Reasons for Optimism—and Caution—in 2019

By Ken Simonson
Contractors are showing signs of optimism about increasing volumes of work in 2019—and with good reason. But there are also 3 reasons to be cautious.

On the positive side, the economy continues to expand, employment is steadily rising in nearly all states, and business and consumer confidence remains high. These indicators all suggest that demand for construction will not slacken, at least early in the year.

Construction employment has been increasing even faster than total nonfarm payroll employment: nearly 3 times as fast. Between October 2017 and October 2018, construction employment jumped 4.9%, compared to 1.7% for the overall economy. That’s a strong vote of confidence in the outlook for continued demand for projects. Despite this rapid increase in headcount, job openings in construction have been setting records in recent months, suggesting that contractors would hire even more workers if they could.

While “help wanted” signs do imply a backlog of projects, the inability to fill those vacant positions may pose the biggest problem contractors face in 2019. The shortage of qualified workers appears likely to get even worse, as the pool of unemployed jobseekers with recent construction experience has dropped to some of the lowest levels in the history of the data, which stretches back to 2000.

A second challenge for contractors is guessing how to price projects. In 2018, the cost of materials and services used in all types of construction accelerated significantly—much more than the price contractors charged to erect new buildings. The producer price index for new nonresidential buildings, a measure of what a fixed group of contractors say they would charge to construct the same set of buildings each month, increased 5% from October 2017 to October 2018. Meanwhile, the index for inputs to construction (materials used in every type of project, items consumed during construction such as diesel fuel and services) jumped 6.6% over the same interval.

Prices soared in part because of tariffs the Trump administration imposed during the year on steel, aluminum, Canadian lumber, and thousands of Chinese products, many of which are used in construction. The tariffs largely took contractors by surprise, leaving them no chance to recoup higher costs on projects they had already committed to building at a fixed price. Buying from U.S. producers offered no protection, since they often raise their prices in lockstep with any tariff increases.

In 2018, some contractors may have had materials on hand or were able to buy them before tariffs took effect. This year, the full impact of the earlier tariffs will hit, along with possible new tariffs if the U.S. and its trading partners are unable to reach agreements to end them.

The third worry is less severe at this point but may be felt as the year wears on: interest rate increases. The Federal Reserve is widely expected to continuing raising its short-term interest rate target gradually but steadily. Meanwhile, long-term rates also appear likely to rise, as the federal deficit expands rapidly. These increases may cut into the ability of home buyers, developers and state and local government bond issuers to finance houses, commercial projects and infrastructure.

Despite these risks to further growth, most contractors should be able to find additional projects to bid on. All they need to do is find a way to price their work profitably and find the workers to execute it.

Kenneth D. Simonson is the Chief Economist for the Associated General Contractors of America. Originally published at www.constructormagazine.com. Reprinted with permission from Constructor, a publication of the Associated General Contractors of America. Mr. Simonson has more than 40 years of experience analyzing, advocating, and communicating about economic and tax issues.

Keep Calm, Stay Focused, and Get Ahead of the Next Downturn

2018 marked another strong and dynamic year for the North American built environment, with total U.S. engineering and construction (E&C) spending growth expected to finish at 5%, the same as in the previous year.

By Chris Daum
Through 2019, FMI expects E&C spending to continue to grow at an anticipated 3% annual rate, with mostly positive, albeit moderately decelerating, growth rates across the residential, nonresidential buildings, and nonresidential structures market sectors.

The Architecture Billings Index—which typically leads relevant construction activity by 9 to 12 months—paints a similarly upbeat picture. According to latest readings, contractors will continue to have robust backlogs during the coming months.

Mergers and acquisitions (M&A) will likely remain strong this year as well, following an active year in 2018 across the North American built environment, which was shaped by over 400 closed or announced transactions, a 33% increase from the number of deals closed or announced in 2017. Deal flow in 2018 was primarily defined by midsized or smaller strategic deals, as opposed to larger $1 billion deals we have seen in recent years, and was spread across all subsectors of the broader built environment.

