Position Your Civil Infrastructure Company to Capitalize on These Trends

Infrastructure and construction needs moved to the forefront with the passing of the Infrastructure Investment and Jobs Acts (IIJA) in 2021. That was quickly followed up with funding from the Inflation Reduction Act (IRA) and the CHIPS and Science Act in 2022. Many in the construction industry celebrated the influx of money for roads, bridges, water systems and other critical U.S. infrastructure needs.

Ongoing federal funding is just one of several trends that gives us reason to be optimistic about the civil infrastructure market for the next several years. While many of these trends will continue through that period and beyond, there are risks we are monitoring in the mid- to long- term that require a measure of caution.

Understanding the trends driving the sector and the broader economy will help your civil infrastructure firm create a strategy that will drive long-term success. Shifting a construction firm to a new geography, business or market can take years to pay dividends, meaning that now is the time to evaluate where you are and where you’re going.

Trends Driving Long-Term Growth

There are many trends driving investment in the civil infrastructure market that give us reasons for optimism about the future.

In the near term, infrastructure segments will be lifted above long-term growth rates because:

• Aging infrastructure requires investment.
• Federal investment from the IIJA, IRA and other allocations provide an uplift over historic baseline levels of construction spending.
• Climate change-related impacts will likely drive investments in systems to protect communities and prevent widespread damage.
• The transformation of energy generation, transmission and distribution is driving investment in alternative production and upgrades across the nation’s electric grid.
• The increase in alternative procurement, which gives contractors opportunities to sell based on value instead of bid-build.

The 2021 Report Card for America’s Infrastructure rated the overall U.S. infrastructure a C-, yet that masks some of the sectors most in need of investment, such as stormwater, wastewater, roads and levees. IIJA and other federal funds will help close the gap but won’t come close to solving all the infrastructure needs.

Investment is even more imperative as the impact of natural disasters on aging infrastructure continues to be top of mind. The IIJA specifically allocated funds to create transportation, ports and airports, and other infrastructure that helps mitigate the effects of natural disasters. Communities across the nation are investing in systems to control flooding and manage stormwater, while those vulnerable to earthquakes, hurricanes and wildfires continue to allocate funds to protect their infrastructure.

The energy transformation is also seeing money pour into technology and services to modernize the power grid, enable better energy storage and produce power from greener sources such as wind, solar and hydropower. The push toward electric vehicles has spurred investment in battery infrastructure and charging networks.

Civil infrastructure companies are also benefiting from the shift to alternative procurement methods. Alternative procurement, which includes project delivery methods such as construction manager/general contractor (CMGC), construction management-at-risk (CMAR), progressive design build and integrated project delivery (IPD), is pushing industry stakeholders to emphasize collaboration and high-value preconstruction solutions in their projects. Collaborating and executing projects more effectively is particularly critical in today’s infrastructure space, where many owners face drastic budget shortfalls, risk mitigation concerns, intense schedule pressures and resource constraints.

Trends Weighing on Infrastructure Growth

While it’s natural to consider recent history and current backlogs and anticipate continued growth ahead, there are several trends we are watching that could weigh on future growth, such as:

• Persistently high inflation continues to push cost increases.
• If history repeats, we are at risk of returning to normally modest growth in in federal infrastructure spending compared with the current elevated level of allocations.

While inflation dropped to 3.5% in March from its recent 9.1% peak in June 2022, it continues to be a drag on project starts. As owners grapple with financing and soaring project costs, many are delaying projects in anticipation of improved economics.

Combine this with continued constraints in some parts of the supply chain, and it can be challenging to manage labor, materials and schedules for projects and those in the backlog. We continue to watch the macroeconomic trends with caution and advise clients to monitor any schedule slips.

Highway construction costs increased by 53.8% since the passage of the IIJA, and this is just one sector. Escalating costs of construction and repair, fueled by inflation, scarcity of labor, increased risk and evolving regulatory compliance requirements, are making projects more expensive.

We’re also keeping an eye on the disbursement of federal funds and whether these will continue after the initial allocations. It’s clear that continued investment is necessary, but it’s unknown if Congress will continue to make additional infrastructure investments after this round of funding is complete.

We believe it is important for companies to consider the risks associated with their specific segments and geographies, as well as macro-economic risks to understand the opportunities ahead and to determine the right long-term strategy.

Now is the time for civil infrastructure companies to evaluate the changes coming in the market and make sure they have growth plans in place. While the near- to mid-term prospects look positive, you can’t wait for a downturn to begin positioning your company for what’s coming.

What we’ve seen in the past few years likely won’t continue and you need to pay attention to those shifts now. If you’d like to discuss any of the trends in this article or let me know what you’re seeing in your specific markets, please reach out