As 2023 winds down, many contractors are starting to plan for 2024. The Smart Construction team has analyzed market trends and forecasts to help your team navigate the year ahead. Read on for insights into the dynamics shaping the US construction industry as we move into 2024 and how you can position your company for success in the coming year and beyond.
Introduction
Entering 2024, heavy civil construction will confront a highly dynamic market full of opportunities and challenges. The financial and technology outlook for the construction industry in the United States is generally positive, with several key trends and challenges expected to shape the industry's trajectory. Massive government funding, uncertain material and labor markets, coupled with economic volatility underscore the complexity of the current environment.
This guide delves into these topics, among others, and offers strategies for construction companies to navigate the uncertainty and succeed in 2024.
Analyzing the Dynamic Construction Industry Landscape
Despite continued challenges from volatile construction costs, high interest rates, high inflation, and labor shortages, the construction industry grew modestly in 2023. According to Deloitte analysis, the construction industry’s nominal value increased by 7% year-over-year, and gross output grew by 6% year-to-date. This is nowhere near the documented growth seen during the construction heyday of the mid-2010s when rates were low, but it represents a promising trend coming out of the pandemic.
Construction Spending in 2024: A Mixed Bag
The industry is expected to continue growing in 2024, though forecasts vary widely across the industry. The expected growth is largely due to government funding from three key pieces of legislation passed in 2021 and 2022—the Infrastructure Investment and Jobs Act (IIJA), the Inflation Reduction Act (IRA), and the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act—expected to flow into the industry. On the other hand, expectations for commercial construction are a mixed bag. Warehouse and logistics spending should continue to grow overall with some downturn in regional markets, but office construction is expected to contract dramatically, continuing the trend from recent years.
Housing starts appear to be rebounding going into 2024 as rates come down, according to the Commerce Department. Reports indicate that housing starts have started to climb in the fourth quarter of 2023, and permits for future construction of single-family housing have risen to the highest level since May 2022. This could be good news for heavy civil contractors who saw stable residential work dry up due to homebuilders pausing big developments when mortgage rates were at their peak.
For the heavy civil construction industry overall, the outlook is also generally positive. According to ENR, the non-building sector, which includes heavy civil construction, is forecasted to see total starts increase by 25% by the end of 2023 versus last year and rise by 7% in 2024 over 2023 levels.
Companies that can strategically align themselves with owners in promising sectors – energy, infrastructure, transportation/logistics, and residential – should be positioned well for growth in the year ahead.
Tempering Expectations: Dynamics Affecting Construction
Despite expectations for higher construction spending in 2024 compared to 2023, contractors will deal with continued uncertainty in the economic landscape and labor & material markets.
Labor Market Dynamics
Labor market dynamics will prove particularly challenging for the heavy civil construction industry. Many companies we talk with highlight the skilled labor shortage as a major barrier to growth. This is not a new phenomenon for 2024. As we pointed out in our 2023 Construction Outlook, the construction industry has experienced a labor shortage for quite some time. Demand for construction workers is at an all-time high, but the number of skilled workers is lower than ever. The industry will need to hire an estimated 546,000 additional workers to meet production demands in 2023 into 2024, according to Construction Dive research. This shortage is one of the leading causes of construction defaults, scheduling and cost overruns, and increased on-site injuries according to AIA. Life Insurance company The Hartford estimates that more than 40% of the current U.S. construction workforce is expected to retire in the next decade, so this issue is likely to persist for years to come.
The labor shortage is not the only labor challenge going into 2024. According to developer JLL, labor costs are expected to rise by 3-5% due to the ongoing shortage of skilled workers. This will place even more pressure on contractors trying to find enough workers to complete an influx of new projects, especially as government programs funnel funds to large infrastructure works. This project-labor mismatch will be a major theme throughout 2024 and may put a damper on government excitement about new funding packages.
Inflation and Interest Rate Uncertainty
In addition to high labor costs, the industry is grappling with ongoing inflation and volatility in material prices. High interest rates and slower economic growth are expected to put increasing pressure on the construction and manufacturing sectors in 2024, per AWCI’s research. The Federal Reserve's actions in raising interest rates to combat inflation have been a significant factor in this trend. The federal funds interest rate recorded a 22-year high in September 2023 at 5.3%, and this high-interest-rate environment is expected to persist into 2024. The impact of high rates is expected to be felt more significantly in the second half of 2024, particularly as projects in the current pipeline deliver.
This "higher for longer" interest rate environment could lead to a slowdown in non-residential construction in late 2023 and into 2024, with recovery expected sometime in 2025 based on an analysis by Forbes. The Fed's decisions will be closely watched over the coming months after no changes to rates in December.