Several factors contributed to this active market, including activity from private equity firms (both as buyers and sellers), public companies looking for growth (including newly public companies), and significant interest in specific sectors like building and energy services. It should be noted, however, that a major driver of M&A activity in the industry also related (and still does) to the demographic need for owner succession due to retiring baby boomers.

In 2019 and beyond, we expect to see buyers be more cautious with their acquisition activity. Not that the activity will cease, but firms will probably be more selective about where they place their bets given where we are in the current economic cycle, and because many buyers are still integrating the companies they acquired during the past few years. Along with traditional mergers and acquisitions, we’re also seeing increased interest in employee stock ownership plans (ESOPs) as an alternative exit strategy to selling an E&C business. This change in sentiment tells us that, as more owners evaluate their options, the tax-advantaged value creation afforded by the ESOP can be a great choice for many E&C companies grappling with ownership transitions.

And then there’s all the buzz around construction tech startups that are set to transform the E&C space. Over the last decade, more than $10 billion has been allocated to funding construction technology. Most of that money came through early-stage venture capital deals. Brick & Mortar Ventures, for example, was among the first venture investors focused exclusively on early stage A/E/C technology firms and has made over 22 investments to date.

As construction technology companies mature, larger acquirers are stepping in and making full (or at least majority) acquisitions. These acquisitions are being driven by both strategic and financial (e.g., private equity) acquirers. For example, strategic acquirers are making significant construction tech investments for various key reasons, including talent acquisition. Leveraging acquisitions to acquire and build talent can be a very efficient alternative to internal hiring and development practices. Trimble’s $1.2 billion acquisition of Viewpoint, for instance, gave the former a leading construction management solution and a team of over 700 experienced individuals capable of driving future business growth.

While many of today’s construction tech startups may be in growth mode right now, E&C is an unpredictable sector. So, where venture capital firms may be involved with it during the “boom” times, the real test comes when E&C startups must maintain growth during a downturn. That’s where the rubber meets the road, and it’s a scenario we could all be experiencing sometime in the next 12 to 24 months.

Preparing for the Next Downturn: Lessons Learned From the Great Recession

The E&C industry has endured seismic shifts during the past decade and is still going strong in 2019.

Rumblings about a recession on the horizon are starting to make company leaders a bit nervous, but many are just too busy keeping up with current work to start thinking about contingency planning. In fact, the constrained labor situation, coupled with material increases, compressed project schedules, and ongoing margin compression, are all creating more risk for E&C firms today—and right when we find ourselves at the top of the market. As we like to say, “Contractors don’t starve to death; they die from gluttony. They get too much work, too fast, with inadequate resources, and then they get into financial trouble and run out of cash.”

Now is the time to get proactive with conversations and planning around lessons learned from the last downturn and “recession-proof” your company. While the last recession was historic in scale and duration, the next downturn will likely look very different. Still, through good preparation, companies can take the lessons they (or their predecessors) learned from the last recession and use them to avoid repeating any costly mistakes. Following are 7 key lessons from FMI’s Senior Consultants and Directors that all E&C firms can learn from:

1. Don’t wait too long to make any hard decisions you have been deferring. This might be a marginal performer you’ve been keeping, an underperforming office or division that has been limping along, or anything else you’ve been unwilling to pull the trigger on. During the last recession, these types of issues plagued E&C companies for far too long. Leadership that is slow to react and respond can make or break a company.
2. Find your own sweet spot and don’t just follow the herd. Be picky and don’t chase every project or every owner. Know what your core competencies are and with whom you like to work. Also, don’t just be a market follower, especially if you are trailing behind others in markets where your company has little or no expertise. If you’re following the crowd, you’re going to be a year behind the latest movements.
3. Work on the new, envisioned future and set the strategy for post-recession success. Be clear on organizational purpose and values during this exercise; they will be tested. Many of today’s leaders are in constant firefighting mode and not focusing on the big picture. Living in a reactive mode and not being proactive and taking charge of shaping your own destiny and future can become your biggest detriments.
4. Get a grasp on “incremental economics” like revenue, margin, and overhead. A good business doesn’t turn on its head in a bad market. A competitive landscape has transformed standard estimating procedures into a game of marksmanship. Understanding the total costs for each project and how these costs break down is the first step in knowing where and how you can improve profit margins. Too many E&C firms lack true knowledge of what it costs them to both do and pursue work. In a recession, the ability to produce as inexpensively as possible is the key differentiator. If you know your costs for any specific scope of work (i.e., historical costs), you can proactively reduce or raise your prices according to market conditions.
5. Maintain a healthy balance sheet (i.e., cash and working capital) in the context of growth plans.
   Conduct a risk analysis on all existing projects slated to complete more than 6 months out. Identify high-risk projects and how each will be staffed to take to project completion. Leverage
   and utilize a multiskilled workforce: In-house, self-perform capabilities can mean a difference on margins, time and manpower, while all-around adaptability can make a firm indispensable to satisfied clients.
6. Get positioned in your market (and in the heads of your clients)—early. The game of selling work and interacting with clients has changed quite a bit for many E&C companies. These days, early plans allow for the most flexibility. Look particularly close at segments that are likely to do well in a recession. Are you winning the size and type of work that will allow you to quickly expand in the event of a market change? Do you truly understand your clients’ mindsets? Do you get their way of thinking and what’s important to them? While client relationships won’t guarantee you work, they do still matter and are critical when the market slows down.
7. Get more feet on the street. It’s time to give sellers/doers the skills they need to be confident calling on customers. Have them build a list of contacts that they want to keep in touch with. Then, create a training program to educate your people on “how to behave in a recession”—estimators with project selection, field managers with scope management, PMs with cash management, etc. Client interaction across all company levels will increase your presence with clients, give you an inside track, and improve collaboration among future leaders.

Back in the Great Recession, contractors had large backlogs in the fall of 2008, and many thought they would weather the storm. In reality, almost all that backlog disappeared relatively quickly. First, it was deferred, then it was postponed, and then poof—it was gone. It may not happen that way next time, but history could repeat itself. Much work today is being delayed, with schedules constantly being slowed—perhaps this is a precursor to the next slowdown. This is a red flag to keep a close eye on as we move further into 2019.

Back to the Basics

Instead of grasping for straws once the downturn hits, FMI tells companies to go back to the basics and focus on building the best organization possible now. Make sure you have:

• Great disciplines around communication, feedback, and planning.
• Great people who can embrace the organization, negotiate well, and understand what the owners want.
• The right support structures and systems.
• The right financial mechanisms in place.
• The right technology to support your company’s vision and strategies.

As the industry continues to climb toward the market peak, this is also the time to unabashedly build out your equity base. That way, when you transition into the next downturn, you’ll have the cash resources to do whatever it takes to survive (even if that’s “no work” because the money’s not there). Skip this step and you’ll wind up overextended going into the slowdown; that’s where companies historically run into trouble.

Here are 6 more “back to the basics” strategies that E&C companies can use to offset the negative impacts of the next recession:

1. Extrapolate clarity of purpose in your values and the goals/milestones that are in front of you.
2. Use data analysis to evaluate these goals against the current context of what’s going on in your business.
3. Be an agile and flexible leader.
4. Explore the market itself, your peers, and other benchmark industries and business builders that you feel that you can learn from.
5. Be intellectually curious and use your mental flexibility and intuition to come up with new, creative business ideas.
6. Have a plan in place for your key talent. What people do you need to have on your team 10 years from now in order to sustain the business for the next 30 years?

Right now, the market is still relatively good; you still have options. All E&C firms should be picking opportunities that allow them to succeed, or to at least know that they have a trail of work in place as they head for the next downturn. The market leaders will be the ones who really understand the markets and who know where construction is headed, while the chase group that doesn’t understand and/or care may get crushed.

Controlling Your Own Destiny in Murky Times

Dynamic and inherently risky businesses, E&C firms succeed and fail for various reasons.

Over the years, FMI has found that company failures can often be traced back to several different risk factors. While many E&C firms that go out of business point to external factors as the primary culprits for those failures, we see many examples of companies that succeeded despite the same difficult external forces being present while others failed.

