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How To Plan for an Uncertain Economy With Digital Transformation

Originally aired on 11/7/2022

55 Minute Watch Time

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Transcript

Derek Belcher: 

Good morning and welcome, everybody. I think the recording has started. So for anybody that isn’t able to join us live, you can watch this back as the recording. I’d like to welcome everybody to this webinar and just take a moment to introduce the speakers for today. My name’s Derek Belcher. I’m the director of client success at Ineight. I’ve been fortunate enough to work with construction companies worldwide and advise them through their digital transformation journey and the adoption of modern technology in the construction industry. And I’m honored today to welcome Anirban Basu, Dr. Anirban Basu, Chairman and CEO of Sage Policy Group, economic policy consulting firm, provides strategic analytical services to energy suppliers, law firms, medical systems, government agencies, and real estate developers, among others. So welcome, really excited to have this chat with you today. And specifically, we’re doing this on the back of the publication of our Global Capital Projects Outlook report that Ineight produced. And I’ll give you the link at the end of this session to tell you where you can download that and read it for your reference.

So if you just jump to the next slide there, we’re going to talk about some of the objectives we want to cover in some of the high level topics we’re going to talk about today. We’ll explore some insights on whether the economy itself is already indeed in a recession, whether there’s room for optimism in the industry, and we’ll discuss how maybe investment in technology, it’s a good time to do that now as we start to move and future-proof your business in the construction world. So I think these are some of the main objectives we want to touch on today, among many others.

And a couple just sort of housekeeping items. This is going to be an interactive chat. We’re going to have a few questions from myself to keep the conversation going, but we welcome everybody else on the call to send some questions in and we’ll try to answer those as they come in. We’ve got a couple poll questions that we’re going to ask you throughout the session as well, so you can answer those through a text on your phone, so please have those ready and we can talk about those answers, as well.

We’ve got, Linda, it just says that we need to start sharing the screen, just want to make sure that we’re okay there. But I think we’re going to move on to just our… so this is an idea of some of the poll questions and we’re going to come visit those as we move through this conversation. But just to kick things off, get people started, I want you to grab your phone if you have it handy, and just maybe send us a quick answer to this poll question. Over the last three months, how has your company’s backlog fared? And as you guys can text in some of those answers, maybe I’ll give an opportunity for Anirban. Welcome. Introduce yourself, and we can start our conversation.

 

Anirban Basu: 

What can I tell you? Thank you very much, Derek, for the opportunity. Thanks to Ineight, obviously, and I’m actually reviewing again the report, the Global Capital Projects Outlook, and seeing some real optimism there and some real desire to digitize construction firms around the world. My name is Anirban Basu, I’m an economist. Please hold any further applause. And I’ve been asked to participate in this conversation about what is the construction outlook, is there a reason for optimism? What are the challenges? What are the opportunities? Which segments are likely to the best? And what does this mean perhaps for public contractors versus private contractors, all those kinds of things. So I hope we get an opportunity to discuss things with that kind of granularity, and that’s sort of what today’s agenda is.

 

Derek Belcher:

Awesome. Yeah, appreciate that. And now I’ve been following your work. I think it’s really great that people follow your work because it gives a kind of high level overview perspective of the economy as a whole, which is super important when it comes to construction industries, chasing projects, building projects, building the stuff that we live and use and work in every day. So I think we’ll start things off talking about that high level. We’re coming out of a pandemic, kind of an unprecedented time. What is your high level overview of the status of the economy as a whole as we come out of this pandemic? There’s talks of inflation, supply chain shortages, labor shortages, cost of borrowing, remote working. All of these things all together at the same time is kind of unheard of. How are you seeing the economy faring coming out of this?

 

Anirban Basu:

It’s Dickensian in the sense of it was the best of times, it was the worst of times. So for instance, when we look at the construction economy, many contractors tell me that they are busy. They’re operating at capacity, they have significant backlog. At the same time, when we look at the broader macroeconomic statistics, people are wrestling with inflation. Obviously borrowing costs are rising very rapidly and obviously a segment as leveraged as real estate and construction would be impacted by that. And we’ll certainly talk about that during this conversation, Derek, but it’s been a very rapid recovery from the early stage of the pandemic. By the second quarter of last year, gross domestic product in this country was actually above its pre-pandemic level. Just in the last three months or so, we’ve now recovered all the jobs that were lost in March and April of 2020.

We lost about 22 million jobs. We’ve now recovered those and then some. We actually have 800,000 more jobs operating in the US economy now than prior to the pandemic. The unemployment rate is down to 3.7%. As you know, there are 10.7 million available unfilled jobs in America. Consumers have been spending aggressively, businesses have been looking to buy and have been buying equipment in large amounts. And so right now, it’s a portrait of an economy that’s expanding. But the problem is it’s not overheated. We have consumer inflation at 8.2%. We have materials price inflation facing contractors of 16.3% over the past year. And so while the economy has been good, there are reasons to believe that the economy may not be nearly as good in 2023 and that for even those contractors with lots of backlog going in 2023, that could catch up to some folks in 2024. But we can discuss all of these things.

 

Derek Belcher: 

Yeah. No, very interesting. And it’s interesting to hear kind of the economy as a whole. And we’re going to try to focus a little bit more specifically on the construction industry today. Sage Policy Group is primarily an economic and policy consulting group, and you cover a lot of different industries, but I’ve noticed in your work that you seem to have a particular interest in the construction industry, kind of a secret love affair with the construction industry. What is it specifically about the construction industry that you find so interesting from an economist perspective?

