Key Insights from Deloitte’s 2024 Engineering and Construction Industry Outlook

The construction industry holds a vital position within the US economy, serving as a cornerstone for economic growth and development. This sector not only provides millions of jobs but also stimulates economic activity through its extensive supply chains and significant investment in materials and technology.

In 2023 alone, total construction spending in the US reached nearly $1.98 trillion, underscoring the sector's substantial economic footprint​.

It plays a crucial role in shaping the built environment, influencing everything from urban development and housing affordability to transportation networks and energy infrastructure. As such, the industry's health and direction are closely monitored by policymakers, investors, and business leaders.

Recognizing the strategic importance of the construction sector, Deloitte publishes its annual Engineering and Construction Industry Outlook to provide stakeholders with a comprehensive analysis of emerging trends, challenges, and opportunities.

The 2024 edition of this report is particularly relevant as it examines the longer-term impacts of significant government investments through initiatives such as the Infrastructure Investment and Jobs Act (IIJA), the Inflation Reduction Act (IRA), and the CHIPS Act.

These measures are poised to drive substantial growth in infrastructure and manufacturing projects, presenting both opportunities and challenges for the industry​.

Economic Impact and Spending Trends

Overview of Economic Uncertainty

Economic challenges including persistent high inflation and rising interest rates have significantly impacted the industry’s dynamics and investment strategies.

As of September 2023, the federal funds interest rate reached a 22-year high of 5.3%, marking a 108% year-over-year increase. This spike in interest rates, combined with inflationary pressures, has led to increased borrowing costs and financial strain on construction projects​.

Economic policies aimed at controlling inflation, such as tightening monetary policy by the Federal Reserve, have further complicated the market environment.

The consumer price index (CPI) for urban consumers in US cities rose by 4% year-over-year in August 2023, contributing to the financial burden on both construction firms and clients. These economic conditions have resulted in a mixed impact on construction spending, with some sectors experiencing growth while others face decline​​.

Despite these challenges, the construction industry showed resilience, with total construction spending in the US reaching $1.98 trillion in August 2023, a 7.4% increase from the previous year.

This growth is indicative of the industry's capacity to adapt and find opportunities even in uncertain times. However, the distribution of this spending highlights stark contrasts between different sectors of the industry​​.

Nonresidential vs. Residential Construction

A detailed comparison reveals a divergence in the performance of nonresidential and residential construction sectors. Nonresidential construction saw a significant growth of 17.6% year-over-year as of August 2023.

This robust increase was driven by substantial investments in manufacturing construction, which alone surged by 65.5%.

Key factors contributing to this growth include government funding through initiatives like the CHIPS Act, which allocates over $52 billion for manufacturing projects, and the IRA, which supports clean energy and other industrial activities.

In contrast, the residential construction sector experienced a decline, with spending decreasing by 3% over the same period.

This downturn can be attributed to the adverse effects of high interest and mortgage rates, which have eroded housing affordability and dampened demand.

From January to August 2023, housing starts fell by 13% compared to the previous year, reflecting the sector’s sensitivity to economic cycles and monetary policy changes​​.

The contrasting trends between nonresidential and residential construction underscore the impact of targeted government investments and market demand dynamics. While nonresidential construction benefits from large-scale federal funding and initiatives aimed at boosting infrastructure and industrial capabilities, the residential sector struggles with affordability issues and reduced consumer confidence due to economic uncertainties.

This divergence highlights the need for strategic planning and adaptive measures within the industry to address sector-specific challenges and leverage growth opportunities​.

Government Funding and Infrastructure Development

Role of Government Initiatives

Government funding through the CHIPS Act, Inflation Reduction Act (IRA), and Infrastructure Investment and Jobs Act (IIJA) plays a crucial role in revitalizing the US construction industry.

The CHIPS Act allocates over $52 billion to boost domestic semiconductor manufacturing, directly influencing the construction of chip fabrication plants and related infrastructure. This significant investment aims to enhance national security and technological leadership by reducing reliance on foreign supply chains.

The IRA, with its focus on clean energy, provides substantial tax credits and incentives for constructing renewable energy facilities and upgrading existing infrastructure.

This act is expected to drive the development of wind farms, solar power plants, and energy storage systems, contributing to the broader goal of reducing carbon emissions and promoting sustainable construction practices.

The IIJA, a comprehensive $1.2 trillion package, targets critical infrastructure improvements across the country. It allocates funds for various sectors, including transportation, broadband, climate resilience, and energy infrastructure.

These investments are set to address long-standing infrastructure deficits, improve connectivity, and enhance the overall efficiency and sustainability of the US infrastructure network.

Infrastructure Projects

Key infrastructure projects funded by the IIJA span multiple sectors, each with a significant impact on the construction industry and the broader economy.

For instance, the transportation sector will see substantial investments, with $58.8 billion earmarked for projects such as highway expansions, bridge repairs, and public transit system upgrades. These projects aim to improve mobility, reduce traffic congestion, and enhance safety across the nation's transportation networks​​.