In one of our flagship research studies, “Why Contractors Fail,” for example, many seasoned industry executives emphatically rejected the notion that luck or other extraneous forces were responsible for their companies’ decline. With signs pointing to a possible economic slowdown in the not-too-distant future, it’s a good time to revisit the 5 root causes of contractor failure—all of which can be mitigated and controlled:

1. Poor strategic leadership. Strong leadership can serve as a cornerstone for success in even the most difficult market conditions. For example, many companies experience financial difficulty when ownership changes hands from one generation to the next (a process that is taking place across many of today’s E&C firms). To ensure successful ownership transfer and management succession, owners need to prove that the company can grow and succeed without them. The only way to do this is by having successors who are capable and willing to lead. At that point, the question becomes, can the next generation carry the business forward? Firms get into trouble here, regardless of whether they are family-owned or not. Companies that lack a clear vision, purpose, and a fact-based strategy often find themselves with no set direction. Under poor strategic leadership, people begin making bad decisions (i.e., selecting the wrong projects, hiring the wrong employees, putting the wrong systems in place and so forth), and before the company’s leadership knows it’s happening, the firm can find itself on the path to failure.
2. Excessive ego. Extremely confident and often unwilling to listen to the opinions and suggestions of others, the leader with an excessive ego can literally take down the entire company. To be a successful contractor, you must have self-confidence and a high tolerance for risk. Contractors also must possess a high degree of optimism, but avoid carrying that optimism and risk tolerance to the extreme—a scenario that can lead to bad business decisions and ultimately company failure. There are many examples of construction firms that have run into financial problems due to the leader’s hubris and perception of being invincible. Sometimes this is referred to as “driving the business off a cliff at 100 mph”—self-destruction at its worst.
3. Too much change. When too many things happen too quickly, it’s easy to get overwhelmed and thrown off course. Any company can absorb some level of change, but there’s a limit to what most organizations can handle at any given time. To avoid driving too much change in the organization and managing risk more effectively, companies should make a list of everything that’s new, including customers, projects, geographical targets, superintendents, project managers, systems, etc.—to fully understand the speed of change the organization is experiencing. The more changes on the list, the higher the risk of failure. Therefore, it is critical to manage the rate of change on an ongoing basis, particularly in anticipation of a market slowdown.
4. Loss of discipline. Successful E&C firms tend to be extremely well-disciplined in all areas of their businesses. Most companies that experienced failure grew from small, regional operations into national powerhouses (e.g., J.A. Jones, Guy F. Atkinson, etc.). Along the way, these firms almost universally lost their internal business discipline, became overall bureaucratic, and moved outside of their core competencies. On the other hand, there are a few world-class E&C firms that operate with an incredible amount of discipline. They do the same thing the same way, every day and everywhere that they operate. This discipline is baked into the company’s culture, permeates the organization, and endures for generations.
5. Inadequate capitalization. Construction projects have upside limits on the level of profit that you can earn, but the amount of money you can lose is unlimited. The difference between a good year and a great year or a bad year and a catastrophic year can be boiled down to just 1 or 2 jobs. Sometimes people will ask us, “How much money should I keep in my construction company?” And we always answer this question by asking, “How much money can you lose on a single construction job?” And when you think about this, the answer is, “All you’ve got.” Overcoming this failure factor requires an adequate capital base that allows you to withstand inevitable problems and live to fight another day. Building a robust equity base will also help you weather a downturn more easily.

Looking ahead and given all the indicators in today’s global economic environment, E&C firms should be cautious and remain vigilant with respect to cash flow management, balance sheet health, operational discipline, rate of change and people. At this point, no one knows when the next recession will hit, but one thing is clear: It will arrive at some point. And when it does, you want to be ready and in control of your own destiny, not the victim of fate.

Chris Daum is the President and Chief Executive Officer of FMI Corporation (www.fminet.com). Excerpted with permission from “2018 FMI Overview,” www.fminet.com/construction-outlook. Mr. Daum oversees the management of all FMI businesses and services and leads the firm’s strategic growth efforts. He may be reached at cdaum@fminet.com.

