With the first two months of 2007 nearly behind us, we have a good sense of what the coming year will bring. For the construction industry, it promises to be another busy one, with many projects across a range of diverse sectors in the ground throughout New England and the rest of the country, and many more in pre-construction stages.
It should exciting, and while it will present distinct challenges to builders, it will offer considerable opportunities and rewards to companies that are best positioned to meet those challenges.
We expect to see a continuation of the 2006 building boom in the health care, education and hospitality segments. A report issued at the end of last year by Reed Construction Data found that nationally, health care construction spending is rising at an accelerated rate.
The overall national surge is especially seen in patient care facilities such as hospital expansions and nursing homes.
New England saw a 77-percent increase in new hospital projects through October 2006 as compared with the same period in 2005; that trend is expected to continue as hospitals continue to attract new sources of capital.
In the education sector, construction starts grew by nearly 18 percent in the first three-quarters of 2006. Spending, especially on middle and high schools, is expected to continue to grow through 2008. A recent RCD forecast anticipated a nearly 10-percent growth in education construction spending in 2007.
Hotel builders entered 2007 riding a crest of feverish activity. RCD notes that the national hotel building boom is now peaking and will remain at the high 2006 levels throughout the next year.
The report predicts a 22-percent increase in job-site construction spending in this sector in 2007.
The sector’s momentum persists locally as well: Last year, hotel construction spending was up 12 percent over the previous year in New England, with the high level of activity expected to continue in coming months.
The bullish expectations are not to suggest that 2007 will not pose challenges to builders as well. Cost increases for steel and other materials continue to be a concern for construction contractors. But the good news is that there are indications that the volatile materials market, which at this time last year was the subject of countless industry headlines, may be stabilizing. We are no longer seeing materials price hikes every other month. But pricing nonetheless remains an area that builders ignore at their own great risk.
Contractors in 2007 will need to continue to take steps to manage the risk posed by material pricing volatility. Escalation clauses in contracts can provide a buffer for price uncertainties. Estimators need to work closely with in-house purchasers to gauge the direction of the market and get ahead of the pricing cycles.
At Suffolk Construction, for example, we make extensive use of industry analysis by planners to help provide realistic cost estimates and accurate projections of the amount of materials needed. Our planning systems allow us to purchase steel, for instance, in large enough quantities to enjoy bulk rates. That type of analysis, which we then act upon, will continue to be a vital part of our pre-construction strategies in the coming year.
Another potential challenge that promises to be just as significant, at least in our region, is subcontractor availability: Are there enough subcontractors around to meet the demand? This is a function of the huge volume of construction work on the horizon.
The issue is already prevalent in Florida and Las Vegas, and it may be felt in Rhode Island and the rest of New England very soon. With institutional and education markets remaining so busy, and with the commercial and residential sectors also strong, builders will have to ensure that the supply of subcontractors meets the demand for them in 2007.
Add the fact that the community of subcontractors that can do large scale-work such as hotels and hospitals is small, and the expected result should surprise no one: Builders will have to pay higher premiums for subcontractors.
With subcontractors confident in the high demand for their work, their quotes may be higher, and general contractors will have to hire them quickly before their dance cards fill up.
Busy contractors may be forced just to ride out the cycle, paying the higher premiums and getting their projects built. But as they do so, they will have to be even more mindful of, and attentive to, quality and productivity.
As subcontractors hire less-experienced laborers, so that they themselves can meet the increased work load they are experiencing, the quality and productivity of work can suffer.
The companies best positioned to thrive in 2007 will be those able to take advantage of the opportunities presented by the building boom while at the same time managing and overcoming the challenges facing the industry.
Diversification across various sectors enables builders to take advantage of surges in such areas as health care, education and hospitality. At the same time, the successful builder will need the ability the help clients combat cost escalation brought on by ongoing materials volatility and subcontractor shortages. Contractors will need strong pre-construction teams, with specialized professionals in their estimating and purchasing offices, to understand and stay ahead of the market, and enough stability to ride out the cycle of subcontractor availability issues.
Being able to manage these risks, while being prepared to capitalize on the opportunities presented by the market, will separate the most successful builders from the rest of the pack.
Scott Menard heads Suffolk Construction Co.’s Preconstruction Services Group, which assists clients by managing items around design, constructability, permitting, estimating and logistics.
