. July is the 4th best month in the last 3 years, going back to April 2015, the 2nd highest month ever. The decline of manufacturing starts from the June high to a normal amount in July accounts for more than half of the total Nonres Bldgs decline in July. The news is not the decline in July, a return to normal, but the abnormally high starts in June.
Office and Warehouse starts, both up from a strong 2017, are seeing gains from data centers (in office) and distribution centers (in warehouse which is in commercial spending). Amusement/Recreation starts YTD are triple last year. The only nonresidential markets lower year-to-date are retail stores and healthcare. The decline in retail stores, which is also in commercial spending, is being hidden by the increase in warehouses, which are at an all-time high.
Adjusted for inflation, Jan 2008, by a few percent, is still the best ever for nonresidential buildings starts and spending.
The plots above show the 3mo moving average and trend line of starts for Residential, Non-building Infrastructure and Nonresidential Buildings. Starts can be erratic from month to month. The trend line gives a better impression of how starts impact spending.
The plot below is an index. The plot shows greater accuracy in the forecast when the predicted cash flow and actual spending plot lines move in the same direction. If the slope of the lines is the same, then the cash flow accurately predicted the spending.
The light green line, spending estimated from starts cash flow, shows smooth spending, even though actual monthly starts are erratic (see nonres bldgs plot shown above). The actual spending often follows pretty close to the pattern as that estimated from cash flows.
Year-to-date (YTD) 2018 starts are up 2% from 2017, but 2017 starts through July have already been revised up by 12%, up 16% in nonresidential buildings, 22% in non-building and 4% in residential. 2018 starts will be revised next year and revisions have always been up. Revisions in previous years have averaged more than +7%/yr. for the last 5 years, with most of the upward revision in nonresidential.
Dodge reported this headline on Nov. 2, 2017 “New Construction Starts in 2018 to Increase 3% to $765 Billion According to Dodge Data & Analytics.” At the time, Dodge predicted construction starts for 2017 on track to finish at $745 billion. However, as each new month of starts is reported in 2018, the comparable month in 2017 is revised up to the latest data. Currently through July 2018, total starts in 2017 have already been revised up to $795 billion. 2017 starts, once all revisions are posted, could reach close to $800 billion.
2018 starts, based on initial data this year, could reach $800 billion, at first appearing to show no gain from 2017. Historically, revisions increase the initial total. After revisions posted next year, 2018 starts could reach $830-$840 billion.
Starts in both 2017 and 2018 are stronger than expected just 6 months ago. The current SAAR monthly $ of starts is 10% higher than anticipated just 6 months ago.
Construction spending is up year-to-date through May in every sector. Only Manufacturing and Power markets are down YTD, but not enough to drag the sectors negative. Both markets are expected to finish the year up. (Religious market is down, but represents only 0.2% of spending).
Cash flow from all starts still in backlog supports a 2018 spending forecast of $1,336 billion, a spending increase of 7% over 2017. The forecast for 2019, based on a 3% increase in starts, is $1,398 billion, an increase of 4.6% over 2018. The strongest growth in spending for 2018 and 2019 is forecast in Non-building Infrastructure.
Dodge reported May new construction starts at a seasonally adjusted annual rate of $778,000 million, up 15% from April. Also, year-to-date starts total $294,000 million, 3% lower than the same 5 months of 2017.
However, 2018 numbers will not be revised until next year and 2017 numbers through May have already been revised up 13%, up about 18% in nonresidential and 6% in residential. So the potential that YTD numbers remain 3% below 2017 is very small. Revisions to previous year’s numbers have averaged more than +7% for the last 5 years with most of the upward revision in nonresidential.
Revisions to 2017 year-to-date have already resulted in a 4% increase in both 2018 and 2019 starting backlog.
Although Dodge, in its midyear report, is predicting 2017 starts at a total of $763,000 million, the current rate of revision seems to indicate 2017 starts could reach closer to $800,000 million. Forecast 2018 total starts will increase only slightly over 2017.
Keep in mind, unlike the Census spending data which captures 100% of all spending, the new starts data is a sampling of project starts, representing about 60% of total work volume. For this reason, the actual starts dollars cannot be used directly to represent spending. However, the change in predicted cash flow from starts can be used to predict the change in spending.
