Latest study shows Civil Contractors Cautious in expected revenue and profit margin changes

The latest edition of The Civil Quarterly (TCQ) from Dodge Construction Network reveals that contractors continue to expect an increase in revenue and profit margins, but notably less since last quarter, potentially due to acute supply chain issues and potential economic downturn.

The report, produced in partnership with Infotech and Hexagon, is based on a quarterly survey of civil contractors and engineers that examines the business conditions that they face and also includes two unique topics per quarter exploring key trends in this sector.

Civil Contractor responses about their market expectations reveal the following:

• Over half (53%) still expect an increase in revenue in the next 12 months, which has slipped notably since last quarter (66%)
• Nearly half (45%) are expecting increases to their profit margin in the next 12 months, but slightly fewer than last quarter (51%)

In a normal market, these levels of expectation in revenue and profit margins would be powerful. However, the decreases in those expectations, as compared to the previous quarter, are noteworthy for the lack of correlation to current data indicating the volume of work.

The ratio of contractor’s current level of backlog and the level they consider ideal is 97, which suggests they are already near capacity in their volume of work. Furthermore, 77% report very high confidence levels in the volume of work in the near future.

Despite notions of a boom market, one indication of what is driving caution is that 60% of those who expect reduced revenue and/or profit margin believe an economic downturn will decrease the number of private projects. This is a significant increase from the 49% reported at the beginning of 2022. This increase could represent a shift from assuming an economic downturn was a short-term issue to now believing it to be a longer-term one.

In addition, contractors continue to report supply chain challenges. Nearly all (93%) report that their construction projects have been impacted by fluctuations in the cost of construction materials, and 93% also expect cost increases for construction materials to continue for at least another six months.

The combination of these two factors may make contractors far more cautious about what to expect in the immediate future. However, there are signs that the market will continue to see high levels of activity, evidenced in the findings from engineers who are both experiencing an overload of backlog now (with the ratio of real to ideal at 150) and the majority of whom (88%) have high confidence that the market will continue to supply them with new work for at least two years.

All these factors make alternative strategies or ways of doing business increasingly important in the civil sector. The two special topics included in the study this quarter both offer ways to help contractors work more efficiently include:

• Offsite Construction: 50% of contractors find that using offsite construction methods like prefabrication and modular construction improves the cost of their projects compared with projects that do not use this approach. In addition, 42% find it improves schedule, 34% quality, and perhaps most crucially these days, 30% supply chain management.
• E-Bidding: The use of bid aggregation services by contractors grew between 2020 and 2022 by 8 percentage points up to 88%. While the most prominent benefit for contractors is the ability to find good bid opportunities, many also find it improves the process of submitting bids by making it faster, easier and more reliable.

The Civil Quarterly provides a quarterly snapshot of the current business health of contractors operating in this dynamic environment and explores trends in the industry. The report is the result of a partnership with Founding partner Infotech^® and Platinum partner Hexagon. It is based on original research collected from civil contractors and engineers and is available for free download to inform stakeholders in the U.S. civil construction industry. Future editions will continue to address a wide range of related topics providing a comprehensive view of this complex and ever-changing segment of the construction economy.