2006 Buyers' Intentions Study

By Anne Gelaude and Greg Sitek -- Associated Construction Publications, 11/15/2005

Economists are forecasting continued growth in 2006. Most are predicting increases in virtually every phase of the construction market except for housing which is expected to decline slightly. The housing market has been soaring upward for some time now and it's not only new construction but also the remodeling side of the equation. The experts believe that interest rates will increase and that as a result housing will slow.

Although the industry is on a definite growth curve, one that has been buttressed by the passage of a reasonably good highway bill, there are some concerns about the cost of materials and supplies.

Ken Simonson, chief economist of The Associated General Contractors of America (AGC), recently issued an analysis of the cost of construction from 2001 to 2005, which examines reasons for the dramatic rise in construction costs in the past two years as compared to the general rate of inflation.

"Simonson compares two common inflation measures, the consumer price index for all urban consumers (CPI-U) and the producer price index (PPI) for finished goods, against a variety of PPIs for construction materials and groupings of materials and finds that, in general, consumer prices have remained very moderate through the entire period, although they have accelerated in the past two years as oil prices have set new records ... In contrast, construction costs have risen dramatically in 2004, 2005, or both, after having moved similarly to the overall PPI in the previous three years.

"Hurricanes Katrina and Rita struck especially hard at the supply of construction inputs ranging from diesel fuel to plastics to cement. As of late October, the majority of Gulf of Mexico crude oil and natural gas production was still shut in, virtually assuring that construction materials that use oil or natural gas as a feedstock would be much higher priced, at least through the winter heating season, than if the storms had not occurred. Katrina also interfered with imports of cement and natural rubber, and the hurricane damaged plants that produce gypsum, lumber and plywood, and liquid hydrogen for galvanizing steel.

"Major construction materials all showed price spikes in 2004 and 2005, after declining or experiencing very modest increases between 2001 and 2003," said Simonson.

"Consequently, many contractors and owners were making little or no provision for price increases in 2004, had not locked in materials prices and had to absorb huge, unexpected cost increases. For example, metal fabricators that had contracted to provide products at fixed prices were squeezed by scrap surcharges and base-price hikes from mills. Some fabricators declared bankruptcy, and many stopped guaranteeing prices beyond a short period."

Virtually all of our materials and supplies move across our road system on diesel-powered trucks that consume large volumes of fuel. With the cost of fuel as high as it is we can expect to see these added transportation costs passed on to all levels of consumption. Hopefully this won't trigger national inflation. There are economists who believe that the economy is and has been slowing for the last several months. This started before the tragic series of hurricanes that have wreaked havoc on our Gulf Coast from one end to the other.

The impact that Katrina and Rita are having on our materials and supplies, as noted earlier by Simonson, will be far reaching and long lasting. When you juxtapose these events on last year's earthquake and tsunami the strain on materials, supplies, equipment, and labor becomes very evident. Construction will flourish for the next several years as rebuilding continues but the costs will continue to increase.

Our annual Buyers' Intentions Study looks at what you think of the construction market as it affects you and how it influences your plans to purchase equipment and other related products that help you function as a contractor. As you read through the analysis of the survey results you will see some changes over last year and some shifts. One of the most notable is the increased percentage of respondents who believe the economy will remain strong and will continue to grow; 92 percent of the participants believe the economy will remain stable or grow.

Equipment ownership versus rental has made a shift with survey results indicating an increase in rental and a decrease in ownership. This is reflected in the sale of equipment as reported by Associated Equipment Manufacturers with high volume sales in the machines common to frequent rental. Equipment manufacturers across the board have had a very good year. Industry experts point to an active rental market as being one of the contributing factors.

This year's survey results indicate that contractors are buying more used equipment than new. Again the finger is pointed at the rental market's influence. There is more used equipment available as rental operations acquire new inventory to meet increased demands.

What's on the shopping list? Topping the list is computers and computer software. This correlates with the survey results indicating computer use. It's up. The No. 2 item on the plan-to-buy list is light to medium trucks (to 26,000 GVW). Generators and compressors are high on the list and so are lasers. When looking at purchase plans for 2006 the top items are repeats of last year's results.

The emphasis of intended purchases has changed over the years as the way we do business has. Finding tools and equipment that can give you an advantage, help you get jobs done quicker with greater efficiency and keep your crews from going down the street are critical to success. Looking ahead over the next 12 months is challenging because there as so many unusual factors influencing both the national economy and the construction market.

To be successful and survive in the coming months you need to plan ahead and get as many price commitments on critical machines, materials and supplies as you can. And hope the hurricane season in 2006 is less brutal than it was this year.

Hopefully the information gathered for this survey will help you plan ahead so that you can succeed and survive the challenges of prosperity.

The survey was conducted using subscriber e-mail addresses from the circulation of all 14 Associated Construction Publications (ACP) magazines in addition to respondents in the construction industry accessing the survey online. Surveys were completed online as hosted by the regional publications' website, www.acppubs.com. The responses were exported into a Microsoft Excel spreadsheet and tabulations were performed using Excel's data analysis tools. These results were used to report the percentages in the following charts. For the purpose of this study, all responses are reported as a national aggregate.

All contractors who are subscribers with known e-mail addresses were eligible to participate, opening this year's survey to a population of 15,113 construction professionals. In all, 227 subscribers completed the survey.

The following results in both text and graphic format highlight the issues from the survey. The early questions ask about the demographic profile of the individual respondents and the firms for which they work. This information will provide an overview of the respondents who participated in the survey. The middle section of the questionnaire asks about equipment buying decisions, both present and future. From this section, next year's forecasts regarding equipment — from types of equipment desired to means of acquiring the equipment — are generated. Finally, the last section of the survey asks comprehensive questions surrounding the use of the Internet for business purposes. With the growing ease of using the Internet, knowledge about how other construction industry professionals are using this additional research and purchasing tool is summarized. Together, the three sections combine to provide a profile of construction industry professionals throughout the country who are making decisions about equipment purchases with varying levels of information technology assistance via the Internet.

Click here to go to the detailed results of the survey

This year's survey results indicate an optimistic approach to 2006 with most respondents feeling the market will increase. Many companies are still enjoying the benefits of the late 1990s when cash flow allowed equipment to be bought and the current fleets still reflect the signs of ownership, although the rates of ownership have decreased from last year and rental usage has increased.

Fifty percent of respondents to this year's survey are representative of businesses with $500,000 to $5 million in annual contract volume, a greater number of firms in the mid-size category than last year. Over 55 percent of respondents were also either the owner of their company or the president. Equipment purchase plans for 2006 include many of the same machines that were listed in the last two years of survey responses, with the addition of one new item to the top 10 list.

Remaining cognizant of the environment in which construction professionals work, the intent of this survey is to help highlight the changes that are moving the industry so that businesses can react to these influences and focus activities to help them operate profitably. Competitive strategies can then be effectively derived from such market and industry knowledge.

Your comments and suggestions regarding this Buyers' Intentions Study are appreciated. You can mail, fax or e-mail us.

Mail:
Associated Construction Publications
30 Technology Parkway South, Suite 100
Norcross, GA 30092
Fax: (770) 417-4138

E-mail:
agelaude@reedbusiness.com or gsitek@reedbusiness.com