 

Anirban Basu:

Derek, let me be honest with you, and let me be honest with the audience. When you start a small business, you don’t know what’s going to happen. You don’t know where the business is going to come from. And one of the things that we got lucky with is that an organization called Associated Builders and Contractors about 14 years ago needed a chief economist. And they have chapters around the country, and the Baltimore chapter of their organization, which is actually the original chapter of their organization, really rooted for me to become the chief economist. They pushed and Baltimore people support Baltimore people often. And so when I became the chief economist of Associated Builder and Contractors in 2008, it was just accidental. I had never done really very much construction economics, but over the last decade and a half, that’s much of what I have done.

So now I’m also the chief economist to the Construction Financial Management Association. I’m also the chief economist to the Modular Building Institute, but many, many others. And so yes, I have a love fair with construction because it’s very important for us to have the finest-built environment that we can have, the most productive, cleanest, greenest and most conducive to highest quality of life. But it has been the case that in some sense, construction has had a love affair with me, at least some of these associations that have given me the chance to research construction data and understand the industry and therefore talk about it to various audiences.

 

Derek Belcher:  

Yeah, no, I think that’s excellent. Absolutely true. Over the last couple decades, what do you see as advantages in the construction industry, being in the construction industry, especially in these economic times? And then conversely, what are some of the disadvantages you see being in the construction industry as compared to some of the other industries that you work with?

 

Anirban Basu: 

Well, there’s real advantages. I mean, one of them is it’s an opportunity for entrepreneurship. So you see lots of folks who may or may not have a college degree, may not have significant education attainment, but they start their own construction firm, they start their own painting company or their own glazing company, or maybe they start a mechanical contracting firm or whatever it happens to be. So I see so much entrepreneurship in the construction industry. That’s a fabulous thing. The second thing is there’s an opportunity to make lots of money. Construction, often these projects are really big, so if you can get the delivery process right, if you can deliver on time and on budget, people will pay extra for that. If you’ve got that nice reputation, that demonstrated capacity to do something that many contractors actually don’t do, which is deliver projects on time and in budget.

And so there’s an opportunity, there’s an upside here is what I’m trying to say. [inaudible 00:09:19] upside. And then of course just it’s nice to be able to see tangible outcomes for your effort so that if you’re in some of these occupations like, I don’t know, a life insurance broker or something like this, when’s the only time that you see tangible outcomes for your effort? When somebody dies. That’s no good. The same would be true for a mortician, I suppose. But in construction, you’re improving the built environment right now. You’re building the airports and seaports and office buildings and hotels. You can see that, and so that’s very exciting when people can see what they’re working on actually takes shape and improve this built environment and actually often add to the beauty of our communities. So anyway, those are the big advantages of construction, I think.

 

Derek Belcher:

Absolutely. Yeah, and I think it’s really important with these kind of entrepreneurs starting construction companies to have the right tools and the right skills and the right technology to build those businesses, because often they’ll start small but grow very quickly if they’re good at what they do. So that’s one of the great advantages in the construction business, is often you hear these smaller companies starting out and if they’re good at what they do, they very quickly build a backlog and have too much work, more work than they know what to do with or the tools and the people to supply that work.

And on that note, as we talked about before, during the pandemic, we kind of went into hibernation. We didn’t go out for groceries, we didn’t go do things, we didn’t go to work. We’re still doing things remotely. As life slowly returns back to normal, something curious has happened, and you talked about this in some of your work, it’s that skilled labor seems to have dried up. And it’s a question that a lot of people are asking, where has everybody gone? What are they doing? And then maybe we can talk on that a little bit and talk about how companies are maybe adjusting their approach, dealing with the fact that they haven’t got a lot of skilled labor around. And then on top of that, speaking about the entrepreneurs, over the pandemic, did people take a step back and decide to start their own companies and we’re just starting to see them growing as we see this skilled labor return? Or what are you seeing?

 

Anirban Basu: 

Well, first of all, the average construction worker is older than the average worker, at least in the United States. And that’s particularly true in the skilled construction trade. So that’s electrical work, that’s pipe fitting, that’s carpentry, so on and so forth. And so a lot of our finest construction workers are baby boomers. They learned their love of working in construction or their hands and minds or equipment at the same time early in life, often in high school in shop class, shop class typically taught by someone with enormous arms wearing a Rush tee shirt and driving a Trans Am. And so that group comes out of the seventies and eighties, and many of them enter the skilled construction trades because at that time, not everyone had bought into this mantra of, well, you got to have a four year college degree. If you want to be successful in America, you have to have a four year college degree.

And I think the educational structures around the country have sort of bought into this notion that, well, that’s it. You go to college, you’re good to go. But it does not satisfy every interest, every personality. I’ve said it many times that somewhere out there today is someone sitting in French literature class at some college studying Moliere’s Tartuffe, which of course is his greatest play, and they’re bored out of their skulls, but they’d be the world’s greatest carpenter. They were simply never exposed to that.

And so during the early stages of the pandemic, we saw a lot of baby boomers retire earlier than anticipated, about 1.6 million. And there went many of our skilled construction workers. And so when you’ve got too many people retiring, not enough entry among young Americans into the skilled construction trades, guess what? You have structural shortages. This preceded the pandemic, the pandemic made it worse. And then on top of that, the pandemic ushered forth this notion that people could work remotely, and a lot of workers these days actually prefer to work remotely. About 68% of people prefer to work remotely according to a recent survey by Good Hire, which is a background check company out of Redwood City, California. So you can’t do construction or skilled construction work remotely. You can’t do it. And so at the end of the day, we have the skill shortage and it will persist because it’s not cyclical in nature, it is structural.