From Sept’17 through May’18 new construction starts reached the highest average since 2004 and are just below an all-time high. Residential starts posted the best 6 months average since 2006, up 8% from the prior 6 months. Both nonresidential buildings and non-building infrastructure are lower than recent highs. Both could finish the year with starts at a decline of 4% to 5% below 2017 totals, but they are both still near the best year of starts on record.
Starts totals near new highs is in current $. If 2004$ were represented in constant 2018$, the total would be 40% higher due to inflation. So, after adjusting for inflation, today we are still 40% below that 2004 high point.
- TOTAL All Construction Starting Backlog for 2018 reached an all-time high, increased 35% in the last three years, 14% in the last year.
- Nonresidential Buildings 2018 starting backlog is the highest ever, up 50% in four years, up 17% from 2017.
- Non-building Infrastructure 2018 starting backlog is the highest ever, up 45% in three years, up 16% from 2017.
- Residential work within the year comes mostly from new starts within the year, only 30% from starting backlog.
The erratic nature of new construction starts belies how smoothly those projects feed into backlog and monthly spending.
Backlog shows fairly constant growth for the last 5 or 6 years. Spending in any given month includes projects started and entered into backlog from 1 month ago to 3 or 4 years ago. In some non-building cases, projects are in backlog for 6 to 8 years, so project starts that appear as a high spike enter backlog and spending and produce a constant upward slope. Most spending within the year in nonresidential work comes from backlog. Most spending in residential work comes from new starts.
The cash flow model of all previous jobs underway already in backlog and all new starts shows the current predicted spending. Starting backlog for 2018 plus new starts in 2018 minus all spending in 2018 generates the forecast work remaining in backlog for the start of 2019.
The predicted spending plot will be added here after July 1 Census spending release.
Much more to come in next few days. edz
This is a partial selection of slides I will be presenting on May 16 in Dallas at Hanson Wade’s Advanced Building Estimation Conference. I’m covering the topics Inflation/Escalation and Forecasting particularly as it relates to staffing planning.
Brief notes on spending, starts, backlog, jobs and inflation from March and April tweets.
Nonresidential construction spending is not decelerating in 2018. Will see best growth since 14% in 2015.
Residential construction spending is slowing to +7% growth in 2018, after 6 consecutive years of strong growth averaging 13%/year.
Non-building Infrastructure forecast growth of 8% in 2018, potential to hit a new all-time high due to very large projects in Power and Transportation.
Public construction 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 more than half of the Public spending growth in 2018.
In Oct 2016 and again in Feb 2017, I forecast Manufacturing spending would fall 13% in 2017 after hitting peak spending in 2015 from massive growth in new starts in 2014. At that time, the AIA consensus forecast (average of seven analysts) was that spending would increase +0.4%. By July the consensus had been revised to average -6.6%. I updated my forecast to -11.8%. Based on cash flows, from April 2016 through the end of 2017 I expected spending to decline in 17 of 21 months. It declined in 14 of those months. Manufacturing spending finished 2017 down 11.9%.
In Fall 2017, I predicted Manufacturing construction spending would increase +9% in 2018. However, through March, total construction starts for Manufacturing over the last 12 months would count as the 2nd highest year on record. Therefore I’ve recently revised my forecast up to +13% spending in 2018. I’m now expecting double digit % spending growth in both 2018 & 2019. The January 2018 AIA consensus estimate is for +2.8% increase in 2018 spending and +5.2% in 2019. Some analysts predict 2018 spending will decline. My data shows increases in starts and backlog indicate large gains.
Nonresidential Buildings new starts are up 55% in four years. 2018 starting backlog is the highest ever, up 24% in two years.
Nonresidential Bldgs 2018 starting backlog is 55% higher than at the start of 2014, the beginning of the current growth cycle. Spending is UP 38% with 2018 spending forecast up 9%. Institutional accounts for 52% of 2018 construction spending growth, Commercial 27%, Industrial 21%.
80% of all nonresidential buildings construction spending forecast in 2018 is already in backlog projects at the start of the year.
New Construction Starts are booming (need to look past the mo/mo and ytd)
- Residential – 2 highest qtrs since 2006 in last 12 months
- Nonres Bldgs – 3 highest qtrs since Q1 2008 in last 15 months
- Nonbldg Infra – highet qtr since Q1 2015 peak in last 6 months.