Though Signs Point to a Slowdown, Growth in Construction Spending Should Continue through 2020

By Kermit Baker

Growth should continue through 2020, but a number of emerging red flags suggest a cautious outlook.

Spending on nonresidential buildings nationally is projected to grow by 4.4% this year, paced by healthy gains in the industrial and institutional building sectors. For 2020, growth is projected to slow to 2.4%, with essentially no increase in spending on commercial facilities but gains in the 3% range in the industrial and institutional categories. Still, there is growing concern inside and outside of the industry that a broader economic downturn may be materializing over the next 12 to 24 months.

Continued healthy gains in construction activity in the near-term is the projection of the AIA Consensus Construction Forecast Panel, composed of leading national construction forecasting firms. As a group, they see the 2018 growth rate remaining essentially unchanged for this year. However, the composition will change significantly. Last year, spending on commercial facilities increased around 7% while advancing by about half that rate for institutional buildings and declining for the industrial sector. This year, gains in each of the major building sectors are expected to be in the 3% to 5% range.

These projections are consistent with business conditions at U.S. architecture firms as measured by AIA’s Architecture Billings Index (ABI). The average ABI score for 2018 was essentially unchanged from 2017. Since the ABI has been shown to lead construction spending by an average of 9–12 months, this would suggest that the growth in spending on nonresidential buildings in 2019 should be close to the growth rate of 2018. Additionally, new design contracts coming into architecture firms grew at a healthy pace in 2018, underscoring the robust level of backlogs currently enjoyed by most firms.

Overall Economy Performing Well

While nervousness persists, the economy has been performing very well recently. Growth in GDP is estimated to be close to 3% for this past year. The jobs market continues to be very healthy. Over 2.6 million net new payroll jobs were added in 2018, far exceeding the less than 2.2 million added in 2017. As a result, the national unemployment rate was below 4% for most of the year. Consumer sentiment levels remained strong, with 2018 recording their highest readings in almost 2 decades. The nation’s factories also were humming, with industrial output achieving its strongest growth in almost a decade.

However, there are several signals that are pointing to an emerging slowdown in the broader economy, and therefore in the construction sector. These include declines in leading economic indicators, weakness in some key sectors of the economy, and softness in the markets of our major trading partners. These signals may be temporary responses to negative short-term conditions, but historically they have preceded a more widespread downturn.

Declines in leading economic indicators: Financial measures such as stock prices, interest rates, and corporate profits—which are often are more forward-looking—frequently turn down before actual economic activity softens. Stock prices have been exceedingly volatile for several months, somewhat obscuring the downward trend of about 15% in the fourth quarter of 2018.

Long-term interest rates have been easing somewhat recently, while short-term rates have been rising as a result of actions by the Federal Reserve Board. This has caused a flattening in the yield curve, where returns from long-term rates move closer to those of short-term rates. If the yield curve were to invert—meaning that long-term yields moved below short-term yields—that would be an historically strong indication of an impending recession.

Weakness in some key sectors of the economy: Despite overall economic strength, there are signs that cracks are emerging in some of the leading sectors of the economy. Of particular vulnerability are major consumer purchases like homes and cars, as well as major business investments in plants and equipment.

After dropping sharply during the Great Recession, housing starts have seen a very disappointing recovery. It appears that housing starts have peaked for this cycle, having declined steadily from their first-quarter 2018 levels. Auto sales fall in the same category of major consumer purchases that often are financed; likewise, this sector has seen softness recently, having declined in 2017 and remained at this same lower level last year.

Business investments often reflect what corporate leaders feel is the growth potential for their companies. Investment nationally in new plants and equipment saw healthy growth in 2017 and through the first half of 2018, but slowed significantly beginning in the third quarter of last year. Given the recent trends in business confidence scores, investment is unlikely to accelerate anytime soon. Business confidence fell sharply through 2018, with the fourth quarter showing the lowest levels in 6 years.