 

Derek Belcher: 

Right, yeah. And have you talked to any construction companies that are taking a different approach to maybe skill up labor that they’ve hired? Is there more spend from construction companies in sending people back to school to get a trade?

 

Anirban Basu:

Oh, sure. There’s lots of firm participation with apprenticeship programs, for instance. And a lot of apprenticeship programs have been stood up in recent years with a lot of support from membership organizations and others, for instance. We do that at Associated Builders and Contractors, for instance, but many others do the same thing, and you can see that there’s an interest as we get set to rebuild much of America’s infrastructure in communities supporting more programs to train the next generation of skilled construction workers. So that’s happening.

Other firms, of course, one of the other ways to do this is to simply scoop up your competitors. So mergers and acquisitions are often driven by a desire for human capital. So if you find a smaller firm with a specialized group of people who have some very neat and interesting and profit maximizing skill set, you might see that as a factor behind consolidation. And we’ve seen a ton of consolidation as you know within the construction industry. And indeed many construction firms have actually purchased architectural firms to have that vertical integration. So various approaches, but I must tell you that we’re talking about digitization today and moving to next generations of construction technology. If you don’t have a workforce that can master today’s technology, it’s very difficult to adapt to tomorrow’s technology. And that’s one of the things that I think that has slowed productivity growth in the construction industry is that it’s hard to move to new technology when your workers are having tough time mastering today’s technology.

 

Derek Belcher:  

That’s right, absolutely. And I think definitely want to come back to that point because I think there’s also a bit of a shift happening as well as the skilled construction workers are getting younger. As you mentioned, baby boomers are retiring. The folk coming up now, they’ve grown up with an iPhone and an iPad, they’ve grown up using a computer. So the new technology, modern technology to help deliver projects safely on time and on budget, it’s not about teaching them how to use technology and use the new software and develop these new procedures, but it’s just about showing them the tool and having them go ahead and use it. So there’s less training involved. But I think really good topic that I think we want to touch on again.

But you mentioned about working remotely, and I think Linda, we’ve got a question if we want to revisit one of the poll question that was up there originally and see what kind of responses we got. And then additionally, we’ve got a poll question with regard to remote work. And I think it’s a very interesting topic. So we haven’t got any answers back on this one, but Anirban, I think we’ve talked about this briefly with the people that you work with, what are you seeing with their backlog. It’s as high as it used to be? Are they starting to draw it down? What’s going on?

 

Anirban Basu:  

I have not really seen any kind of draw down in backlog. Now, we survey our members every month at ABC. We do something similar at the Construction Financial Management Association. There are some people who are worried out there about what the future portends. That’s true, but when I look at the latest data regarding backlog, many contractors continue to tell me they’re getting bidding opportunities, they’ve got a significant backlog, that some project owners are moving forward with projects. And I want to delineate, of course, public construction, public works construction from private construction or privately financed construction. There’s a difference there. And many public contractors who I speak to, meaning contractors who work on public works will tell me, “Look, Anirban, we’re going to be busy for the next five years. There’s all this money lined up for infrastructure that we’re going to be busy for the next five years.” To the extent that I talk about weakness today, it’ll be in certain privately finance construction segments, but to date, to date backlog has actually held up reasonably well. I don’t hear a lot of talk about project delays or cancellations, certainly not cancellations. So the backlog is pretty stable.

 

Derek Belcher:

Okay, awesome. Yeah, great. I think the poll questions, we’re not getting responses. I think there is a bit of a technical difficulty there, but one of the ones I wanted to talk about was just the remote work. And so maybe if people want to put a comment in the chat or something, but just how construction companies are faring with this push towards remote work and if they seem to be losing staff going to other companies or other industries where remote work is a little bit easier because you don’t have to have boots on the ground. And I think that just adds to the other kind of, not issue, but hurdle that construction companies have to manage with this shortage in skilled labor, and now the idea that people want to be able to work remotely. So I think it’s an interesting aspect and really catalyst to try to make those workers on site more productive. The other-

 

Anirban Basu: 

Well, no…

 

Derek Belcher:

Yeah, go ahead.

 

Anirban Basu: 

No, I was going to say, yes, it’s remote work, but it’s also flexible scheduling. So my guess is out there right now, there are a lot of folks driving around Lyfts and Ubers who could be construction workers, who might even be construction workers, but they love the flexibility of turning on their Lyft or Uber app in the morning, then they turn it off in the early afternoon, maybe they drive in the evenings, maybe they don’t, but they choose that. Construction, not only do you have to be at the job site, at least for the skilled construction trades, we still can’t use digital technology necessarily to lay brick or to install windows or to install mechanical systems, whether heating or air conditioning, whatever it happens to be. And not only that, but often the timing is not flexible.

We often work in teams in construction, so when my teammates are there, I have to be there. And so yes, I think that it’s one of the reasons that it’s so hard to recruit in construction is because other industries now offer more flexibility in terms of managing one’s day. And of course in some cases, like professional services, the opportunity to work remotely. And yes, that makes recruiting for construction or finding people, young people in particular, to enter the construction trades much more challenging than it was pre-pandemic.

 

Derek Belcher: 

That’s right. Yeah. I think I got one more question and it really focuses on the challenges with construction and then we can jump into more positive areas of construction industry. But being an economist, you’re used to dealing with the challenges. What do they say? Economists are the-

 

Anirban Basu:

Dismal scientists. We’re the dismal scientists.

