US Construction firms are likely to find reasons for optimism in 2025
In 2024, the construction industry showed strong growth, with a 10% rise in value added and a 12% jump in gross output. Construction spending exceeded $2 trillion and remained stable in early 2024. Despite a talent shortage, employment reached 8.3 million in July 2024, exceeding the previous high of 7.7 million in 2006 and steadily increasing for over a year.
The Dodge Momentum Index, which tracks nonresidential building spending, rose in the second quarter of 2024, indicating more confidence among market owners and developers.
However, the sector faced challenges like high interest rates and inflation, impacting residential and commercial projects. Ongoing difficulties in lending and weak architectural firm billings are expected to persist. Nevertheless, government investments and a potential drop in interest rates may offer some relief in the upcoming quarters.
2025 Energy, Resources, & Industrials Outlooks
Looking ahead to 2025, there are reasons for optimism. The latest Deloitte's analysis suggests that short-term interest rates may fall after a 50 basis point cut by the Federal Reserve in September 2024. Improved economic conditions are likely to boost construction demand across various sectors.
1. Managing the labor mismatch:
The construction industry is facing a serious talent shortage. From August 2023 to July 2024, there were an average of 382,000 job openings each month, marking three years of increased openings nearing 400,000. This rise in job openings may be due to higher spending in manufacturing and nonresidential construction. The situation is expected to worsen as the industry anticipates growth, raising concerns about the expanding labor gap.
Attracting workers is a major issue for construction companies, impacting both skilled and unskilled roles. Recruiting on-site labor has been particularly tough, especially for skilled positions. The demand is complicated by projects such as data centers, semiconductor factories, and large-scale developments that need specialized workers like welders and electricians. A large data center can create about 1,700 local construction jobs over 18 to 24 months.
The engineering and construction field is also experiencing changing skill needs. For example, 44% of the skills needed in infrastructure are likely to change in the next five years. This evolution will complicate the search for talent as companies look to fill gaps in both traditional skills and those necessary for a more digital and automated future. There is increasing demand for digital skills such as data analysis, cloud computing, and software development, as well as soft skills like people management and business relations.
1.2 An aging workforce presents another issue
With projections indicating that, by 2030, the average age of craft workers will be 46 years. Firms also face a perceived lack of interest among younger generations who possess different expectations when it comes to work and the working environment. This creates a unique challenge necessitating a balance between institutional knowledge that experienced employees bring and the new skills and perspectives of younger employees.
The industry is likely to keep an eye on several important workforce issues in 2025. Talent shortages are likely to remain a key concern for the E&C industry. In particular, the increase of manufacturing construction and the continued build-out of data centers and energy-specific projects could put additional pressure on the industry.
For example, skilled labor shortages and increasing construction costs could delay some natural gas projects on the US Gulf Coast. Additionally, industry players are likely to monitor the evolving blend of skills (technical, digital, and managerial) necessary to satisfactorily complete major projects.
The engineering and construction industry could consider a multitude of strategies to address these issues in 2025.
Integrating AI-enabled automation and digital tools: These tools can augment workforce productivity by helping workers focus on high-value tasks. They could also help attract younger workers to the industry while aiding the retention of older workers by reducing physical strain and enhancing safety. Additionally, AI-powered technologies like robots or autonomous machines can be used in labor-intensive trades like drywall installation, thereby helping the workforce to perform more tactical jobs.
Offering more opportunities for career growth and diversification: To combat high turnover rates, organizations can encourage cross-skilling and internal mobility through job rotation and cross-training. The use of experiential learning tools like augmented reality and virtual reality, for example, is one way to help workers build new skills. Training tradespeople and technicians on a variety of tasks and developing diverse skill sets is becoming more common, driven by a desire for a more consistent work environment, higher wages, and more challenging work.20
Recruiting from outside of the sector: Companies may also tap into alternative sources of talent, such as employees transitioning from tech and other sectors.
Creating partnerships: Companies can focus on or scale up ecosystem partnerships with academia and government to help create a steady talent pool by offering apprenticeships and work-study programs.
2. Increasing technological integration:
Digital tools and technologies are being explored across the value chain to enhance productivity, streamline operations, bolster safety, and improve the customer experience. Some industry firms are already using technologies such as cloud computing, IoT devices, 5G and private cellular networks, and AI in their operations. Now, they’re placing a new emphasis on scaling technology opportunities that range from the back office to project delivery and connected construction, digital twin, and elevating building information modeling systems.
Companies are leveraging digital tools and AI to increase their capacity and capabilities, aiming to offset labor shortages by using these technologies to help optimize a portion of work hours.
Building Information Modeling (BIM) has advanced with improved common data environments and ISO 19650 standards. It creates digital representations of projects to aid in material selection, scheduling, clash coordination, conflict resolution, and minimizing risks, all while maintaining budgets. These tools enhance company capacity, enabling the execution of complex projects efficiently. For instance, one mechanical and electrical construction company has significantly improved its margins by doubling its BIM designers and investing in prefabrication.
Digital twin technologies enable companies to enhance value by simulating and optimizing construction processes. A US-based infrastructure consulting firm is using digital twins and augmented reality to streamline operations amid labor constraints. The industry is progressing toward a "whole digital twin" concept, which includes the physical twin, operational twin, and intelligent twin.
The operational twin facilitates data feedback loops between operations and engineering, improving design efficiency and safety, reducing downtime, and increasing utilization. While many companies already utilize physical and operational twins, competition will likely focus on the intelligent twin, which identifies complex patterns through large data sets and is suitable for AI and machine learning integration.
