Construction is reliably cyclical. Demand ramps up, ramps down and then goes back up again broadly in sync with wider economic cycles. Indeed, new construction starts are one of the key indicators of economic direction.
In many ways that is still true. We are currently more than a decade into one of the longest upswings that anybody in the industry can remember, one which started in the aftermath of the financial crisis of 2008. And though construction professionals in The Americas are largely optimistic about their future, demand for construction services regularly exceeds the capacity for the industry to deliver, which has built up pressure in a number of key – albeit predictable – areas.
Capital project owners find themselves in a situation where they are scrambling just to get companies to do the work – especially in the US. The focus is therefore very much on scheduling, productivity and timely delivery – with budget protection a secondary consideration. Though the question of ‘Are we spending money in the right way?’ continues to be front of mind, ‘Can we deliver on time?’ is increasingly becoming a far more common consideration in light of increasing pressure in the US to deliver a significantly heightened slate of industrial, energy and wider infrastructure projects.
Risk management will get ever-more democratic
The spotlight remains on project controls tools that help both owners and contractors produce more realistic schedules and budgets to achieve more predictability in capital project delivery. We expect that focus to continue, regardless of macro-economics.
However, this mindset now extends to almost all areas of the business. One of the most striking is the way that planners are using cloud-based solutions to collaborate with subject matter experts to identify cost and schedule risks. In a rapidly changing economic environment, the ability to continuously assess risk has become increasingly important.
That means moving away from the traditional means of conducting isolated, point-in-time risk assessments. In its place is a more democratized approach where experienced experts regularly provide their insights as inputs into collaborative risk models that planners can use to quantify cost and schedule risk on an ongoing basis.
What’s more, the trend toward design-build and alternative delivery contract models is also shining the risk spotlight on designers and engineers, who are also feeling the pressures of outsized demand. Understanding the risk associated with the completion schedule for design deliverables, along with the ever-present risk of quantity growth as the designs evolve, is fundamental to creating realistic construction schedules and budgets.
The democratization of risk assessment is enabling smaller firms to efficiently tackle risk without the staff and specialized experts in place at larger firms. In other words, what used to be the domain of the most mature and sophisticated organizations is now moving to the mainstream. As an effective, technology-enabled alternative to the static risk assessment workshops of the past, we can realistically expect it to become one of the more noticeable trends of 2022.
The question that is front of mind at the moment, is to what extent the return of inflation will affect the construction cycle, especially in the US where inflation hit a 40-year high in January. Inflationary pressure almost always stems from high demand outpacing supply, but in this construction cycle there are other forces at work. If the current retreat of the pandemic holds, some of the current ‘artificial’ drivers of inflation will likely ease. That could help to contain inflation without the monetary policy interventions that generally quell demand. Regardless, the spotlight on project cost is almost certain to get brighter as the industry grapples with an affordability problem. As we saw in the recession in 2008-2009, there will be increased scrutiny over which projects to fund, what scope they must contain to justify a return on investment, and what risks there are in overshooting the budget.
However, there are some unique counter-cyclical forces within this construction cycle, such as massive government spending plans designed to drive job growth. The Infrastructure Investment and Jobs Act in the U.S. is a perfect example, with US roads, bridges, rail, airports, ports, waterways, power, and IT infrastructure set to benefit from $550 billion of federal investments over five years. Such publicly-funded programs will continue to drive construction demand independent of the economic factors at play in the private sector. The result may well be a delicate balancing act that serves to prolong the current growth cycle of the construction industry, with an appropriately balanced view of both schedules and costs.
Another potential counter-cyclical force, depending on its direction is the pandemic, which has so far exacerbated the industry’s long-term labor shortage issues, and added to the difficulties of getting the right people, equipment, and materials to the right job sites at the right time. Only time will tell if those stresses on productivity get better or worse.
New ways of working will remain embedded
Public health concerns forced construction firms to leverage technology in order to re-think hiring processes, to find new and appropriate ways to on-board people, and to add new layers of compliance processes at job sites.
It also increased the use of cloud-based technologies and automated systems that have helped strapped workforces operate more efficiently. These kinds of tools help people to work more effectively together – especially when collaborating on a remote basis.
There are long-term benefits to be had here. Construction is no stranger to worker shortages, and tight profit margins in the industry have long pushed construction organizations to look for ways to create operational efficiencies while controlling costs and man-hours. Covid-19 served to accelerate these initiatives, and after two years of pandemic experience, these systems, processes and behaviors are now embedded. We fully expect these tools to continue to deliver efficiencies that will alleviate some of the imbalances between demand and supply, and enable companies on the supply side of that equation to deliver predictable results when it comes to capital projects.
Procurement will move away from just-in-time
Of course, labor shortages have been matched by procurement issues and logistical challenges within the supply chain. The current period is one of the most unpredictable and uncertain that most industry veterans have seen in their 30 year plus careers.
Whether it’s goods from the local supply store, specialized materials, engineered equipment, or bulk-bought commodities, everyone is in a scramble to get the necessary resources to site on time – with near zero expectation of anything close to historical prices.
We’re seeing that pan out in procurement departments and contracting discussions across the country. Where once construction firms had a Plan A, and maybe a notion of a Plan B, now there is a whole alphabet of scenarios and what-ifs to piece together to keep projects on track. In some cases, the cost-benefit analysis calls for implementing both Plan A and Plan B simultaneously to cover all bases. This is particularly notable in low-cost, but high-risk scenarios.
Here too the emphasis has to be on eliminating waste and ensuring more efficiency in the use of limited resources. But we also predict a more thoughtful and future-oriented approach within procurement. Long-term habits are hard to break, but we’re already seeing a move away from the just-in-time model, which was great for reducing storage costs but not great for avoiding surprises during periods of supply interruptions.
With the need to take a longer-term horizon for procurement, firms are planning purchases across multiple projects at a time, and further into the future, driving demand for technology that offers the necessary visibility and planning capability to support more predictable outcomes.
The wider-lens view of construction is that of an industry in flux. The consistently upward-moving cycle we’re currently experiencing may continue undaunted, shaking off a few hits from the pandemic and becoming even stronger because of it. Or it may ultimately be disrupted by runaway inflation and other world events that could negatively impact construction demand. Regardless of how it plays out, we will likely see greater adoption of sophist technology that will help construction stakeholders more capably control the scope, costs and schedules of large capital projects.
InEight’s Global Capital Projects Outlook revealed that digital transformation is considered the biggest short-term source of opportunity for construction professionals in The Americas, and we expect this trend to continue as project owners and construction firms of all sizes seek to deliver more streamlined, more efficient and more cost-effective projects.
Brad Barth is Chief Product Officer at InEight. InEight provides field-tested project management software for the owners, contractors, engineers and architects who are building the world around us. Over 575,000 users and more than 850 customers worldwide rely on InEight for real-time insights that help manage risk and keep projects on schedule and under budget across the entire life cycle. From pre-planning to design, from estimating to scheduling, and from field execution to turnover, InEight has powered more than $1 trillion in projects globally across infrastructure, public sector, energy and power, oil, gas and chemical, mining, and commercial.