 

Derek Belcher:  

Dismal scientists. That’s right.

 

Anirban Basu: 

We rarely have any friends. Hardly any of us have ever been on a date. It’s a really sad existence and that’s one of the reasons our outlooks tend to be so pessimistic.

 

Derek Belcher:   

Right. So as a dismal scientist, Anirban, one of the kind of challenges that has been very pertinent recently has been the supply chain and getting materials to the site. Talking in the construction industry, how are people faring with those supply chain issues? Are they slowly getting better and what have they done to mitigate those issues in the past?

 

Anirban Basu:

Oh, I think they’re slowly getting better, but we’re nowhere close to the supply chain efficiencies that we enjoyed pre-pandemic. So pre-pandemic, what was the notion about supply chain? Just in time inventory management. If you want something, it’ll be there for you just in time, don’t worry about it’ll be there. But what has happened over the course of the pandemic of course, is that many operations shut down. They’ve had a hard time reopening because they can’t find enough workers, because their suppliers are having a difficult time finding workers. So you have all these component shortages all over the place. We have an incredible number of homes under construction right now, single family homes, but it’s because builders can’t finish those homes in many cases, they can’t get that garage door that they need. That’s a customized garage door, of course.

And these supply chain issues have improved since, let’s say late 2021, when they’re at their worst, according to various data. Their shipping costs have fallen in recent months, they have not risen. So delivery charges have been falling as well in some cases, but I got to tell you, this just in time inventory no longer operates particularly well, does it? Many equipment shortages, equipment delays, so on and so forth. And so that’s one of the reasons that so many projects are behind schedule is because if contractors can’t line up materials and equipment in a timely fashion, then nothing else works.

 

Derek Belcher: 

Yeah, I think I’m starting to see a lot of construction companies obviously focus on that supply chain with an eagle eye because they need to be able to plan out those big materials, those big vessels or pumps that are coming in, they need to make sure that they’re onsite on time so that they can finish the projects, as you said. So I think they’re looking for tools to help them manage that supply chain and the supply chain issues by putting some dates to when these deliveries need to happen in order to finish the project on time, and so they’re looking for new tools to be able to manage that delivery schedule.

 

Anirban Basu:    

Yeah, they’re also looking for new suppliers. So many contractors tell me that, “We used to source or this type of equipment or that type of machine from X supplier,” and now they use that supplier still, but you can’t count on that supplier anymore because that supplier often comes back and says, “I can’t get you that. You’ll have to look someplace else.” So now they have expanded the number of people from whom they buy materials or equipment, and that’s just a response to the supply chain issues, which linger. Russia, Ukraine, zero COVID policy in China. China’s [inaudible 00:23:28] to a quarter of global manufacturing. All of these things impact the global supply chain. Of course, much of what we use in America, we import, as it turns out. We’re starting to reshore more production, but we’re dependent on many foreign suppliers in this country. And in many cases, those foreign suppliers are not fully operable and so this is going to persist for quite some time.

 

Derek Belcher: 

Yeah. So not only are you having to manage your timelines more closely and schedule in a lot of buffer to make sure that you get these projects done on time, you’re having to manage multiple suppliers, way more suppliers than you used to because you’re going to have to go to multiple suppliers to get all the material you need. And then also, you’re going to have to deal with a lot of foreign suppliers as you did in the past, but now, in the state of the global world is that those foreign suppliers may be tougher to deal with. And getting stuff to you is harder, too.

 

Anirban Basu:

And here’s the other thing, the couple of other things. First of all, the construction lawyer I would say to you has never been more important. So as a construction lawyer who puts into your contract maybe that force majeure clause so that when that piece of equipment that you need to do the work does not come, you have some legal recourse to say, “Look, it was not in our control. And so this project delay, it can’t be laid upon us on our door and therefore we’re not liable for any damages.” So that’s one thing.

The second thing is I don’t think in our lifetime, or at least many of our lifetimes, have we seen this kind of materials price volatility. So the project may not begin for a year or something like that, 18 months, and so you know what materials you need, when do you buy the materials? How do you hedge that price so that if the price explodes for whether it’s natural gas or oil or soft lumber, copper or steel, whatever it is you’re trying to purchase, how do you protect yourself financially against that risk? And do you have the wherewithal, therefore, if that materials price goes up, let’s say steel prices surge, which has happened earlier during the pandemic on occasion, can I pass that cost increase long to my project owner, my customer, or am I stuck eating that from my profit margin? And does that turn what would’ve been a profit project into a money loser?

 

Derek Belcher: 

That’s exactly right. And I think you touched on this before, some of our conversations before this webinar, and that was the conversation around margin. A lot of these construction firms had a lot of backlog. They’re working on these projects, but now they’re faced with all of these issues, these challenges, and are you seeing them lose it out of the margin or how are they able to pass it on to the owner?

 

Anirban Basu: 

See, again, this is surprising to me, Derek, because again, I actually survey our members regarding their expectations over the next six months for profit margins. During my most recent survey, I had more contractors telling me that they expected their profit margins to expand over the next six months than shrink. And I’ve been shocked by this, because I would’ve thought that with these higher boring costs, higher costs generally, that more and more projected owners will be pushing back on these cost increases. And I’m sure more are, in fact, and eventually they’ll show up in the data, but to date, I have been surprised that contractors have not been more negatively impacted by some of these inflationary dynamics and these higher borrowing costs faced by their customers. I think eventually it will catch up to them. Again, I’m a dismal scientist, but right now I got to tell you, many of the contractors remain quite upbeat about the near term.