Construction Starts data is regularly misinterpreted in common industry forecasting articles. Starts do not directly indicate changes in spending. A Forecast Cash Flow from Starts gives an indication of the rate of change in spending.
Educational new construction starts total from the last five months of 2017 posted the highest 5mo total starts in at least seven years, 13% higher than the next best 5mo. Jan 2018 monthly spending up 12% from 2017 mid-year low.
Healthcare construction 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. Spending will increase slowly.
Amusement/Rec construction starts avg of +15%/yr for 5yrs, up 30% in 2016, 5% in 2017. In last 6mo, Aug 2017 to Jan 2018, four very large billion$+ projects started, almost a year’s worth of new starts in 6mo. Backlog indicates 15%-20% spending increases for 2018 and 2019.
In 2010, Warehouse new construction 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.
Lodging starting backlog up 13% for 2018, having already averaged increases of 30%/yr since 2015. Starting backlog jumped from $7 bil/yr in 2014 to $17 bil/yr in 2018, supported similar spending growth. Although 2016 was peak starts, it looks like 2018 will be peak backlog.
New construction starts for Manufacturing total for the last 12 months would count as the 2nd highest year on record. I’m now expecting double digit % spending growth in both 2018 & 2019. The consensus estimate is for +2.8% increase in 2018 spending and +5.2% in 2019. Some analysts predict 2018 manufacturing bldg spending will decline.
Structural steel contract includes structural shapes, steel joists, metal deck, stairs and rails, about 10% of total building final cost.
Other steel in a building can include reinforcing steel, exterior metal wall panels, metal ceiling frames, wall studs, door frames, canopies, steel duct, steel pipe and conduit, about 6% of total building cost.
All steel (in a structural steel building) is at least 16% of total building cost. There are more hidden costs of steel in mechanical, electrical and plumbing equipment.
Raw mill steel is about one fourth the final cost of structural steel installed. A 25% increase in cost of mill steel could raise a structural steel subcontract bid price by 6.25%. At 10% of total building budget, that would raise total building cost by 0.625%.
A 25% increase in cost of mill steel could raise the other nonstructural steel costs by 6.25%. At 6% of total building budget, that would raise total building cost by 0.375%.
A 25% tariff on mill steel raises building cost inflation by at least 1%. That’s about $7.5 billion of unexpected cost inflation just in 2018.
Watch for unexpected impacts from steel tariffs, potentially adding 5% or more to total cost of bridges (plate steel). Also impacted, power industry, pipeline, transmission & communication towers, transportation.
Steel tariff could inflate the cost of the proposed $2.1 billion Gordy Howe International Bridge by $100 million. That would hurt the budget.
2018 Construction Spending Forecast – Nonresidential Bldgs construction spending in 2018 forecast to reach a new high, $459 billion, up 9% over 2017, passing the previous 2008 high. In constant $, 2018 will still be 18% below peak.
An estimator could be far off when indexing construction cost using a general cost index versus an actual selling price index.
Failure to account for the affect of inflation on the cost of construction could result in a failure to be profitable.
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%. In 2013 it reached a 12-year high of 8%.
If you are hiring to meet your needs and you see that construction spending (revenue) has increased by 25%, do you hire to match revenue? No! Hiring requires a knowledge of volume growth, and revenue doesn’t show that. Revenue minus inflation shows volume.
Construction activity has a direct influence on construction inflation. Nonresidential Buildings and Non-building Infrastructure backlog are both at all-time highs.
Construction Jobs vs volume growth the last 5 years is nearly even, yet jobs imbalances exist within sectors. Nonresidential Buildings and Non-building Infrastructure show excess jobs while Residential shows a severe jobs deficit. But not all of the apparent deficit in residential jobs is real.
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 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.”
So, the mis-classified labor reduces the nonresidential excess and offsets a portion of the residential shortfall.
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 177,000 jobs in the 4 months Nov’17-Feb’18. 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.
Construction jobs pulled back 15k in March, but this follows the strongest month (Feb +65k) in 12 years, so not totally unexpected. I think Mar Construction jobs, (-15k), more likely a pause after Feb (+65k), strongest month in 12 years.
