The national elections are finally over and President Obama has been re-elected. That’s the headline, but there is a subheading too. The electorate has chosen to keep most of the Senate and House in place; so after all the election rigamarole, we are pretty much where we were before the election. Now what? To echo what many pundits and heads of state were saying the day after the election, it is time to get back to work. The FMI Nonresidential 
Construction Index (NRCI) panelists will tell us that they have been working all along and working hard to get more work. Jobs, projects and project funding—that has been the focus of the construction industry since the recession—and, according to our latest reading for the NRCI, the needle hasn’t moved much off center since the beginning of the recession.
Despite all of the challenges, there is slow progress, and the NRCI has been in positive territory since the first quarter of 2010. On average, the NRCI has been just a bit above average for the past two years and now registers 55.5, only 0.7 points higher than last quarter, after flirting near 60 earlier in the year. Nonetheless, anytime one talks in terms of averages, it is important to note that average is not that good, and there are quite a few businesses operating with below-average backlogs and higher delays and cancellations for projects in their markets. Concerned that we might be losing some of the momentum we gained earlier in the 2012, we returned to the questions about delays and cancellations without limiting the question to just owner financial reasons.
The good news is that project delays and cancellations are unchanged since we asked about them in the fourth quarter in 2011, but they continue to run at rates about three times what panelists would consider normal in times before the recession. Lack of project funding still leads the list of reasons for project delays, but market uncertainty is a close second. Regulatory delays and changes in project scope were lesser reasons but still significant. In a related question about regulations, we asked about panelists’ experience with the Office of Federal Contract Compliance Programs (OFCCP) and the agency’s latest push to assure that contractors working on government projects were in compliance with affirmative action and equal opportunity regulations. While only 20 percent of panelists have had recent experience with the OFCCP, 59 percent of those panelists said the interaction was rigorous.
Opportunities are out there, but sometimes they are harder to find. Thirty percent of panelists this quarter said owners have downscaled projects, and 22 percent are seeing more projects being proposed in phases with no guarantee that the next phases will be done. The growth in energy-related construction has helped some companies find business, but 45 percent of panelists are working in regions where there is no energy boom. Where are the next opportunities coming from? Panelists cited power, manufacturing and industrial as their best bets in the near term. Health care construction was also cited frequently for projects ranging from clinics and health care manufacturing to hospitals. With the amount of competition out there, not everyone wanted to answer that question, and some are just not sure where they will find their next opportunities.
And then there is the aftermath of Superstorm Sandy to deal with in the Northeast. The citizens of the hardest-hit areas of New Jersey and New York are still reeling and trying to recover some sense of normalcy before a thorough assessment of the damage can be made. It will take many billions of dollars to recover, and much of that will need solutions from the construction industry for new and repaired housing, communications, transportation work, and inspection and rehabilitation for flooded buildings. After the recovery, there will be a great deal of talk about how to reduce the damage and impact to lives the next time. It is too soon to tell how much this will affect the markets for next year.
NRCI Fourth Quarter 2012 Highlights
Overall economy — The NRCI index component for the overall economy rose 5.7 points in the fourth quarter to 53.8. A positive move but 19.1 points lower than the high for the year in the second quarter.
Overall economy where panelists do business — Closer to home, the index component rose for local markets where panelists do business, but at 56.4 in the fourth quarter of 2012, it is still 15.2 points lower than the results in Q2.
Panelists’ construction business — Improvements in the outlook for the broader economy have not been enough to pull up the component for panelists’ construction business, which dropped 1.6 to 58.3 in the fourth quarter of 2012.
Nonresidential building construction market where panelists do business — At 53.8, there was no change in this component from last quarter.
Change in backlog — The drop of 1.6 in the expected change in backlog matches panelists’ expectations for their overall business. The component now stands at 56.8.
Cost of materials — The cost of materials for construction continues to rise as the component dropped 9.2 points to 23.5 this quarter. (Note: As labor and materials costs go up, the index components go down.)
Cost of labor — At 31.2, the cost of labor is essentially unchanged for the last three quarters of 2012. (Note: As labor and materials costs go up, the index components go down.)
Productivity — The productivity index slipped 0.8 points, as improvements seen in the first two years of the recession are now harder to find.
Delays and cancellations — We last asked panelists about delays and cancellations in the fourth quarter of 2011. The results for the fourth quarter of 2012 show essentially no change. Lack of funding is still the top reason for project delays, but uncertainty in the economy/markets runs a close second, followed by owner budget cutbacks.
Project size — Related to budget cutbacks, compared with five years ago, panelists are experiencing some downsizing of projects in their markets. Thirty-seven percent said, “Yes. Owners have downscaled projects,” and 22 percent said, “More projects are being proposed in phases.”
Energy-Related Construction — As the exploration and mining of shale formations for natural gas and oil and other energy-related projects for wind and solar represent the closest thing to a boom in construction, we asked if it has helped to pick up construction in other sectors of nonresidential construction. Forty-five percent of panelists said, “No. There is no boom in energy projects in the regions we work in.” However, 12 percent have seen more activity in related industrial building, and 21 percent are seeing more activity in commercial construction where there is more energy construction.
Market Opportunities — Looking for pockets of economic improvement, we asked panelists in the fourth quarter of 2012 what their biggest market opportunities for the next six months were. From a wide variety of responses, the two general categories receiving the most mentions were markets for energy/industrial/manufacturing and health care-related projects from assisted living to hospitals.
Office of Federal Contract Compliance Programs (OFCCP) — As more contractors compete for federal contracts, contractors have a greater chance of meeting the agency representatives regulating affirmative action and equal opportunity regulations. We asked panelists what their experience has been with OFCCP compliance efforts and audits. Only 20 percent have had recent experience with the OFCCP compliance efforts. Of that number, 59 percent would characterize the interaction as rigorous and/or aggressive regarding expectations and requirements of the OFCCP. Comments from panelists on this issue ranged from “not a major issue” to an “Egregious overreach, requiring compliance on projects for which the regulations are not intended or applicable.”