While contractors can't control inflation, they can closely monitor costs to identify opportunities for savings. Many companies loosely track their costs or wait to see whether their bank account balances have increased at the end of the month. Creating detailed budgets with cost codes and gathering real-time labor, equipment, and material costs in the field can help contractors determine where they may be able to boost efficiency or productivity to reduce costs.
Volatility of Material Cost and Availability
Material costs are expected to increase by 2% to 6% according to Construction Dive’s outlook. Construction Dive also highlights that while some materials like concrete are expected to decrease slightly in price, others like wood, plastics, composites, plaster, gypsum, and thermal protection are expected to see average increases up to 6.5% per year through 2024 and 2025.
Contractors need to track material purchases, receipts, and installations closely to avoid cost overruns. Additionally, effective planning can limit the impact and high cost of last-minute material purchases.
Opportunities for Heavy Civil Contractors
It may sound like a cop-out, but nobody is quite sure where the construction industry will go in 2024. The trends we highlighted above are estimates, and many experts disagree about what will actually happen. What we do know is the market is full of uncertainty.
Regardless of where the market heads next year and beyond, 2024 will be a great time to “future-proof” your business by adopting technology, building relationships, exploring sustainable practices, and testing out new approaches in the office and field.
Using Technology to Boost Efficiency and Productivity
Contractors should be exploring ways to increase labor productivity through technology. The Smart Construction solutions are just a few tools heavy civil contractors can use to boost efficiency and productivity when labor is short.
Smart Construction helps contractors boost productivity by helping them maximize machine production, visualize & analyze job site data, and manage projects effectively. Additionally, being able to track historical costs and compare against estimates allows your business to refine pricing and go-to-market strategies in certain markets. This may increase capture rates on bids over the competition in a tight market or help combat risk-based pricing on projects.
Additionally, using advanced job site visualization tools, including BIM and drone data, can help you plan more effectively and track progress easily from anywhere, allowing you to catch issues before they turn into schedule or cost overruns. Technology could be your competitive advantage in 2024 if it yields greater production and efficiency for the same or better quality.
Looking to the Future
Owners and GCs are keen to work with tech-enabled contractors who can plan effectively and work their plans efficiently and productively. They want to get their projects completed, so they will need trusted partners who don’t struggle to get work done because of labor shortages. Everyone is dealing with this issue, but it’s not an excuse to go over time, miss project milestones, or go over budget on your projects. It’s time to use technology as a differentiator for your business.
Research the GCs and Owners in your area. If you can build relationships with the companies leading new infrastructure and manufacturing developments, you may be well-positioned for some work in those areas down the line. The worst thing contractors can do in times of uncertainty is stand flat-footed. You can’t always rely on what has worked in the past, and building new relationships is a great way to keep moving forward.
Think Sustainable
Sustainable development is not going to slow down any time soon. New and upcoming legislation will require owners and developers to build more “green” projects. They will need partners who can meet their changing project needs. This doesn’t mean that you need a green thumb or flashy “sustainable” equipment and practices, however. As we highlighted in a recent blog post, efficiency is sustainability in earthwork. Moving dirt faster and more efficiently is inherently more sustainable and better for your bottom line.
Investing in efficiency is a win-win-win for contractors. Efficient use of resources saves both time and money, which directly translates into increased profitability. Similarly, efficiency helps contractors do more with less, allowing them to optimize their projects and maximize output even when labor is short or the economic situation is uncertain. Finally, greater efficiency and the sustainable benefits that come with it can make a contractor more competitive in the eyes of a sustainability-minded GC, owner, or developer. This can lead to more work and higher profitability in the long run – all from small investments in technology.
The intelligent use of technologies like Smart Construction can help contractors navigate the changing landscape of construction and position themselves as key partners for the future of sustainable construction.
Testing New Approaches
Finally, why not try something new in your business? Do you always find yourself on your back foot when trying to track progress on the job site? Maybe it’s time to try out a drone program to track quantities with aerial surveying. Are your new operators struggling to make grade? Maybe it’s time to retrofit some of your existing equipment to give the latest machine control and 3D guidance to make your inexperienced operators seem like industry veterans. There are many cost-effective ways to boost your efficiency and productivity in times of change. 2024 will be a great year to try out new ways of doing business.
2024 will be a year of opportunity. The contractors that use technology, build strong relationships, and manage their costs and projects effectively will be in a solid position to take advantage.
Reach out to the Smart Construction team to learn more about our innovative hardware and software solutions for the heavy civil construction industry. We are looking forward to partnering with more industry leaders in 2024 and beyond.