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.
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.
If this was initially a 30 month project, with approximately 35% of the cost in labor, then overtime saved 6 months time, but added 15% inflation to the total cost.
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
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.
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.
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.
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%.
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.
For the latest info see 2018 Construction Spending Forecast – Mar 2018
During the period including 2011 through 2017, we had record construction spending, up 50% in 5 years, moderate inflation reaching as high as 4.6% but averaging 3.8%, record construction volume growth (spending minus inflation), up 30% in 5 years and the the 2nd highest rate of jobs growth ever recorded.
Residential spending was up 90% in 5 years, but real residential volume up only 50%. Residential inflation, at 6%/year, was much higher than all construction. Jobs increased only 33%.
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 1993-1999 with the highest 5-year growth ever of 1,483,000 jobs. That same 93-99 period had the previous highest spending and volume growth. 2004-2008 would have reached those lofty highs but the residential recession started in 2006 and by 2008 spending had already dropped 50%, offsetting the highest years of nonresidential growth ever posted.
The point made here is the period 2011-2017 shows spending and jobs at or near record growth. Although 2017 slowed, there is no widespread slowdown in volume or jobs growth.
This 2011-2017 plot of Construction Jobs Growth vs Construction Volume Growth seems to show there is no jobs shortage. In fact it shows jobs are growing slightly faster than volume. But that just does not sit well with survey data from contractors complaining of jobs shortages. So how is that explained?
There have been cries from some quarters, including this blog, that the answer lies in declining productivity. There seems to be plenty of workers, but it now takes more workers to do the same job that took fewer in the past. As we will see, that is part of the answer, but doesn’t explain why some contractors need to fill vacant positions. To find data that might answer that question about a jobs shortage we must dig a little deeper.
The total jobs vs volume picture masks what is going on in the three major sectors, Residential, Nonresidential Buildings and Non-Building Infrastructure. A breakout of jobs and volume growth by sector helps identify the imbalances and helps explain construction worker shortages. It shows the residential sector at a jobs deficit.
7 years 2011-2017 – % Jobs growth vs % Volume growth
- Totals All Construction Jobs +31%, Volume +30%
- Nonres Bldgs Jobs +27%, Volume +19%
- Nonbldg Hvy Engr Jobs +21%, Volume +12%
- Residential Jobs +40%, Volume +54%
The totals show jobs and volume almost equal, data that supports the 2011-2017 totals plot above and what we would expect in a balanced market. But severe imbalances show up by sector. Both nonresidential sectors show jobs growth far outpaced volume growth. Residential stands out with a huge deficit, with jobs way below volume growth.
Just looking at 2017 growth shows the most recent imbalances.
2017 % jobs growth vs % volume growth
- Totals All Construction Jobs +3.4% Volume -0.8%
- Nonres Bldgs Jobs +3.3% Volume -1.6%
- Nonbldg Hvy Engr Jobs +1.7% Volume -6.0%
- Residential Jobs +3.5% Volume +4.2%
Census recently released initial construction spending for 2017, totaling $1.230 trillion, up only 3.8% from 2016. What is somewhat disconcerting is that 2017 construction spending initial reports growth of 3.8% do not even match the total inflation growth of 4.6% for 2017, indicating a -0.8% volume decline. However, as does always occur, I’m expecting upward revisions (estimated +2%) to 2017$ construction spending on 7-1-18. If we don’t get an upward revision, then 2017 will go down as the largest productivity decline since recession. Even if we do get +2% upward revision to 2017$ spending, 2017 volume would be revised up to +1.2% and jobs growth will still exceed volume growth.
Let’s look a little deeper at the data within the sectors. Each chart is set to zero at Jan 2011 so we can see the change from that point, the low point of the recession, until today. At the bottom of each chart is shown a Balance at start. That represents the cumulative surplus or deficit of jobs growth compared to volume growth for the previous 10 years prior to Jan 2011. If there are no changes in productivity, or no surplus or deficit to counteract, then jobs should grow at the same pace as volume.
There are slight differences between the data in the three sector charts and the total construction chart. The sector charts use annual avg data and the totals chart uses actual monthly data.
