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Nonresidential Construction Index Reverses Course, Gains in First Quarter

This result for the beginning of 2017 is welcome, as many have been expecting a slower economy, according to FMI.

The FMI Nonresidential Construction Index gained 5.6 points in the first quarter with almost every component of the NRCI Index moving in the positive direction. This result for the beginning of 2017 is welcome, as many have been expecting a slower economy, according to FMI.

That expectation seemed to be only based on the idea that it has been good for so long, it must go down, FMI said. The fact that material and labor costs continue to rise is a positive sign of a growing economy.

"It appears we can sustain the growth cycle for some time longer, and that may be in part because it has been slow growth, not a meteoric burn and decay. Slow growth or not, panelists indicate that finding enough talented people to do the work and somehow improve productivity are among their chief concerns again this year," FMI said in a statement.

Finding qualified superintendents and project managers are among the toughest challenges for 2017. Nearly half of the NRCI panelists indicated they need to replace most critical positions in their companies within the next five years, only 35% currently have management succession plans in place.

Current Issues Summary

Hiring plans: Hiring plans for NRCI panelist companies are on par or a bit higher than last year, with 53% expecting a 0% to 5% increase in full-time direct employees.

Top challenges for 2017: The top challenge continues to be hiring top people followed by increasing productivity. Finding profitable work is expected to be a greater challenge than in 2016.

Expected growth for 2017: Panelists’ outlook for growth is modest for 2017, but slightly higher than for 2016 at around 2.5% to 5% with 11% responding expecting over 5% growth.

• Lean construction and IPD trends: Panelists’ response to several questions about trends in the use of lean construction, integrated project delivery (IPD) and the application of both on a project. The majority who answered the questions are applying lean construction practice on nearly half of their projects. The use of IPD is somewhat lower, and the use of both practices together on a project is still a small percentage for most companies but shows signs of growth. Most expect it will be three years or more before these practices see widespread use.

Ownership transfer and management succession plans: Forty-one percent of panelists said they will need successors to replace most critical positions within the next 5 to 10 years. Only 24% have ownership transfer plans in place. The top ownership transfer plan by far is “sell to employees.”

NRCI First Quarter 2017 Highlights

• Overall economy: The NRCI Index component for the overall economy jumped 15.4 points to a strong showing of 73.8, reflecting improvements in GDP, the recent stock market rally and expectations of business-friendly policy changes.

• Overall economy where respondents do business: NRCI panelists were slightly less confident about the business outlook in their local markets compared with the overall economy, but still registered a positive 11.8-point jump to 72.0 for this component of the NRCI Index.

• Respondents’ construction business: Panelists’ outlook for their own business improved 8.7 points to a solid 75.3. This is a continuation of a strong business outlook in 2016.

• Nonresidential building construction market where respondents do business: Registering an increase over the fourth quarter of 9.1 points to 73.7, panelists are not seeing what was an expected slowdown last quarter.

• Expected Change in Backlog: Backlogs continue to be reported at a median of 12 months, and most panelists expect this to continue or improve in the coming months.

• Cost of construction materials and labor: With a strong outlook, it is not surprising to see increases in the costs of inputs like construction materials and labor.

Productivity: The component in index for productivity made a positive move to get out of negative territory, but only up to 50.0 points. Increasing productivity is one of the top challenges for construction in 2017.

Download the full report here.

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