 

Derek Belcher:   

Great. Very interesting. And in fact, it is what we found in the Global Capital Project report, as well. It is rather surprising, but good as well. Speaking to a dismal scientist, we’ve got some positivity. One thing I wanted to, as an opportunity in the construction industry, something that I’ve always found very interesting coming from industrial engineering background is that over the past few decades, manufacturing retail, they’ve all had a dramatic increase in productivity and they’ve really focused on increasing their productivity. Most of it has been through technology. I mean, a big part of it has been through technology and better manufacturing means better supply chain management algorithms to guess that supply chain and what needs to be done there. But the productivity growth in construction has averaged 1% a year over the past two decades. And I still, I find that absolutely astounding.

I deal with a lot of customers that are doing estimating and they’re estimating a big project and they’re looking at productivity charts from two decades ago, and they’re still using that as their benchmark number to estimate their future projects. That hasn’t changed and it seems to still work. So why do you think that is and what lessons can you teach the construction or make us aware of from other industries that maybe construction industry can learn from and to help better that productivity and further that? I think it’s not all bad news because construction is quite different than those other industries, right? There’s always going to be an element of construction activities that are not the same from one project to a next, but 1% a year, I feel like we could do a little bit better than that.

 

Anirban Basu:

Oh, and there’s some measures out there, some studies that have found that in some cases over lengthy periods of time, construction productivity actually declines, that workers become less productive. And again, that’s what you would expect perhaps at least to a certain extent from an industry that has a tendency to lose its most experienced and skilled workers to retirement, for instance, and has fewer of the best and the brightest entering the construction trades. And don’t get me wrong, construction’s very hard work. It takes very bright people, but if a lot of those bright people are persuaded by their parents and educators to look elsewhere, to look to information technology or graphic design or whatever it happens to be they might be interested in, then we’re just not going to have enough brain power enter the construction trades. We need to change that by the way. And in certain societies as you know, construction is wildly productive.

In China for instance, they’re able to construct large airports in the span of less than a year. I mean, how do they do that? Human beings, construction, they’re able to, and in many cases it’s first class construction with very elaborate design. So why are we behind? Again, my very strong sense is there’s some inertia in our industry, that it’s very hard when you’re in an environment in which low bid winds and when construction never stops. So construction’s going on continuously and you can’t take a break to retrain those workers on the newest technologies so that you can adopt those newest technologies. So you end up using the current technologies indefinitely. You use productivity charts from 20 years ago indefinitely. And so the industry doesn’t just make much progress. So how do we get to the point where we have such skilled construction workers that we can actually embrace the technologies of today and the future? And there’s no obvious answer to that.

 

Derek Belcher:

And we’re starting to see, or I’m starting to see a lot of these younger construction workers, they’ve gone into construction, men and women looking for a new opportunity. And if they’re presented with two job offers, they’re going to very easily pick the construction company that they view as more focused on continuous improvement, productivity improvement, and most importantly, technology adoption. So we’ve got young construction workers coming out of university or college, trade school, they’re coming onto a construction site and if they’re handed a piece of paper to report their time or report their quantities, they’re not happy with that. That’s not good enough anymore. So I think this inertia and this use of the old tools and the old methods, I think it’s going to naturally change as we start to get the employees, the workers demanding that change.

 

Anirban Basu: 

Yeah. Well, I mean guess we could in some sense bifurcate the construction workforce. So on the one hand, there are the construction managers or the project managers and the estimators who largely work with computers, who are largely working with that digital technology, but they’re not actually engaged in the process of installing construction materials. They’re not dry walling, they’re not painting. And when you think about the construction’s productivity, you can have fabulous construction managers, you can have terrific estimators who just get it right in terms of what the inflation rate’s going to be and how much materials are going to cost for the future, all these kinds of things, but at the end of the day, what defines construction productivity is the people at the job site who are actually building the buildings, whether fulfillment centers or data centers, hotels, office buildings or bridges or whatever it happens to be, the structures, and that’s I think where the construction industry has become less productive or not quite as rapidly productive as other segments. It’s actually where the work gets done, not simply where it gets managed.

 

Derek Belcher: 

Right. Yep. And I think its big focus always is to take the busy work away from those construction folks actually building the building, take that busy work away, take that paperwork away, make that easier, make the insights from their work easier to find, manage, view, report on so that they can focus on actually doing the work. And more importantly, if you’ve got access to some of those metrics, you can look for better ways to construct and seek out productivity gains there. So I think it’s an exciting time.

I had another sort of worry or thought. There’s going to be a lot of infrastructure spend in the US coming up. Finally. Thank goodness. But speaking of that inertia and the status quo, what are your thoughts on how the US can be strategic about effectively spending all of this infrastructure money? And more importantly, or specifically, how can we make sure that we don’t get complacent with, we’ve got all this money, let’s build this project the same way we’ve always built it. We don’t really want to worry about changing our tools or how we do it or our processes because we’ve got the money anyways, lowest bid wins, we’re just going to do it as we will. So with all of this big spend, is there a worry that we could get complacent and not look to gain the productivity that we need to?

 

Anirban Basu:

Oh, absolutely. I’ve been very concerned about this, Derek, which is… on November 15th of last year, President Biden signed the Infrastructure Investment in Jobs Act, $1.2 trillion package, $550 billion in new money. On March 11th of last year, so earlier than that, he signs the American Rescue Plan Act of 2021. And that, among other things, offers $350 billion in direct financial support to state local governments and some of that money was be spent on infrastructure. So we have a lot of money parked at departments of transportation and other agencies around the country. We have these elevated materials prices. We don’t have enough construction workers. And so how can we ensure that the American taxpayer who’s staring down the barrel of a more than $30 trillion national debt gets value for their infrastructure dollars? That’s challenging.