In the broadband sector, the IIJA provides funding to expand high-speed internet access to underserved and rural communities. This initiative not only boosts construction activities related to laying fiber optic cables and building network infrastructure but also promotes economic development by improving digital connectivity and access to information​.

Climate resilience projects funded by the IIJA focus on fortifying infrastructure against extreme weather events and natural disasters. Investments in flood control systems, wildfire prevention measures, and coastal defenses are designed to protect communities and reduce the economic impact of climate change on infrastructure.

The energy sector will benefit from investments aimed at upgrading the national power grid and developing renewable energy sources. Projects include the construction of new transmission lines to integrate renewable energy into the grid, enhancing the reliability and efficiency of the energy supply.

These initiatives support the transition to a cleaner energy future and stimulate construction activities related to energy infrastructure​.

The long-term impact of these infrastructure projects on the construction industry is profound. They are expected to create jobs, stimulate economic growth, and drive technological advancements in construction practices.

By addressing critical infrastructure needs and promoting sustainable development, these projects contribute to a more resilient and efficient economy, setting the foundation for future growth and innovation in the construction industry​​.

Technological Advancements and Innovation

Adoption of Advanced Technologies

The construction industry is rapidly integrating advanced technologies such as generative AI, drones, autonomous vehicles, and IoT sensors. These technologies are transforming traditional construction practices by enhancing productivity, safety, sustainability, and enabling new business models.

• Generative AI: This technology is used for optimizing design processes, predicting project outcomes, and automating administrative tasks. AI-driven tools can analyze vast amounts of data to provide insights that improve decision-making, reduce errors, and streamline operations.
• Drones: Drones are extensively used for site surveys, inspections, and monitoring. They provide real-time data, high-resolution imagery, and 3D mapping, which helps in accurate planning, tracking progress, and ensuring safety compliance.
• Autonomous Vehicles: Autonomous guided vehicles (AGVs) are employed for material transport and task optimization on construction sites. They reduce the need for manual labor, enhance precision, and increase operational efficiency.
• IoT Sensors: IoT sensors are deployed to monitor environmental conditions, equipment usage, and structural health. They provide real-time data that helps in predictive maintenance, improving resource management, and enhancing site safety​.

The benefits of these technologies are substantial. They lead to higher productivity by automating repetitive tasks and improving accuracy. Safety is enhanced through continuous monitoring and real-time alerts.

Sustainability is promoted by optimizing resource use and reducing waste. Furthermore, these technologies enable the development of new business models, such as data-driven decision-making and predictive analytics, which provide a competitive edge in the market.

Human-in-the-Loop Concept

Despite the rise of automation, the construction industry still relies heavily on skilled professionals. The human-in-the-loop concept ensures that advanced technologies are used effectively, with human oversight playing a critical role in their deployment and operation.

Skilled professionals are essential for interpreting data, making informed decisions, and managing complex tasks that require human judgment.

For instance, while AI can analyze patterns and predict outcomes, human experts are needed to validate these predictions and apply them in practical scenarios. Similarly, drone data needs to be interpreted by engineers to make meaningful conclusions about site conditions and project progress.

Examples of human oversight include:

• AI and Machine Learning: Experts train AI models, ensuring they are accurate and relevant to specific project needs. They also monitor AI outputs to prevent errors and biases.
• Drone Operations: Licensed operators control drones and analyze the data they collect. They ensure that drones are used safely and comply with regulatory requirements.
• IoT Sensor Data: Engineers interpret sensor data to make decisions about maintenance, safety measures, and resource allocation. They also troubleshoot and resolve issues that automated systems may not detect.

Integration of advanced technologies with skilled human oversight ensures that the construction industry can leverage the best of both worlds.

It combines the efficiency and precision of automation with the critical thinking and problem-solving abilities of humans, leading to improved project outcomes and innovation​​.

Labor Market and Cost Volatility

Labor Market Dynamics

The construction industry is currently grappling with a tight labor market, significantly impacting its operations. As of August 2023, the average hourly wage for construction workers rose to $36.70, reflecting a 5.2% increase year-over-year. This rise in wages is primarily driven by the high demand for skilled labor, which outpaces the supply available in the market​​.

Smaller construction firms face particular challenges in attracting and retaining talent. They often struggle to compete with larger companies that can offer higher wages, better benefits, and more stable employment opportunities.

Talent gap means smaller firms may experience project delays, increased labor costs, and reduced competitiveness. Additionally, the limited availability of skilled workers can lead to increased reliance on overtime and less experienced labor, further affecting productivity and project outcomes​.

Cost Volatility

The construction industry is also dealing with significant cost volatility in raw materials and equipment. Prices for key materials such as steel, lumber, and concrete have fluctuated widely, driven by supply chain disruptions, global demand shifts, and economic uncertainties.

For example, although prices for some materials, like lumber, have moderated from their pandemic peaks, they remain well above pre-pandemic levels​​.