Nonresidential Buildings and Non-building Infrastructure, over seven years and the most recent three years, show jobs increasing far more rapidly than volume. Nonresidential Buildings started 2011 with a surplus of jobs after the recession, but Infrastructure started 2011 with a substantial deficit of jobs. Only in this last year did Infrastructure jobs reach long-term balance with work volume.
Nonresidential Buildings started 2011 with a 13% surplus of jobs and more than doubled it in the seven years following. I’ve suggested before it could be that a part of this surplus is due to companies hiring to meet revenue growth, and not inflation adjusted volume. Although nonresidential spending actually increased 43%, volume since 2010 has increased only 12%. Since 2010 there has been 30% nonresidential buildings inflation, which adds zero to volume growth and zero need for new jobs. A 43% increase in spending could lead companies to erroneously act to staff up to meet spending, or revenue, more than needed for the 12% volume increase.
This plot for residential work shows from 2011 to the end of 2017, we’ve experienced a 20% growth deficit in jobs. How many residential jobs does this 20% growth deficit represent? From Jan 2011 through Dec 2017, residential jobs increased from approximately 2,000,000 to 2,700,000. So the base on which the % growth increased over that time is calculated on 2,000,000. An additional 20% growth would be a maximum of 400,000 more jobs needed to offset the seven year deficit. But what about the imbalances that existed when we started the period?
During the residential recession from just 2005 through 2010, residential volume declined by 55%, but jobs were reduced by only 38%. For the entire period 2001-2010, total volume of work declined by 14% more than jobs were reduced. Some of the surplus jobs get absorbed into workforce productivity losses and some remain available to increase workload. It’s impossible to tell how much of that labor force would be available to absorb future work, so for purposes of this analysis an estimate of at least 5% seems not unreasonable. That would mean for 2011-2017, instead of a need for an additional 20% more jobs, the need could be reduced by 5% or 100,000 jobs.
This analysis shows a current deficit of 300,000 to 400,000 residential construction jobs. While it does also show nonresidential buildings jobs far exceed the workload and there are more than enough surplus jobs to offset the residential deficit, there would be several questions of how transferable jobs might be between sectors.
- Are there highly technical specialty jobs in Nonresidential Buildings that would not be transferable to Residential?
- What is the incidence of specialty workers engaging in work across sectors? i.e., job is counted in one sector but working in another sector.
- What has been the impact of losing immigrants from the construction workforce?
- Is the ratio of immigrant workers in Residential much higher than Nonresidential?
- Is the pay more attractive in Nonresidential construction?
- What, if any, percentage of the Residential workforce is not being counted? Day labor?
One thing is known for certain, high-rise multifamily residential buildings may often be built by a firm that is classified primarily as a nonresidential commercial builder. Therefore, some jobs that are counted as nonresidential are really residential jobs.
I think most of these would have a more negative impact on Residential jobs. However, there is some possibility that the overall deficit may not be quite as high as available data show (points 2 and 6). And there is always the possibility that we’ve crossed a threshold that has led to new gains in productivity, although to some extent, the stark differences between Residential and Nonresidential Buildings data might counter that proposition.
These two following report references both document that there is a large unaccounted for shadow workforce in construction. This workforce is probably mostly residential.
and this more recent report adds volumes of data on immigrant labor
Unemployment and productivity includes only jobs counted in the official U.S. Census Bureau of Labor Statistics (BLS) jobs report. Both these reports document a large, unaccounted for shadow workforce in construction. By some accounts, 40% or more of the construction workforce in California and Texas are immigrant workers. Immigrants may comprise between 14% and 22% of the total construction workforce. It is not clear how many within that total may or may not be included in the U.S. Census BLS jobs report. However, the totals are significant enough that they would alter some of the results commonly reported.
The best way to see the implications that the available data do show is to look at productivity. The simplest presentation of productivity measures the total volume of work completed divided by the number of workers needed to put the volume of work in place, or $Put-in-Place per worker. In this case, $ spending is adjusted for inflation to get a measure of constant $ volume, and jobs are adjusted for hours worked.
As the Residential jobs deficit increases vs workload, this plot shows that $PIP is increasing. That makes sense. The workload continues to increase and the jobs growth is lagging, so the $PIP per worker goes up. For Nonresidential Buildings, the rate of hiring is exceeding the rate of new volume and therefore the $PIP is declining.