And as you know, when you have money all at once, and now I’m thinking about the lottery winner, the lottery winner to come, because I think the jackpot’s up to $1.8 billion, something like that, when that lottery winner hits, they’re going to waste a lot of that money. Do you think they’re going to spend that money wisely? I doubt it. And so right now, a lot of these governments or agencies are flushed with cash, and so that’s when money often is wasted. Now, that’s not criticism of government. I think that’s human nature, but we want every dollar that the taxpayer is investing in infrastructure to be spent sagaciously and efficiently. But it’s hard to do that when concrete prices have gone up 14.3% over the past year, or construction worker wages arise at their fastest pace in four decades. How does a taxpayer get rate of return for their dollar? It’s going to be very tricky during the years ahead.

 

Derek Belcher: 

Absolutely. I wanted to touch on another thing that I heard you speak about previously was when we look to build projects these days in North America or the US I think you were speaking specifically, I thought it was very interesting you were talking about the design of these buildings. I think it was arenas you were talking about specifically, but we’re going to have to look for ways to spend that money in a smart way and make sure that we can use those facilities that we’re building kind of interchangeably or have them wired or designed so that we can use them for a sporting event one day and have an opportunity to use it for something else at another time. And I heard you speak about that, and I wondered if you wanted to elaborate on that for some of the construction executives and people listening here that are looking for the next project or want to make the next project a little bit more palatable for the owner.

 

Anirban Basu: 

Yeah, I mean, versatility matters. So imagine a situation like this. You’ve designed an office building, but the office vacancy rate in this country is very high right now. That’s a post-pandemic reality. A lot of workers are working remotely so demand for office space is down. Can you build a structure that’s easily convertible into an apartment building? Because as it turns out, at the same time, we don’t have enough housing. So that kind of flexible, adaptively reusable property I think will have the most value going forward. Can you do it? Can an architecture manage to do that so that the cost of converting from office use to apartment use or hotel use to apartment use is less than otherwise would be?

I’m not an architect, so I don’t know how that would work, but I know this, that office buildings are converted into apartment buildings very frequently these days. Hotels are converted into apartment buildings very frequently these days. And then, the other thing is that let’s say you’re building a football stadium as a community. So these days, a football stadium can cost what, $500 million, $2 billion, whatever it happens to be. How can you make that facility a year round facility as opposed to hosting 10 home games a season or whatever it happens to be, and then it’s dormant 355 days of the year? How do you do that? How do you make sure it can host concerts, that kind of thing. We need to build that into our built environment, that kind of adaptability, that kind of flexibility. And by the way, when you do that, you probably end up building fewer buildings and you end up, as it turns out, preserving more green space, more open space in the community. And of course that’s very important to quality of life.

 

Derek Belcher:

Yeah, absolutely. And I always take it back to designing this flexibility. The cheapest place to build an arena is on the computer. Virtual design, virtual design and construction. Being able to walk through that design and then have that virtual design connected to everything else that you need for that project: the materials, the activities, the work packages that you’re going to work to build that building. So building that construction project virtually first or having a very good take on it is super important when you’re talking about that versatility.

 

Anirban Basu: 

Oh, sure. That’s where the progress has been. And it’s been in BIM, and I guess that’s been around with us for quite some time so maybe that’s not the buzzword of the day, but the point is drones and all this 3D graphical imagery and so on and so forth, and all the project management software that’s out there, you’ve got many, many large businesses now that specialize in construction project management software, and they’re all good software. It just depends upon what platform often one starts with and that they’re going to continue to grow with that platform. But again, that’s where the progress has been. It’s been on the management side. How do we get the actual installational materials and the actual building to become more productive? That’s the big challenge. And robotics is part of the story. Modular building, construction done in manufacturing settings is part of the story.

But at the end of the day, what’s the big part of this story, Derek? It’s having a more skilled construction worker who can adapt to new technologies very quickly so that we can escape the old technologies. I mean, you look at a construction job site these days, Derek, it probably looks a lot like it looked like a century ago or 50 years ago. And you got somebody standing around with a sign saying, “Men working,” which of course should be gender neutral, but set that aside. The point is, I remember a construction executive in Baltimore told me about 10 years ago, said, “The last time we had a construction revolution in America was the advent of structural steel, and we really have not had any game changer since that time.” Now, that might be a bit of an exaggeration, but a lot of what we do these days looks a lot like we did five decades ago. And that coincides neatly with that lack of productivity growth.

 

Derek Belcher:

That’s right. One thing I wanted to touch on, because we deal with customers globally and in our outlook report, Capital Projects Outlook report, we had a special section for the APAC region and the Europe region that we deal with. One of the things that’s always interesting to me, and I’ve seen it firsthand dealing with customers in Europe, is that they are ahead of North America in terms of their digital transformation, their uptake in technology. And I have an anecdotal story.

I was out for a jog in Europe one day and I saw a guy, a construction worker, working on installing a new water line, I don’t know if it was a sewer or clean water line, I didn’t get that close, but there was one person working on this job and he had an excavator that was remote controlled and he was standing there beside this pit digging this hole, working on this project seemingly by himself, one truck, one remotely-controlled excavator and this fellow. I’m sure he had other people come around and help him, but that, it boggled my mind because here we have five, six, seven people working on a similar project standing around. And so I find it very interesting that Europe has taken that front step in productivity gains in the construction world. And I don’t know if you have any evidence to that or have seen that or talked to anyone about that.