International slowdown: Given the reliance of the US economy on worldwide trade, our future growth is increasingly dependent on economic conditions across the globe. The economies of many of our trading partners have not been performing as well as our own, which suggests that our export volumes will be declining in the future.

Recent forecasts from the International Monetary Fund suggest that world economic growth will be slowing in the coming years. The slowdown is expected to be the greatest in advanced economies, such as those in the eurozone as well as the UK, Japan, and Canada. Additionally, some emerging economies—most notably China—are expected to see slower growth moving forward. The recently enacted—as well as threatened—tariffs that may expand into trade wars have discouraged global investment while simultaneously slowing exports, particularly to China due in large part to the retaliatory tariffs that China has placed on key US products.

Commercial Construction Soft; Institutional Activity Firming

For the first time in many years, growth in institutional construction activity is projected to exceed its commercial counterparts. The major commercial sectors are feeling the headwinds of a softening economy, while demographic forces are still propelling the key institutional sectors.

Retail activity continues to suffer from the growth of online shopping. While only about 10% of total sales, e-commerce has been growing at about 3 times the rate of traditional brick-and-mortar sales. The slowdown in housing hasn’t helped, as new residential development often spurs new retail construction activity. Instead, larger shares of investment in these facilities is going to the renovation of existing buildings. The panel is projecting less than 2% growth in retail construction spending this year, and essentially flat levels next year.

Office construction looks to be the strongest commercial sector, with 5% growth projected for this year and 1% in 2020. This sector has benefited from strong job growth, and the apparent bottoming out of the years-long decline in office space per employee. Much of the increase has come from the booming technology sector, so the outlook is dependent on continued growth in this industry sector.

Education facilities are the largest nonresidential building sector, accounting for over 20% of overall spending. While demographic trends are generally favorable to the education construction outlook, fiscal developments are the real growth engine. Rising house values have finally given local governments a boost in property tax revenue to undertake new projects and renovate older buildings. The rising stock market in recent years had built up endowments for private schools and colleges to expand their facilities. The consensus is for 5.5% growth in the education sector this year, and an additional 4% in 2020.

Health-care building spending is benefiting from extremely favorable underlying demographics, but growth has been tempered by uncertain implementation and modifications to the federal Affordable Care Act. The outlook looks a bit brighter now, and the panel is calling for 4% growth this year, and an additional 3.6% next year.
The nonresidential building construction outlook can best be described as benefiting from solid current conditions but tempered by growing uncertainty over how broader economic trends will play out. The fact that architecture firms had a strong 2018 bodes well for healthy growth continuing in construction activity through this year. However, AIA recently surveyed architecture firms about their expectations for revenue growth in 2019, which are more tempered. While 2018 gains averaged over 7%, their expectations are for less than 3% growth in 2019.

Kermit Baker, Hon. AIA, is AIA’s Chief Economist and part of the AIA Economics and Market Research Group, which provides AIA members with insights and analysis of the economic factors that shape the business of architecture. Reprinted with permission from AIA, January 16, 2019, www.aia.org.

2019 Engineering and Construction Industry Outlook

By Michelle Meisels

As we move into the final year of a decade that has seen its share of peaks and valleys, there is no doubt that our industry is an active participant in building the future of the modern world. Overall growth in 2018 for the U.S. engineering and construction industry is projected to be around 5% and is likely to accelerate further going into 2019.¹ Mergers and acquisitions are positioned for a strong 2019, following an active year, which to date has seen 344 deals with a total value of more than $20 billion.² Driving this activity are the proliferation of mega projects infused with advanced technologies, a focus on smart cities, and the promises of a data-driven world.

The engineering and construction industry is facing considerable hurdles—finding and retaining talent, responding to material price volatility due to tariffs and other trade-related headwinds, and absorbing the rapid pace of technology development pervading our personal and business lives. However, there is reason to be optimistic. Digital is transforming the industry itself and helping us imagine, create, and build the spaces, structures, and cities of tomorrow. Engineering, design, and construction firms have a unique opportunity to leave a mark on the smart cities of the future, using advanced technologies to design and build them today. These same technologies hold the promise to help firms achieve operational efficiencies, thereby reducing costs while improving margins. Those firms that embrace the projects of tomorrow and invest in digital transformation are expected to be the winners here.

