The following article is based on industry data captured from FMI’s heavy civil contractor panel that provides input on key questions each quarter. This summary represents a sneak preview of our Q2 data, which will be published in the Q2 Heavy Civil Construction Index (HCCI) in late April.
As rising interest rates, inflation, bank failures, and myriad other trends continue to impact the overall economy, construction continues to be fairly strong during this otherwise uncertain period. Heavy civil project pipelines continue to build as organizations take on new projects, finish existing ones, and begin to see the benefits of the Infrastructure Investment and Jobs Act (IIJA).
For the second quarter of 2023, the Heavy Civil Construction Index jumped to 55.5, up from 51.3 during the prior quarter. This increase of more than a few basis points indicates high levels of optimism among the companies that participated in FMI’s quarterly survey. We’re also seeing continuing improvement in the economic outlook, which could be because construction generally lags the broader economy on this sentiment. While certain pockets of the economy are clearly managing through uncertainty right now, construction firms remain optimistic.
The bipartisan infrastructure bill that was passed into law in 2022 may be stoking optimism among heavy civil firms and may have also helped boost the index for the coming quarter. As contractors look to the remainder of 2023 and factor in the projects related to the IIJA, their optimism continues to grow.
Four Key Economic Indicators
Focused on four key economic indicators, FMI’s HCCI surveys companies on the state of the overall economy, the overall economy where the company operates, construction as a whole, and the heavy civil markets where the company does business. For the second quarter of 2023, the overall U.S. economy was the lowest-rated component while the companies’ specific business was the highest-rated component. Put simply, the closer you get to the income statement of the contractor, the higher their optimism.
We also asked about individual construction sub-segments, including highway, transit, aviation, commercial site, and residential. For the second quarter, the only two sub-segments that fell below 50 year-over-year on the index were private commercial site development and residential site development. This wasn’t surprising based on the current state of these two markets and their expected lack of growth.
On the bright side, both private commercial and residential fared better for the second quarter than they did for the first quarter of the year, indicating a slight uptick in sentiment. Companies still expect growth to slow in those two segments, but by less than expected during the first quarter of the year. Longer-term, survey respondents put both of these sub-segments at 50 on the index, meaning that an equal number of them thought it will be better or worse over the coming three years. This is less pessimistic than what FMI found when it surveyed heavy civil contractors in late 2022 for the coming quarter.
Burning Through the Backlogs
Contractors are adding backlogs significantly faster than they’re burning it. These companies say they aren’t growing intentionally, but rather that they’re struggling to get work completed due to the ongoing supply chain disruptions, material shortages, and labor constraints.
As a result, what was once viewed as a positive measure indicative of company growth has since become somewhat of a challenge as organizations struggle to burn off project backlogs and generate revenue. Instead, they’re just adding to the backlog and addressing the work that’s in front of them.
According to the second quarter survey, an overwhelming majority of contractors (about 85%) say that they’re at or above where they expect (or need) to be from a backlog standpoint right now. That’s a positive sign that could be related to the natural cyclicality of the heavy civil construction market with the busy spring and summer seasons right around the corner.
In comparing the profit margin on work they acquired during the first quarter versus the same period in 2022, about 90% of heavy civil contractors say their margin is at or above where it was a year earlier. Contractors say they’re seeing a steady margin rise for work acquired.
Despite overall uncertainty, heavy civil contractors are planning for strong performances in 2023 and 2024, supported by IIJA and other federal programs. While labor and supply chain issues persist, they are working through backlogs with higher margins and more opportunities to bid on projects.