 

Anirban Basu: 

Oh sure, of course. So there’s a cultural aspect to this, by the way. So my very strong sense is that in at least parts of Europe, there is this enormous respect for precision manufacturing and construction. I mean, this is the continent that gives us Mercedes and Ferrari and Lamborghini and so on and so forth. And if you look at the Germans or the Swiss, really leaders in terms of precision manufacturing, it’s no surprise that Swiss watches are the finest watches in the world. It’s because there’s a tradition there, a history there.

And in Germany, it’s very common, by the way, when a young person graduates from apprenticeship program, let’s say over two years, to be featured in the newspaper because they put as much importance in that kind of education and training as they might in somebody graduating from a leading German university. Around here, when some kid graduates from Stanford or Yale, that might get into the newspaper, but rarely would you see anyone in the newspaper graduating from a two year apprenticeship program to go into the skilled trades. We need to have that level of respect for that other pathway to prosperity.

 

Derek Belcher:    

That’s right.

 

Anirban Basu:    

And we don’t culturally, and that’s one of the reasons that I think the Europeans, in fact in many cases do have that respect for the craftsperson. And so they end up having better craftsmanship and more productivity growth because those craft people want to work with the latest technology, they want to be as productive as possible.

 

Derek Belcher:  

Absolutely. Yeah, and if they have that mindset, the precision, building, as you said, the people actually doing the construction, they are celebrated equally and they’ve got that productivity part kind of dialed in and now they’re looking for technology to make sure they’re at the forefront of the transformation on the managing side, as well. So I find that very interesting.

And then one thing that you’ve touched on and I find very interesting, and I think we’re going to see a lot of this, because you mentioned construction, there’s a great opportunity for entrepreneurs. It goes hand in hand that we can help in North America being that we celebrate entrepreneurs in North America. And so I think entrepreneurs that are taking on the construction world is going to be very important and I think we’re going to grow very quickly that way. And I think that’s going to be a change coming out of the pandemic. People were able to take a step back, look at what they value, maybe start their own company, look at the tools they want to use to develop that company and move forward and go out and get some work.

You’ve referred to this as the great recalibration, at least I’ve heard you mention that word before, and I find that very interesting because what do you think’s going to change or shift in terms of corporate and business norms coming out of the pandemic? And if so, how do you think these are going to affect the construction industry?

 

Anirban Basu: 

Well, I mean, I’ll tell you, I think that the world has changed in the following way. Many ways, of course, but one of the following ways is this, that when I was growing up and when I started my career, I was very thankful for my job. I understood how important it was to be able to put bread on the table and pay my apartment rent and all those kinds of things, eventually buy a house. And yes, unfortunately I had to get married because my parents made me, but the point is I was very thankful for that job.

I think younger workers these days take the job for granted. They think they’re doing you a favor by showing up to work. And they are. And they are. But the power seems to have gravitated away from employer to employee. And there’s some benefits to that, but for employers, it means we have to work that much harder to hold onto people, to keep them loyal, because the level of loyalty, when people were graduating from high school when I was graduating from high school, the notion was, “Maybe I can find a place that’ll employ me for 30, 40 years and I’d love to spend my career in one place.”

These young people, “I’ll get a job, I’ll go leave in a year, I want to leave in two years,” whatever. And so that’s, I think one of the things that’s changed for contractors and other employers. How do you retain that staff stability? How do you keep the same team members, especially your best team members, with you for year after year after year? So they get better as you get better. They grow with you. Is it equity? Is it just higher pay? Is it access to the latest technology? Is it just the social mission of the organization? It’s probably all of those things, by the way, but I think that’s at the heart of what faces construction today, to be more creative in terms of recruitment and retention of top talent.

 

Derek Belcher:

That’s right. Yeah. No, I mean retaining… getting talent, retaining talent is always a challenge, and I think we may see in this kind of recalibration a little bit more project-oriented teams coming together and maybe disbanding at the end of a project. There’s nothing more satisfying in construction than seeing a project from start to finish and being able to walk away and say, “I built that.” That’s something that, it’s a feeling you don’t get in many other places. And so I think maybe a team coming together for a specific project is going to be important and I think that onboarding of folks into that technology stack or a process to build that is going to be really important to make sure that you have the ability to onboard people quickly or perhaps a tool that they’ve used before. And so I think that’s something else that I’ve seen a lot of construction companies looking for is that, “If we use this tool, who else is using it so that if there is people that want to work for a project and then move on, maybe come to us, they have a technology stack that they’re used to working with?” Which is I think important in spinning people up for a specific project.

 

Anirban Basu: 

And actually, that’s how Hollywood does it when it makes movies. People come together, set designers and camera people and actors and directors and producers, and then they disband it. They may never work together again.

 

Derek Belcher:  

That’s right.

 

Anirban Basu:  

And so. now there’s advantages to that, to have that flexibility of being able to put teams together with certain skill sets, but there’s a disadvantage too, isn’t that right? Which is the transaction cost, getting the team together, and how do you know that that team member will be available for that particular project at that time? And so when people are working disparately like this, that can also create some organizational issues. So look, no matter what you do, it’s a challenge because construction is hard.

 

Derek Belcher:   

That’s right.