Robotics and automation are increasingly gaining traction in E&C firms. Some firms are incorporating robots to transport materials autonomously, perform precise welding, plan layouts, and operate remotely in hazardous environments.26 With the integration of AI, these robots can be adapted to new tasks, creating smarter construction sites and paving the way for a future where automated systems, humanoids, and collaborate robots (cobots) are commonplace,27 working to ensure cost-effective and sustainable construction practices.
Beyond these, companies will likely invest in the next wave of transformative technologies such as augmented and virtual reality, generative AI (gen AI) (over the next one to three years),28 and even more autonomous gen AI applications like agentic AI. Construction firms could continue to reinvent operations as these high-performance and cutting-edge technologies become more of a reality.
3. Financial considerations:
Against the backdrop of cost overruns due to elevated inflation and interest rates, E&C companies are expected to focus on creating value and sustaining growth through strategic divestitures, refined capital allocation, cash flow optimization, and increased private equity (PE) investments in 2025.
Large construction firms may optimize their portfolios by divesting noncore assets, cleaning up balance sheets, and reinvesting in core business areas to enhance overall performance. Companies may limit financing for or completely exit noncore business units or product lines. They may also look to optimize their geographic expansion.
These strategies aim to enhance margins and drive targeted growth.
Many large firms may consider shifting from lump-sum contracts to reimbursable projects to improve earnings predictability and cash flow. Companies may also implement strategic cost reduction programs from shared service delivery to strategic sourcing and category management for materials and services to optimize cash flow. Owners are increasingly prioritizing projects in industries that promise higher returns on investment while minimizing short-term risks.
Somewhat conversely, smaller firms will likely seek market share and revenue growth, attracting interest from large firms as well as PE investors, presenting new opportunities for expansion.
Mergers and acquisitions activity will likely be an important growth strategy for both large and small firms. Between August 2023 and July 2024, there were 528 completed M&A deals in the construction industry, totaling more than US$38 billion, which is more than three times the deal value from the previous year.34
Deloitte’s analysis of major deals revealed that construction firms are integrating vertically as well as horizontally. Vertical integration deals include acquiring companies within the supply chain (such as building products manufacturers and their suppliers) to enhance control over production and distribution. Horizontal integration deals include acquiring competitors or companies at the same stage of the value chain. These deals may also help companies consolidate market presence or diversify offerings by target product lines such as building products, cement and aggregates, steel, solutions for heating, ventilation and air conditioning, clean room solutions, and homebuilding services.
With increased governmental spending in sectors such as transportation, broadband, and clean energy, PE firms may pursue more buying opportunities in the construction sector.35 Between August 2023 and July 2024, there were 112 completed M&A deals in the construction industry from PE investors, totaling more than US$14 billion, almost double the deal value in the previous year.36 Deloitte’s analysis of major deals by PE firms in the construction industry indicates that they are primarily focused on strategic expansion and operational and technological enhancements. In the coming year, PE firms may seek to expand their portfolios and industry footprint by investing in construction technologies and automation. Solar technology, renewable energy, and clean energy construction projects also are expected to be prime prospects for PE investors.
As prices of construction materials have moderated in the last few months, E&C firms may find it easier to manage costs if this trend continues through 2025.37 Effective resource allocation will be important as firms emphasize strategic investments to achieve sustainable results.
4. Industrial policies: E&C firms are likely to remain agile in the face of the evolving policy landscape
The engineering and construction sector continues to benefit from government investment. For example, since the IIJA was signed into law in 2021, total manufacturing construction spending has more than doubled.38
Industry players are likely to continue to closely follow the macroeconomic situation and any policy shifts that could have an impact on the E&C sector, including federal investments. In 2023, there were 1,326 new unique recipients with US$2.15 billion of IIJA obligations, compared with only 542 new unique recipients with US$325 million of IIJA obligations from January 2024 to August 2024.39 Actual spending has been increasing at a more moderate rate than the subsidies offered under these pieces of legislation.40
Finally, E&C firms will continue to follow trade policy developments, such as the recent increase in tariff rates on various strategic materials like steel and aluminum,41 which can have significant impacts on cost and delivery times.
E&C firms will likely continue to align their operations to capitalize on any government incentives and policies in the coming years.42
Embracing changes to capitalize on growth opportunities in 2025
The E&C sector is not new to disruption and volatility, and evolving economic and regulatory factors are expected to play a pivotal role in shaping the upcoming year. Nonetheless, 2025 could present opportunities for continued growth. To capitalize on these opportunities, E&C leaders should keep a close eye on the following factors in their considerations for key decision-making:
Changing talent requirements: The labor mismatch and evolving skill requirements need innovative workforce strategies, including automation, enhanced worker experiences, and diversity initiatives. The sector’s ability to adapt to an aging workforce, integrate new technologies, and attract new employees will be important in working to meet the demands of a rapidly evolving market and ensuring a robust and skilled workforce for the future.
Technological advancements: Advancements in technology will continue to modernize the construction industry in 2025. The sector is more readily implementing technologies like BIM, digital twins, robotics, and automation. These technologies may help streamline project management, collaboration, and decision-making while reducing delays and costs. With wide-scale adoption, companies could experience improved productivity, safety, and resource allocation.
Market dynamics: Changing economic conditions will likely be critical in shaping the construction industry in 2025. Lower interest rates and falling inflation may reduce project financing costs. This ease in financing will likely encourage both public- and private-sector investments in construction.
Evolving policy landscape: Federal infrastructure investments like the IIJA will likely continue to benefit nonresidential infrastructure projects, including transportation, manufacturing, and utility facilities. The recent increase in tariff rates on strategic materials like steel and aluminum aims to boost domestic production capacity but also could potentially raise the risk of reciprocal tariffs.
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