In boom times, residential construction adds between 150,000 and 170,000 jobs per year and has only twice since 1993 added 200,000 jobs per year. In the most recent several years expansion, residential has reached a high of 156,000 jobs in one year but has averaged 130,000 per year over 5 years. So it’s pretty unlikely that we are about to start adding residential construction jobs at a continuous rate of 200,000+ jobs per year.
If residential jobs growth were to increase by 50,000 jobs per year over and above current average growth, it would take 6 to 8 years to wipe out the jobs deficit in residential construction.
This problem is not going away anytime soon.
For more history on jobs growth see Is There a Construction Jobs Shortage?
For more on the imbalances of Res and Nonres jobs see A Harder Pill To Swallow!
For some hypotheses as to why nonresidential imbalances continue to increase see Construction Spending May 2017 – Behind The Headlines
The Producer Price Index (PPI) for material inputs to construction gives us an indication whether costs for material inputs are going up or down. The PPI tracks producers’ cost to produce the product and supply finished products to retailers or contractors. However, that is far from the total cost from the contractor.
A good example is steel. The producer price for steel from the mill might be $750/ton for long beams and columns. The only increases captured at the producer level might be the changes in cost for raw material, energy to manufacture and the producers labor and markup. But the structural steel contractor is then responsible for delivery to shop, detailing, shop fabrication, transport to construction site, load and unload, cranes and welding equipment needed to install, installation crews and finally overhead and profit accounting for at least eight more points of potential cost change. Finally the steel subcontractor must then assess the market conditions, whether tight or favorable to higher profits, to adjust the bid price or selling price. The final cost of steel installed could be $3000/ton.
The PPI for Construction Inputs IS NOT an indicator of construction inflation. It does not represent the selling price, nor does it give any indication of the trend, up or down, of selling price.
In 2009 PPI for inputs was flat but construction inflation, as measured by final cost of buildings, was down 8% to 10%. In 2010, the PPI for construction inputs was up 5.3% but the selling price was flat. Construction inflation, based on several decades of trends, is approximately double consumer inflation. However, from mid-2009 to late 2012, that long-term trend did not hold up. During that period, PPI ranged from 0% to +6.8%, but construction inflation/deflation ranged from -10% to +2.3%, lower than PPI for all four years, something which seldom occurs. Construction inflation/deflation was primarily influenced by depressed bid margins, which had been driven lower due to diminished work volume.
The following table shows the differences between the PPI Inputs from 2011 to 2017 and the actual inflation for the major construction sectors. This table shows clearly that PPI Inputs and Inflation not only can vary widely but also may not even move in the same direction.
The PPI tables published by the Bureau of Labor Statistics do include several line items that represent Final Trades Cost or Whole Building Cost. Those PPI items don’t give us any details about the producer price or retail price of the materials used, but they do include all of the contractors costs incurred, including markups, on the final product delivered to the consumer, the building owner. I would note however that those line items in the PPI almost always show lower inflation than final Selling Price inflation indices developed separately from the PPI. Follow this link to table of inflation values which includes the PPI final cost for trades and buildings.
Construction Managers responsible for working with the client to manage project cost, part of which includes preparing a full building cost estimate, should not rely on PPI values as an indication of inflation. Selling price inflation indices are more appropriate indices to use to adjust project costs.
It is always important to carry the proper value for cost inflation. Whether adjusting the cost of a recently built project to predict what it might cost to build a similar project in the near future, or answering a client question, “What will it cost if I delay my project start?”, the proper value for inflation (which differs by sector and differs every year) can make or break your estimate.
Contractors responsible for a particular building material, although the PPI Inputs will not track market conditions sale prices from producer to the contractor, can get some indication of whether material prices are rising or falling. Contractors should be aware of PPI trends to interpret the data throughout the year.
PPI TRENDS HELP TO INTERPRET THE DATA
- 60% of the time, the highest increase of the year in the PPI is in the first quarter.
- 75% of the time, two-thirds of the annual increase occured in the first six months.
- In 25 years, the highest increase for the year has never been in Q4.
- 60% of the time, the lowest increase of the year in the PPI is in Q4.
- 50% of the time, Q4 is negative, yet in 25 years the PPI was negative only four times.