As we enter 2019, here are some observations and signposts for our industry.

Upgrading Infrastructure and Digitizing the Smart Cities of Tomorrow

The cities we live in today are the growth engines of our economy and society.

However, in the United States, the infrastructure that supports these urban centers is crumbling. Reports from the American Society of Civil Engineers give the country a D+ rating, indicating the current infrastructure’s poor conditions and deteriorating levels.³ The essential underpinnings—roads, bridges, transit, and water—all received a C+ or lower rating with no single infrastructure segment rated as A, or exceptional and fit for the future.⁴ Given the population growth in cities, there is a startling gap between the rising growth of urban dwellers and the infrastructure to support them. Recent pledges from the U.S. government to support public works projects may spur an increase in projects for domestic engineering and construction companies in the year ahead, which could present significant opportunities.

At the same time that existing infrastructure needs desperate upgrades, the march of progression toward Smart City 1.0 continues to accelerate, as cities around the world invest in the “connected infrastructure” that will enable better management of urban assets such as public transit, wastewater systems, and roads.⁵ IDC forecasts that smart cities spending will reach $158 billion globally by 2022,⁶ an opportunity for the entire spectrum of firms in our industry to help cities execute on their visions. Engineering and construction firms are key enablers of this powerful vision for upgrading infrastructure to incorporate sensing technology and data analytics that could improve the lives of the people who move within and between cities. Collectively these companies are building the roads and highways, designing the smart residential and office buildings, and creating digital touchpoints of connectivity between people and their vehicles, homes, and workplaces.

What would help these cities is a clearly articulated strategy for leveraging advanced technologies like the Internet of Things (IoT), analytics, and artificial intelligence (AI) along with the scale to respond to the influx of digital transformation projects in smart cities worldwide. From a funding perspective, the strategy may include plans for public–private partnerships, as the cost of many of these projects could be cost-prohibitive for a city to undertake. Private funding in cooperation with government entities is one avenue to fund these major projects. From a delivery perspective, the more complete the solution a firm can bring to the table, the greater the positive outcome. The recently announced strategic alliance⁷ between one of the leading global infrastructure firms and an electronics innovation company to work together building smart cities is one example of how to marry scale with digital. In the coming year, we expect to see design, engineering, and construction firms further augment their portfolios with digital and connected technology assets in an effort to capture a larger share of this market.

Analytics and data are the core for future growth, productivity, and efficiency

Data is quickly becoming the core for future success in the construction industry.

It moves business decisions from reactive to predictive and could enable engineering and construction firms to outpace their competition. For this reason, it is likely to be a priority on the growth agenda of CIOs in the coming year. A data and analytics strategy can fuel the ability to deliver smart buildings and smart cities projects, identify and address diminishing margins, and manage increasing project size and complexity.⁸ It can help identify not only what went wrong but also prevent it from happening in the future.

Data related to engineering and construction projects exists in a multitude of sources, many of them outside traditional enterprise resource planning (ERP) systems. Therefore, companies should devise a framework for collecting the data from all of these sources, using tools and models to analyze that data, and providing the insights gleaned to the right people in the right moment to make an impact on the business.

Data and analytics also provide companies the ability to refine operations and tackle business goals like reducing costs or providing next-generation client services. Companies can use a data-driven approach to unlock smart decision making, identify the optimal location for their project, and source the best materials to use, all through an interface that enables decision makers to ask questions and work through scenarios. And as we have seen in other industries, data can even be packaged as a value-added service to clients. Engineering and construction companies should continue making investments in data and analytics in the coming year to ensure they are keeping pace with the rapid developments in this area.

Talent remains a challenge

A pervasive challenge that could hamper the industry’s growth and momentum in the coming year is the tight labor market.