Price fluctuations complicate project planning and budgeting. Firms must continuously adjust their cost estimates and procurement strategies to accommodate changing material costs. This unpredictability can lead to increased project costs, delays, and strained relationships with clients who are wary of budget overruns.

To manage cost volatility and maintain profitability, construction firms are adopting several strategies:

• Flexible Contract Structures: Many firms are using cost-plus contracts, which allow for adjustments based on material price changes, reducing the risk of fixed-price commitments.
• Bulk Purchasing and Long-Term Supplier Agreements: By negotiating bulk purchases and establishing long-term agreements with suppliers, firms can lock in prices and ensure a steady supply of materials.
• Advanced Procurement Planning: Firms are investing in better forecasting tools and procurement practices to anticipate market trends and secure materials at favorable prices.
• Value Engineering: This involves re-evaluating project designs to identify more cost-effective materials and methods without compromising quality or performance​.

The ability to adapt to labor and cost challenges will be crucial for construction companies aiming to remain competitive in the current economic landscape.

Mergers and Acquisitions (M&A) Activity

Trends in M&A

The construction industry has seen a notable increase in mergers and acquisitions (M&A) activity. Between October 2022 and September 2023, there were 184 M&A deals, with a total estimated value of $3.7 billion. This surge in M&A activity is driven by strategic reasons such as market expansion, achieving cost efficiency, and enhancing resilience to market fluctuations.

• Market Expansion: Companies are using M&A to enter new markets or expand their geographical footprint. This allows them to access new customer bases and diversify their revenue streams.
• Cost Efficiency: M&A can lead to economies of scale, reducing operational costs and increasing profitability. By consolidating resources, firms can streamline operations and improve efficiency.
• Strategic Growth: M&A enables companies to acquire specialized expertise, advanced technologies, and valuable assets that can drive growth and innovation. It also allows firms to strengthen their competitive position in the market.

These strategic reasons underscore the importance of M&A as a tool for construction firms to navigate economic uncertainties and capitalize on growth opportunities.

Impact on the Industry

M&A activity is reshaping the construction landscape by fostering consolidation and enhancing the capabilities of firms. The increased M&A activity is leading to the formation of larger, more diversified companies that can better withstand market volatility and economic downturns.

• Enhanced Capabilities: Acquisitions allow firms to integrate new technologies, expertise, and resources, enhancing their service offerings and operational efficiency.
• Market Position: Larger firms emerging from M&A activities have a stronger market presence, better access to capital, and improved bargaining power with suppliers and clients.
• Innovation and Growth: M&A facilitates innovation by combining the strengths of different companies. This can lead to the development of new construction techniques, materials, and technologies.

For example, recent significant M&A deals include the acquisition of specialty contractors and technology firms by larger construction companies. These deals are aimed at enhancing capabilities in areas such as digital construction, sustainability, and project management. Such acquisitions not only expand the service offerings of the acquiring firms but also accelerate the adoption of innovative practices across the industry​.

The implications of these M&A activities are profound. They enable construction firms to achieve greater scale, improve efficiency, and enhance their competitive edge.

As the industry continues to evolve, M&A will remain a key strategy for firms looking to grow and adapt to changing market conditions.

Conclusion

The Deloitte 2024 Engineering and Construction Industry Outlook highlights several critical trends and challenges shaping the future of the construction industry.

Key findings from the report indicate that despite economic uncertainties, the construction sector is experiencing growth driven by significant government investments and technological advancements.

Government funding through the CHIPS Act, IRA, and IIJA is crucial in revitalizing the industry. These initiatives are not only boosting manufacturing and infrastructure projects but also promoting sustainable development and technological integration.

The allocation of billions of dollars to critical sectors like transportation, broadband, climate resilience, and energy infrastructure underscores the transformative potential of these investments​​.

Technological advancements are redefining construction practices. The adoption of generative AI, drones, autonomous vehicles, and IoT sensors is enhancing productivity, safety, and sustainability.

These technologies are creating new business models and opportunities for innovation, ensuring that the industry remains competitive and forward-looking​​.

The labor market remains tight, with rising wages and a scarcity of skilled workers posing significant challenges, particularly for smaller firms. Managing cost volatility in raw materials and equipment is critical for maintaining profitability.

Firms are employing various strategies, including flexible contracts, bulk purchasing, and advanced procurement planning, to navigate these challenges effectively​.

Mergers and acquisitions are reshaping the industry landscape, fostering consolidation, and enhancing capabilities. Strategic M&A activities are enabling firms to achieve cost efficiencies, expand market presence, and drive innovation. These activities are crucial for firms to adapt to market fluctuations and capitalize on growth opportunities​.

The role of government funding, technological advancements, and market dynamics is pivotal in shaping the future of the construction industry.

References

1. 2024 Engineering and Construction Industry Outlook.
2. 2024 Energy, Resources, and Industrials Outlook.
3. 2024 Energy, Resources, and Industrial outlooks collections