Highlights from the 2022 Deloitte Construction Report

Rick Landi
Mar 21, 2022 7:18:11 AM

The Construction Industry is preparing for another strong year. Total construction spending continues to remain strong, reaching record-high levels in July 2021. 2021 revenue growth for the industry is projected to be around 6.9% and will likely accelerate further in 2022.

The Infrastructure Investment and Jobs Act (IIJA), with investments across health care, public safety, and other public infrastructure, is expected to bode well for Engineering & Construction firms and is likely to accelerate recovery across the non-residential segment.

Several factors positioning industry for strong growth amid headwinds

Total construction spending recovered and peaked at $1.57 trillion in July 2021, a record high for the series and 12% higher than 2019 average levels. The Associated Builders and Contractors’ Construction Confidence Index (CCI), which had plummeted to 38.1 in March 2020, recovered and hovered at 60+ levels during the first half of 2021, signaling consistent expansion in sales. In a recent survey, 91% of E&C respondents characterize the business outlook for their industry as somewhat or very positive, 23% higher than last year. Driving this business confidence is the expected strong performance of the residential segment and growth from the non-residential segment due to the $1 trillion IIJA.

The non-residential segment spending growth remained weak for much of 2021. Spending across educational, office, transportation, health care, and commercial facilities observed the largest year-over-year (YoY) decline in July 2021. Overall, spending levels in July were 11% lower than pre-pandemic levels (February 2020). Weakness in spending calls for additional funding for infrastructure projects, and investments through the recently approved IIJA might provide that.

Per the recently approved IIJA, $550 billion in new federal investments would be made to upgrade America’s infrastructure over five years, including $110 billion on roads, bridges, and major infrastructure projects, $66 billion on passenger and freight rail, $55 billion on water infrastructure, $40 billion on bridge repair, and $39 billion in public transit infrastructure. In addition to infrastructure work, E&C firms are likely to see a further mix of projects coming through with data centers, warehousing, and even health care likely to observe more activity than offices or commercial segments. The bill would provide $65 billion to expand high-speed internet access; $110 billion for roads, bridges, and other projects; and $25 billion for airports.

Supply chain disruption and sourcing challenges likely to affect project delivery and margins

During the second half of 2020, the pandemic exposed the vulnerabilities of global supply chains. Supply issues were expected to stabilize moving into 2021 as both global productions resumed and supplies normalized. However, pandemic-induced supply shortages persist, affecting key materials such as lumber, paint and coatings, aluminum, steel, and cement, among others. These disruptions are due to multiple factors, the first being pent-up demand for key materials as global construction activity resumed. For example, the Aluminum Association reported that aluminum demand in the United States and Canada totaled 8.8 billion pounds through the first four months of 2021, increasing from 2.1 billion pounds in the first four months of 2020 when the pandemic was beginning. Further exacerbating the situation are disruptions in the movement of materials due to increased congestion and delays at major ports such as Yantian and Ningbo in China. The delays are also leading to a spike in freight costs, which are on average three to five times higher than last year’s level.

Contractors should be proactive in managing processes and operations that contribute to margins and profitability, adding efficiencies and optimization where possible. The integration of digital technologies into the supply chain could help.

Connected construction to help the industry unlock new value streams

The industry landscape is rapidly evolving as engineering firms, contractors, and participants across the value chain realize the benefits and increasingly deploy connected construction technologies. These technologies can help bring assets, people, processes, and job sites onto one platform, making everyone and everything work smarter, reduce downtime, optimize asset utilization and efficiency, and gain greater visibility into operations.

At the core of connected construction are emerging technologies and the data and advanced analytics that these new capabilities can enable.

In 2022, connected construction will likely be a catch-all for major digital investments to connect, integrate, and automate operations and bring the entire value chain onto a secure, intelligent infrastructure. Growing digital and technology capability requirements from the commercial construction segment are also likely to push adoption. Similar to last year, building connected capabilities will likely be a priority on CIOs’ growth agenda as they look to enhance their ability to make data-driven decisions, better control costs and schedule variances, and ensure timely project delivery across multiple sites.

M&A to help build broad-based capabilities

In a recent Deloitte survey, 41% of E&C respondents indicated plans to diversify their businesses to reduce exposure to underperforming segments. Yet another trend consistent with the 2021 outlook is a renewed focus on nontraditional M&A approaches, such as forming alliances with technology vendors via an ecosystem approach. Developing or becoming part of such an ecosystem can help E&C companies gain access to new capabilities and turnkey solutions faster, without the need for up-front investments. As we move into 2022, the industry could see another strong year from traditional M&As as well as ecosystems and PPPs.

Firms continuing to grapple with labor shortages as workforce landscape evolves

Most E&C contractors are eager to hire, as evidenced by job openings across the industry hitting a two-year high. However, only 4,000 net payroll additions during the first eight months of 2021 may signal significant issues in getting people through the door. Labor shortages could reach crisis proportions, as the current situation is expected to continue through 2022.

Another factor compounding labor shortages is a lack of qualified candidates. As the industry is creating new roles that are digitally oriented, companies are seeking data engineers, data scientists, coders, and developers. But attracting talent in these roles is a challenge as there is strong competition with technology companies.

Poised to accelerate

The industry has made a significant recovery from a recession on the back of a robust residential market in 2021, but it has also experienced multiple headwinds that are expected to persist in 2022. Labor shortages and supply chain disruptions have hit the industry hard, leading to project delays, rising costs, and further margin erosion. Simultaneously, digital technology continues to make its way into the industry, making it important for E&C firms to focus on developing data and analytics as a core competency. M&A is likely to provide some much-needed impetus to acquire, develop, and integrate these capabilities. Another aspect to consider is talent management strategies: finding the right people and training and reskilling them to enable the work and workplaces of tomorrow. 2022 is expected to be another rewarding but challenging year, and the industry looks to be poised to capture growth opportunities.


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