Analysis of the Construction Industry from 2024 to 2025

In 2024, the construction industry witnessed robust development with remarkable fundamentals. The nominal value-added grew by 10%, and the total output increased by 12%. In the first half of the year, construction expenditures exceeded $2 trillion, maintaining a balanced budget. Despite facing a talent shortage, the employment number in July rose to 8.3 million, surpassing the peak of 7.7 million in July 2006 and continuing to climb over the past year or so. The Dodge Momentum Index steadily increased in the second quarter, reflecting enhanced confidence among owners and developers.

However, the construction industry also faces significant challenges. High interest rates and inflation have hit the residential and commercial sectors. The difficult loan market and the continued weakness in construction companies' bills are expected to persist until this year. Nevertheless, government investment is driving construction investment, and the expected interest rate decline is likely to provide relief to the industry in the coming quarters.

Looking ahead to 2025, there is reason to be optimistic. After the Federal Reserve cut interest rates by 50 basis points in September 2024, short-term interest rates are expected to decline gradually in the coming years. The improving economic situation will affect construction demands. The decline in mortgage interest rates will boost residential construction, and government act investments will drive the development of manufacturing, energy and other fields. The popularization of artificial intelligence will facilitate data center construction. With inflation slowing down and supportive monetary policies in place, the US construction industry is expected to achieve moderate growth in the medium term.

Engineering and construction (E&C) companies, when planning for the new year, have four key areas to seize the expected industry growth and address unforeseen challenges:

I. Managing Labor Mismatch: Building an Agile Workforce

The construction industry is deeply mired in a talent shortage. From August 2023 to July 2024, there were an average of 382,000 monthly job vacancies, with nearly 400,000 new vacancies added on average for three consecutive years. The job vacancies are related to expenditure growth, and the industry expansion in the coming years will exacerbate the challenge. Attracting labor is a difficult problem for construction companies. There is a shortage of workers on construction sites, and it is even more difficult to recruit skilled workers. Projects such as data centers have complicated the situation. The construction of large data centers can create nearly 1,700 construction jobs.

There has been a shift in skill requirements. In the next five years, 44% of the skill requirements in the infrastructure field are expected to change. Companies face a daunting task of bridging the skill gap, and the demand for digital and soft skills is increasing. The workforce is aging, and it is estimated that the average age of handicraft workers will reach 46 in 2030. The younger generation lacks interest, and there is a need to balance the institutional knowledge brought by experienced employees with the new skills and perspectives of young employees.

In 2025, talent shortage will remain a core issue. The accelerated construction in the manufacturing sector and the progress of specific projects will bring pressure. For example, the shortage of skilled labor may delay some natural gas projects on the US Gulf Coast. The industry needs to pay attention to the evolving skills (technical, digital and managerial) required for major projects.

Coping Strategies:

Integrate AI-enabled automation and digital tools to improve efficiency, attract young workers and help retain older workers, and apply them to labor-intensive processes.

Provide diversified career development opportunities, encourage cross-skill cultivation through job rotation and cross-training, and use experiential learning tools to help employees acquire new skills.

Recruit from outside the industry, tapping into talents transitioning from technology and other industries.

Establish partnerships, cooperate with academia and the government, and provide apprenticeships and work-study programs to build a stable talent pool.

II. Strengthening Technology Integration: Transforming the E&C Operational Value Chain

Currently, digital tools and technologies are being explored in all links of the value chain to enhance productivity, simplify operations, improve safety and optimize the customer experience. Some enterprises are using technologies such as cloud computing, the Internet of Things, 5G, and artificial intelligence, extending from back-office operations to project delivery, interconnected construction, digital twins and upgrading the BIM system.

Enterprises use digital tools and artificial intelligence to offset the impact of labor shortages. BIM has matured and can assist in material selection, scheduling, conflict coordination, risk reduction, budget control and capacity improvement. For example, a mechanical and electrical construction company doubled its BIM designers and increased investment in prefabrication to boost its profit margin.

Digital twins focus on simulating and optimizing construction processes to create value. Multinational companies use them with augmented reality to simplify processes and alleviate labor constraints. Enterprises are building the concept of "complete digital twins", including physical twins, operational twins and intelligent twins (predictive twins). Operational twins can provide an opportunity to create a data feedback loop between operations and engineering to improve design for greater efficiency and safety, reduce downtime and increase utilization. While many companies have integrated the first two parts, industry leaders are likely to compete on intelligent twins. Intelligent twins can help explore and identify complex patterns as they can interpret large data sets and are well-suited for AI and machine learning integration.

Robots and automation are becoming increasingly popular in engineering and construction companies. Some companies are using robots to autonomously transport materials, perform precise welding, plan layouts and operate remotely in hazardous environments. By integrating AI, these robots can adapt to new tasks, creating smarter construction sites and paving the way for a future where automated systems, humanoid robots and collaborative robots (cobots) are commonplace. Future investments will also be made in transformative technologies such as augmented reality, virtual reality, generative AI (gen AI) (within the next one to three years), and more autonomous AI applications like agentic AI to reshape operations.

