2009 Industry Forecast
Chaotic financial markets present the most difficult challenge in decades. With each new wave of crisis, the economy lurches from bad to worse. The effectiveness of federal government action to staunch the bleeding, though ambitious and rapid, remains to be seen.
Construction economists predict a bleak year, but not for all sectors. Public funding underpinned much construction activity in recent years, but FY 2008 appropriations show an emphasis on transportation work. Military construction continues to receive increased support. The financial turmoil is badly hurting states and municipalities. It is very hard to obtain short-term funding to manage cash flow, and the cost of bond financing has increased.
ENR predicts that its Building Cost Index will decline 0.5% in 2009 as steel, lumber and cement prices all fall. Structural steel prices peaked in the third quarter of last year at $1,094 a ton. However, rapid decline in demand pushed structural steel prices back 15% last quarter and a further decline of 20% is expected before firming in the second quarter of the year. Production cutbacks are expected to offset reduced demand for other construction materials, maintaining prices at current levels, but prices could fall further if the recession deepens.
Most 2009 labor agreements are already in place as part of multi-year collective bargaining agreements and will continue to increase at pre-negotiated rates. Workers in multiyear contracts have negotiated a 4.7% increase for 2009 on average. With unemployment soaring to double what it was a year ago, union locals entering into new negotiations this year are unlikely to match those gains.
We already see many more bidders on jobs at both General Contractor and Subcontract levels. This is partly caused by contractors bidding projects outside of their normal expertise in terms of building types, as they attempt to shift their business focus away from the weakest market sectors.
Recent bids have come in 5% below the cost estimate. This is a result of increased competition at all levels. General Contractors and Subcontractors are lowering their margins to compete and win jobs. While this is good news on bid day, it can be bad news as construction progresses. Desirable margins will still be sought through a more aggressive approach to change orders and claims. We anticipate a busy year for our claims management and scheduling staff as owners and architects seek help in defending these areas.