 

Anirban Basu: 

And that’s where it is that it’s hard. So many things can go wrong. It only takes, and everyone in this conversation knows that, it only takes one thing to go wrong and the whole project is shot, whether from the perspective profitability or customer satisfaction or wherever it happens to be, or even quality of construction. So it’s a hard world, but of course it’s often what defines our quality of life. I mean, if somebody says to you, “Boy, Denver’s a beautiful city.” I mean, they’ll say, “Okay, yeah, the mountains are there,” but they’re also talking about the built environment. If they say Austin is a beautiful city, or they’ll say Tampa is a lovely city, they’re often talking about the built environment as much as anything else. So it’s really that built environment-

 

Derek Belcher:

Absolutely.

 

Anirban Basu: 

… that nurtures our quality of life, and we need the best construction workers to have the highest quality of life.

 

Derek Belcher:  

Absolutely. And one of those challenges in construction is delivering on time. And so I’ve got my eye on the clock here, and I just had one kind of final general question for you Anirban, and thank you again for giving us your time, and then maybe we’ll try to open it up, Linda, if we have any questions from the audience. And then we’ve got a couple of closing remarks. You talk to a lot of construction leaders, executives, managers, directors, associations. If you had to give maybe one or two key market indicators, key performance indicators to the market from an economist’s perspective, what would you tell them to focus on? What would you tell them to look at?

 

Anirban Basu: 

Oh, I look at the leading indicators like residential building permits if you’re a home builder, which of course are way down right now, mortgage applications, if you’re a home builder, which are way down right now, and on the commercial side, I often look at the architecture buildings index. If architects are busy upstream, contractors are likely to be busy downstream. And by the way, architects are very busy right now. Lots of design work is taking place right now and many architectural firms will tell you, “Our leading problem is we can’t find enough architects,” which sounds similar to what we see in construction. By the way, many engineering firms will say the same thing. “Our leading issue is we can’t find enough engineers.” And by the way, immigration policy probably has something to do with all of this, but setting that aside, that’s what I look for in terms of leading indicators.

I think that this economy is headed into a deep recession next year and that what contractors are going to find initially is that by and large, many contractors tell me that, “Yeah, our cost of living construction services way up. Equipment’s more expensive, materials are more expensive, people are more expensive, but we’ve by and large been able to pass along our cost increases to our project owners. We’ve been able to hold the line on margin.” I think it’s going to get more difficult to do that in 2023, hold the line on margin, as project owners begin to push back more aggressively on escalation. And then in 2024, a higher fraction of contractors might find it’s more difficult to find work to hold backlog steady, that backlog will start to shrink. Now, I could be dead wrong, I’m an economist, but that’s been my forecast all year and I’m sticking to it.

 

Derek Belcher: 

Excellent. Appreciate that. Thank you. Linda, do we have any other questions that I can’t see in the chat at the moment, or are we-

 

Linda: 

No questions at this time.

 

Derek Belcher: 

No questions at this time. All right. Well, that means that you’ve answered all of them. People were probably about to type them and we managed to get to them before they could type it, right Anirban?

 

Anirban Basu:

I’m assuming that’s right. That’s [inaudible 00:51:39]

 

Derek Belcher: 

We’ll assume. Is there anything else you wanted to throw in before we look to close up? And I got a couple extra slides here to close up, but I mean, great chatting with you. Always a pleasure. Anything else that you want to let everybody on the webinar know at the moment?

 

Anirban Basu: 

No. Vote tomorrow and go Ravens. I can’t think of anything else on this Monday as it turns out. I know some people will be watching this taped, but it’s Monday today and Monday Night Football tonight, and the Ravens are playing. So a quite good franchise.

 

Derek Belcher: 

I’ll be [inaudible 00:52:15]

 

Anirban Basu:

My outlook for that is quite good.

 

Derek Belcher:  

I’ll be a Baltimore fan today, a Canadian Baltimore fan. How about that?

 

Anirban Basu:  

Hey, they’re rare, but they’re precious.

 

Derek Belcher:

Awesome. Okay, Linda, I think let’s jump to the next slide, there. And I just wanted to cover off a couple of things and also remind everybody that I think it’s super valuable to follow Dr. Basu’s work, and I want to let you know how you can do that. Before we close, I just wanted to say that webinar is brought to you by Ineight, and again, I’ll give you the links to download the Global Capital Projects Overview for 2022. I think it’s a really important read, at least the closing. You can read the closing remarks and then pick where you want to read into the details.

Ineight is committed to providing insights and resources to help those of you who are building the world around us. So we talked a lot about the built environment and how important that is to build. So we’re committed to providing those resources to help and we’ve got field tested project management software for the owners, contractors, engineers, and designers who are building the world. Over 575,000 users and 850 customers worldwide rely on Ineight for real-time insights and help manage risk, keep projects on schedule and under budget across the entire life cycle. So helping to improve that productivity on the managing side, take away some of that busy work and increase the productivity on the construction, on the actual construction, physical construction side.

And I thank you for everybody for joining, and specifically, Anirban, thank you for your time. Honored to have you talk with us for an hour. And I really want to encourage everybody to check out Sage Policy Group, sign up for their newsletter, basu@substack.com. Really interesting material in there. A lot of other webinars that Anirban has done. Always a pleasure to listen to some of the new insights. And I think you’re very quick to update your data every time there’s a release of new numbers, so I appreciate that, as well. And so please check out Dr. Anirban’s newsletter, Sage Economics, and then please download the Global Capital Projects Outlook from Ineight, and after you’ve listened to this webinar you can read some of the insights that we found in that report. So with that, if there’s no other questions, we’ll close for today. Thank you again.

 

Anirban Basu:  

Thank you all.

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