BY KEN SIMONSON, CHIEF ECONOMIST
AGC OF AMERICA
Contractors have generally low expectations about the volume of work available to bid on in 2021, as project postponements and cancellations proliferate. Meanwhile, margins are being squeezed amid intensifying competition and sharply rising materials costs.
The gloomy outlook dominated the responses of the more than 1,300 contractors who participated in the 2021 AGC-Sage Construction Hiring and Business Outlook Survey. For 13 out of 16 project categories, more respondents replied that they expect the dollar volume of projects available to bid on in 2021 to shrink than expect it to expand. The only segments about which sentiment was more positive than negative were healthcare, such as clinics, testing and screening facilities and medical labs; warehouses; and water and sewer construction. Bearish outlooks ranged from a small net negative for hospital construction to overwhelmingly negative for retail, lodging and private office construction.
More than three out of four respondents reported that at least one project had been postponed or cancelled since the pandemic began, including many projects scheduled to begin in the first half of 2021. In contrast, only one-quarter of the contractors reported winning new or additional work.
In addition to causing widespread postponements, the pandemic has driven up costs and completion times. Nearly two-thirds of respondents reported that projects had taken longer than anticipated and more than half said costs had been higher than anticipated.
Despite these challenges, contractors have been reluctant — or unable — to raise prices. Only one-third of respondents reported putting higher prices into bids or new contracts.
Data from the Bureau of Labor Statistics confirms that contractors are holding the line on pricing, even as the cost climbs for many of their purchases. The producer price index for new nonresidential building construction, which measures the price contractors say they would charge to put up new buildings, inched up just 0.1 percent from April to December 2020. Meanwhile, an index that combines the cost of materials and services used in new nonresidential construction jumped 8.1 percent. This growing disparity represents a significant threat to contractors’ profitability, particularly when there is a diminishing number of opportunities to make up for past losses.
Not all firms are experiencing difficulties. The number of respondents to AGC’s survey who reported that business had already matched or exceeded year-earlier levels was almost identical to the number who said they expected it would take more than six months to reach that mark. And 35 percent of respondents reported they expect their firm’s headcount would increase in 2021, outnumbering the 24 percent who said they expect headcount to decline.
There are significant differences in the outlook by region. Contractors in the South are more optimistic — or less pessimistic — than their counterparts nationally regarding all 16 project types. Conversely, contractors in the Northeast have negative expectations for all categories — more negative — than the national outlook in all cases.
Responses came from every state, with enough participation from half the states that AGC was able to break out those responses. The most optimistic contractors were in Alabama, closely followed by Oregon and Texas. In contrast, respondents from Alaska, New York and Pennsylvania had more pessimistic views than the full panel regarding all project types. At this early stage of getting people vaccinated and reopening the economy, it appears 2021 will be a challenging year for most contractors. But there will be a range of opportunities that vary greatly by location and project type.