Enterprises are increasing their technology expenditures and investments. Drones are widely used for precise measurement, inspection, inventory management, progress monitoring, etc. Emerging technologies have made digital transformation crucial in the industry. In 2025, enterprises should consider using and analyzing data technologies to make better decisions for future designs and project deliveries.

III. Financial Considerations: Strategic Layout for Driving Growth

With cost overruns caused by inflation and rising interest rates, engineering and construction companies in 2025 are expected to focus on creating value and sustaining growth through strategic divestitures, refined capital allocation, cash flow optimization and increased private equity (PE) investment.

Large companies will divest non-core assets, clean up balance sheets and reinvest in core business areas to optimize their portfolios and improve overall performance. They may limit financing for non-core business units or product lines or exit completely. They may also seek to optimize their geographical expansion. These strategies aim to improve profit margins and drive targeted growth.

Many large companies may consider shifting from one-off contracts to paid projects to enhance the predictability of earnings and cash flow. Companies can also implement strategic cost reduction plans, from shared service delivery to strategic sourcing and category management of materials and services, to optimize cash flow. Owners increasingly prioritize projects in industries that promise higher returns on investment while minimizing short-term risks.

Conversely, small companies may seek market share and revenue growth to attract the interest of large companies and private equity investors, providing new expansion opportunities.

Mergers and acquisitions (M&A) activities may be an important growth strategy for both large and small companies. From August 2023 to July 2024, the construction industry completed 528 M&A transactions worth over $380 billion, more than three times the transaction value of the previous year.

Deloitte's analysis of major transactions shows that construction companies are conducting vertical and horizontal integrations. Vertical integration transactions include acquiring companies in the supply chain (such as building product manufacturers and their suppliers) to strengthen control over production and distribution. Horizontal integration transactions include acquiring competitors or companies at the same stage of the value chain. These transactions can also help companies consolidate their market positions or diversify their products by target product lines, such as building products, cement and aggregates, steel, heating, ventilation and air conditioning solutions, clean room solutions and residential construction services.

With increasing government expenditures in areas such as transportation, broadband and clean energy, private equity firms are likely to seek more investment opportunities in the construction industry. From August 2023 to July 2024, private equity investors completed 112 M&A transactions in the construction industry worth over $140 billion, nearly twice the transaction value of the previous year. Deloitte's analysis of major transactions of private equity firms in the construction industry indicates that they mainly focus on strategic expansion and operational and technical enhancements. In the coming year, private equity firms may seek to expand their portfolios and industry footprints by investing in construction technology and automation. Solar technology, renewable energy and clean energy construction projects are also expected to be prime prospects for private equity investors.

If the prices of construction materials continue to moderate until 2025, engineering and construction companies may find it easier to manage costs. With companies emphasizing strategic investments for sustainable outcomes, effective resource allocation will be crucial.

IV. Industrial Policy: Adapting to the Policy Environment for Development

The engineering and construction industry has benefited from government investment. For example, since the Infrastructure Investment and Jobs Act (IIJA) was signed into law in 2021, total expenditures on manufacturing construction have more than doubled.

Industry participants will continue to closely monitor the macroeconomic situation and any policy changes that may affect the E&C industry, including federal investment. In 2023, 1,326 new independent recipients assumed ?325 million in IIJA obligations. The growth rate of actual expenditures has been slower than the subsidies provided by these legislations.

Finally, engineering and construction companies will continue to monitor the development of trade policies, such as the recent increase in tariff rates on various strategic materials such as steel and aluminum. This may have a significant impact on costs and delivery times.

Engineering and construction companies will continue to adjust their operations in the coming years to take advantage of government incentives and policies.

Embracing Change and Seizing Growth Opportunities in 2025

The engineering and construction industry is no stranger to disruption and volatility. Changing economic and regulatory factors are expected to play a key role in shaping the coming year. Nevertheless, 2025 may still offer opportunities for continued growth. When making key decisions, E&C leaders should pay close attention to the following factors:

Evolving Talent Requirements: Innovative labor strategies are needed to address labor mismatches and evolving skill requirements, adapt to an aging workforce, integrate new technologies and attract new employees to meet the rapidly evolving market demands and ensure a strong and skilled workforce in the future.

Technological Advances: In 2025, technological progress will continue to modernize the construction industry. It will be easier for the industry to implement technologies such as BIM, digital twins, robots and automation. These technologies may help simplify project management, collaboration and decision-making while reducing delays and costs. With large-scale adoption, companies can experience improvements in productivity, safety and resource allocation.

Market Dynamics: Changing economic conditions may be crucial in shaping the construction industry in 2025. Lower interest rates and declining inflation may reduce project financing costs. This easing of financing may encourage public and private sector investment in construction.

Evolving Policy Environment: Federal infrastructure investments like the IIJA may continue to benefit non-residential infrastructure projects, including transportation, manufacturing and utility facilities. The recent tariff increases on strategic materials such as steel and aluminum aim to boost domestic capacity but may also increase the risk of retaliatory tariffs.

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