FMI Index: Nonresidential construction unhampered by labor pinch, rising costs

Sources: FMI, Raleigh, N.C.; CP staff

The nonresidential construction sector continues to grow at a solid pace, reflecting 18 months of improving activity despite rising construction materials and labor costs, along with a slight decline in regional economies where most activity is taking place, according to management consultant FMI’s Nonresidential Construction Index Report (NRCI) for Q2 2015.

The Index reflects the observations and sentiments of a sampling of construction industry executives nationwide, convened as FMI panelists. The NRCI for Q2 2015 came in at 64.9, essentially unchanged from Q1’s 64.8 reading, painting a mixed picture of the current state of the nonresidential construction sector. On one hand, the NRCI Q2 component for the overall economy dropped 1.9 points to 76.9 points. While down from its peak of 81.1 a year ago, the component still indicates that panelists remain bullish about the economy. Similarly, indicators for the economies where panelists do the most business stood at 76.7, suggesting continued growth on a broad scale.

Highlights from the NRCI Q2 point to diverse forces driving the industry toward mid-year: a) panelists’ business is now improving with the overall economy, indicating deeper, more sustainable growth; b) the nonresidential building construction market where panelists do business is up 1.9 points to a solid 76.4, in line with overall economic growth; c) the measure of expected change in backlog improved 3.2 points in Q2 from Q1 to reach 71.7, while current backlog remains at a solid 10 months; and, d) the index component for construction materials and labor costs dropped 1 and 5.2 points, respectively, to 21.4 and 12.5, price increases triggering the downward movements.

“While the current and future outlook for nonresidential construction appears stable if relatively unchanged, things could become more dynamic,” says FMI Research Consultant Phil Warner. “In fact, improvements in profitability would happen faster if costs of materials and labor weren’t rising faster than construction pricing. There is also increasing evidence that more contractors are capacity-limited.”

On another NRCI component, only 17 percent of panelists have more than 50 percent of their projects in the Green Construction category. Many note that green construction is now mainstream and considered more the norm than a fad. However, few owners are willing to pay more to build “green.” In 2008, NRCI panelists predicted that green construction would grow from just 13 percent of their then-current backlog to 38 percent in five years. A little over seven years later, panelists report that green construction makes up just 28.6 percent of their backlogs on average.

Panelist responses surrounding current and future trends for construction project delivery methods suggest a return to more collaborative methods. This indicates a shift away from the more traditional approach of design-bid-build popular during the recession as a way to ensure the lowest initial price for projects. However, the expected rate of change over the next three years suggests a slow transition from design-bid-build and CM at-Risk to more design-build and the newer concept of Integrated Project Delivery. The FMI Nonresidential Construction Index Report (NRCI) for Q2 2015 report can be accessed here.