The U.S. construction industry has been consistently adding workforce, and in fact, employs around 7.2 million professionals, the highest levels since the Great Recession of 2008.⁹ All the while, U.S. construction industry unemployment levels have dropped to an 18-year low.¹⁰ In fact, the latest job openings data from Bureau of Labor Statistics suggests that since 2014, while the number of jobs openings have almost doubled, the number of hires over the same period has just increased by 14%.¹¹ Labor shortages are reaching crisis proportions and are expected to continue through 2019 as well.

The impact of not filling job openings and not having the right skill set in the workforce can negatively impact engineering and construction companies in various ways, including not being able to respond to market needs, losing project bids, and failing to innovate. With the influx in expected projects in 2019, engineering and construction companies should consider innovative approaches to attract, recruit, and retain talent. Engaging with the open talent ecosystem, tapping the resources of the retirement-age experienced workforce, and developing in-house training programs are all part of long-term strategies that companies should adopt.

Today, winning the talent war includes projecting a positive brand for your company out to the market—one that reflects the advanced technologies that are part of the connected construction site. And to appeal to new generations entering the workforce, it also showcases the sustainability initiatives that many firms have adopted. Additionally, sourcing talent through apprenticeship programs and technical schools can identify prospective employees with the right skills. And considering the rise of digital, it is also important to understand how skills are changing and then design a talent management strategy that reflects this.

1.  Oldcastle, 2018 North America Construction Forecast Report, October 2017, https://info.buildingsolutions.com/hubfs/2018%20North%20American%20 Construction%20Forecast%20Report.pdf?t=1514916335905, accessed October 25, 2018; Robby Pedraza, “Six reasons the construction industry in the US is projected to accelerate in 2019,” Mobile Modular, September 7, 2018, https://blog.mobilemodular.com/six-reasons-the-construction-industry-in-the-us-is-projected-to-accelerate-in-2019, accessed October 25, 2018.
2. YTD includes January 1, 2018 through October 29, 2018, Thomson One SDC Platinum, accessed October 29, 2018.
3. 2017 Infrastructure Report Card, American Society of Civil Engineers, https://www.infrastructurereportcard.org/making-the-grade/what-makes-a-grade/, accessed October 29, 2018.
4. Ibid.
5. William Eggers and John Skowron, “Forces of change: Smart cities,” Deloitte Insights, March 22, 2018, https://www2.deloitte.com/insights/us/en/focus/smart-city/overview.html.
6. IDC, “IDC forecasts Smart Cities spending to reach $158 billion in 2022, with Singapore, Tokyo, and New York City among top spenders” (press release), July 23, 2018, https://www.idc.com/getdoc.jsp?containerId=prUS44159418, accessed October 25, 2018.
7. “AECOM teams with Arrow Electronics to usher in digital transformation and Smart Cities on a global scale” (press release), Business Wire, September 27, 2018, https://www.businesswire.com/news/home/20180927005708/en/AECOM-Teams-Arrow-Electronics-Usher-Digital-Transformation.
8. “The construction industry’s productivity problem,” The Economist, August 17, 2017, https://www.economist.com/leaders/2017/08/17/the-construction-industrys-productivity-problem, accessed October 25, 2018.
9. US Department of Labor, Bureau of Labor Statistics, Construction Industry: Employment, Hours, and Earnings from the Current Employment Statistics survey (National), https://beta.bls.gov/dataViewer/view/timeseries/CES2000000001, accessed October 25, 2018.
10. US Department of Labor, Bureau of Labor Statistics, Unemployment Level – Construction, https://beta.bls.gov/dataViewer/view/timeseries/LNU03034450, accessed October 25, 2018.
11. US Department of Labor, Bureau of Labor Statistics, Construction Industry: Employment, Hours, and Earnings from the Current Employment Statistics survey (National).

Michelle Meisels is a principal in Deloitte Consulting’s Technology practice and leads the Engineering & Construction practice. Reprinted with permission from Deloitte (www.deloitte.com). She brings over 25 years of consulting experience with a focus on leading large, often global, finance, and information technology transformation programs by leveraging technology. She specializes in cloud ERP, project controls, supply chain management, and analytics technologies. Her primary focus is serving engineering and construction companies. She can be reached at mmeisels@deloitte.com.