Labor woes, material costs shrink profit margins

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Dive Brief:

  • Material costs and labor issues pushed first quarter profit margins in the U.S. construction industry to their weakest point since the middle of the pandemic, according to a Royal Institution of Chartered Surveyors report.
  • Those issues caused current first quarter profit margins to drop 27%, a significant reversal from the 4% growth posted in the 2022 fourth quarter, according to the report.
  • The report mirrors weak first quarter results from various public construction companies across the U.S., including Tutor Perini, Fluor and Granite.

Dive Insight:

High materials costs, inflation and labor challenges all contributed to a slow start to the year in the construction industry, according to the report.

That rings true particularly among publicly-traded firms.

For example, Los Angeles-based Tutor Perini posted a loss of $49 million in the first quarter of 2023, more than double the $22 million it lost during the first quarter of 2022. Meanwhile, Watsonville, California-based Granite Construction reported a loss of $23 million in the first quarter. 

Irving, Texas-based Fluor also lost $107 million in the first quarter, largely due to $80 million worth of charges on two legacy projects. Common issues on those contracts include lack of contractual protection for supply chain volatility, labor escalation costs and overall labor availability, said Fluor CEO David Constable.

But respondents in the RICS survey still remain optimistic about future profit margins. 

The survey reveals a “robust momentum” in the infrastructure sector, particularly among the energy and transport subsectors. For instance, two U.S. construction firms posted massive profit growth to start the year, especially for firms focused on those infrastructure projects.

Dallas-based AECOM reported an 84% jump in profits on Monday, largely due to federal funding from the Infrastructure Investment and Jobs Act, CHIPS Act and the Inflation Reduction Act, said AECOM CEO Troy Rudd. Dallas-based Jacobs Solutions also reported a 144% profit increase from a year ago on Tuesday, again due to IIJA funding and strong activity in water-related construction, said Jacobs CEO Bob Pragada.

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