Construction Industry Trends
February 6, 2012
Industry Intelligence from First Research, a division of Hoover's (a D&B company)
Specialization - With the scale and cost of many construction projects rising, contracts and subcontracts are more likely to be awarded to companies with expertise in a particular specialty. Construction specialties are many, including framing, mechanical, demolition, roofing, electrical, public works, and roads. For many companies, a majority of new contracts comes from existing customers who hire them to do projects similar to those they've completed in the past.
Joint Ventures - As projects get bigger, on-time completion becomes more important to owners of construction firms. Costs for late completion, including penalties, rise disproportionately to actual construction costs. The larger scale and complexity of projects lead to more joint ventures among construction companies, which can pool their expertise and financial resources in bidding for contracts and in implementation.
Design-Build - The technological sophistication of many projects and the increasing use of design-build contracts encourage the integration of engineering and construction companies. Some companies have experienced higher revenue growth from design and engineering work than from construction, resulting in the former comprising the bulk of total company revenue, in some cases. While large companies like Bechtel and Fluor have long combined engineering and construction expertise, the combination of skills is becoming more important for small and midsized companies.
Consolidation - The increased acquisition of smaller construction companies has left a handful of dominant players in the industry. Acquisitions benefit the acquiring firms by expanding their range of services and gaining access to new markets. Firms such as Jacobs Engineering have made at least one major acquisition per year since 2007, allowing them to expand their capabilities in new areas.
Guaranteed Maximum Price Contracts - Guaranteed maximum price contracts are increasingly popular. Such guarantees limit the owner's exposure and put a premium on a construction company's ability to accurately estimate and manage project costs. For these types of contracts, project management skills become more important relative to actual implementation, even of fairly routine building activities.
Per-Project Staffing, Equipment Leases - Rising costs and uncertain markets lead construction firms to acquire many resources on a per-project basis. Many companies have their own project managers on staff, but hire other workers as needed. Cost controls and changing project needs make leasing equipment on a per-project basis more economically feasible.
Security in Building Design - Security concerns are affecting building designs in the post-911 world. High-rise designs often lose favor to low-level buildings. Stronger walls and windows and exits and evacuation routes are being emphasized. Protecting air-circulation systems has become important to prevent gas or biological attacks.
Consolidation - National firms continue to grow through acquisitions, the easiest way to enter new markets. Large homebuilders enjoy economies of scale, with national purchasing power for materials and greater access to capital. In the coming year, the ten largest homebuilders may account for half of all new home sales, according to Builder Magazine. Small homebuilders generally don't grow beyond the 30-home annual building level because of the intensely local nature of real estate.
Non-Homebuilding Services - Some large builders have branched into the related fields of modular and manufactured housing, construction materials, commercial construction, mortgages, and insurance. Some builders have established mortgage banking arms to provide financing for home buyers; typically, these operations originate mortgages, then sell them to other investors. During the recent market downturn, major construction companies pulled back from some of their non-core business segments, such as home services, commercial construction operations, and sub-prime lending services.
High-Tech Homes - Builders are responding to consumer demand by building more new houses with advanced data and other communication capabilities installed. Younger consumers, raised on electronics and computers, expect "structured" wiring that supports computer networks, advanced stereo systems, cable TV, and Internet access. Along with Internet service, low-voltage wiring is fast becoming a fourth utility.
Competition from Commercial Builders - More commercial builders are considering residential construction an extension of their regular business, although homebuilding requires different contractor skills and activities and often has different demand cycles than commercial construction. Homebuilding offers increased risks, but also offers higher margins than commercial work.
Green Construction Growing - Although a green home can cost 5 percent more than a conventional house, some lenders offer mortgage incentives for energy-efficient homes. Green building innovations include more porous materials in walkways and patios to prevent erosion from rain runoff, engineered recycled lumber in building, and the conversion of wood or drywall construction waste onsite into landscape mulch. In 2008, the US Green Building Council (USGBC) launched LEED for Homes, a green home rating system, which has continued to evolve with technological advancements.
Reverse Auction - Contractors are concerned about a growing trend among owners to use the Internet to seek the lowest price from anonymous bidders for construction services, a process called "reverse auction." Contractors fighting for the lowest price often sacrifice quality, safety, and margins.