So when you see monthly news reports from the industry exclaiming, “PPI is up strong for Q1” or “PPI dropped in the 4th Qtr.” it helps to have an understanding that this may not be unusual at all and instead may be the norm.
I’ve read several articles recently describing, Why 2018 could be a boom year for construction spending. Several reasons being given to support a potential boom, when we look a little deeper, actually may not be good indicators at all to predict the trend for a strong year in 2018. In my Fall Forecast I do predict 8% growth in 2018 construction spending, but let’s take a look at what gets us there.
Data that doesn’t tell us much about the future trend in construction spending.
Jobs increased in 2017 up 35% over 2016. In 2017 construction added 210,000 jobs, growth of 35% over 2016, but in 2016 jobs growth decreased by 55% from 2015. 2016 growth was the lowest in 5yrs. In 2013 jobs growth increased by 85% and in 2014 by 71%, but in 2015 and 2016 jobs growth slowed. Yet 2015 was one of the best construction spending years on record. And in 2017, jobs growth increased over 2016 but spending growth slowed. The direction of jobs growth is not an indicator of the future trend in spending.
Nov 2017 spending was higher than expected, and YTD is up 4.2%. This is a slippery slope. Actually we won’t know any particular monthly spending until several months after the initial release. All monthly spending values are subject to revision three times after initial release. However, residential spending is higher than expected for the YTD and nonresidential buildings spending is below expectations for YTD. But more importantly, construction spending normally fluctuates. For instance, in the 2nd half of 2015, spending was down 4 out of 6 months, lower than forecast three times, posting a total decline of 2.5%. Yet 2015 finished the year up 10%. Then, in the 1st half of 2016, spending was up 5 out of 6 months, far exceeding forecast 3 times, posting a total increase of 6% in 6 months. 2016 finished up 6.5% for the year. Neither half performance predicted final results within the year or the forecast for the future. Furthermore, after inflation, 2017 spending is currently flat with 2016$, so all we are seeing in the 4.5% spending growth in 2017 is inflation. Current and past spending is not an indicator of the future trend in spending.
What data does give an indication of the future trend in construction spending?
Construction Starts (Dodge Data & Analytics DDA), Backlog, Cash flow from Starts, the Architectural Billings Index (ABI), The Dodge Momentum Index (DMI) and New Residential Permits and # of Units Construction Starts all give an indication of the future trend in spending.
Residential Permits and # of new units started gives a fairly immediate indication of residential activity. The ABI gives an indication of nonresidential building to start construction about 9 months out and the DMI about 12 months out. The ABI and DMI give some indication as to whether future starts will increase or decrease. DDA Starts give an indication of the percent growth in future work, but not when the spending will occur, so cannot be used directly to predict spending. A good example is the new start for airport terminal work recorded as a new start in 2017 at $4 billion. But it may take 5 or 6 years to complete that $4 billion project and only cash flow will show the impact on spending.
Care must be taken to use Starts data properly. It is regularly misinterpreted in common industry forecasting articles. Starts dollar values represent a survey of about 50% to 60% of industry activity, therefore Starts dollar values cannot ever be used directly to indicate spending. Also, Starts do not directly indicate changes in spending per month or per year. Only by including an expected duration for all Starts and producing a forecast Cash Flow from Starts data can the expected pattern of spending be developed. Finally, it is the rate of change in Starts Cash Flows that gives an indication of the rate of change in spending.
Cash flow is the best indicator of how much and when spending will occur. Cash flow from DDA starts gives a prediction over time of how spending from each month of previous starts will occur from all projects in backlog. Cash flow totals of all jobs can vary considerably from month to month, are not only driven by new jobs starting but also old jobs ending, and are heavily dependent on the type, size and duration of jobs.
Of course, data highlighting demand, occupancy rates, labor and material trends and other economic factors affecting construction trends all weigh into determining future spending expectations. However, for nonresidential buildings and infrastructure approximately 75% to 80% of all spending within the year comes from starting backlog. Most economic factors that will have an affect on spending within the year are already captured in projects that have started and are in current backlog. On the other hand, new residential starts are more important. 70% of all residential spending in the year comes from new starts.
The following trend predictions are developed based on using this outline.