FORECAST - Construction Industry

Commercial Construction Spending Growth Robust

QUARTERLY INDUSTRY UPDATE

Skansa Settles Fraud Allegations - A subsidiary of Skansa, one of the largest construction firms in the US, paid nearly $20 million in April 2011 to settle criminal allegations of fraud during the course of public works projects. Skansa allegedly evaded government contract requirements to hire minority or disadvantaged workers through a third-party subcontractor, according to The New York Times. Officials in law enforcement and the construction industry agree that efforts to skirt federal hiring requirements are widespread on public works projects; last year, Schiavone Construction Company admitted to fraud over the course of five years on public projects. One result of these incidents may be more dedication by construction firms to oversight of hiring requirements.

Rebound in Demand Foreseen - Even with home sales and building slow, some builders are buying land in anticipation of a rebound. The US will add about 1.5 million new households every year for the next decade, but housing starts currently total about 550,000 per year, according to Harvard University's Joint Center for Housing Studies. Many areas have substantial excess inventory, but if housing starts don't increase substantially within the next five years, some experts predict a shortage. Exacerbating the situation is a reduction in the number of builders as a result of the recent downturn, creating capacity constraints. The regions most vulnerable to too little supply by 2012 are those where supply and demand are currently in equilibrium, but may tip due to strengthening demand, such as Washington, Oregon, and New Mexico, according to Moody's. In response, homebuilders are responding by buying up land while prices are still reasonable. Those with the capital to purchase large volumes of land at lower prices are at a great advantage.

New Tax Requirement Criticized - The National Association of Home Builders (NAHB) called on Congress in February 2011 to repeal new IRS reporting requirements related to payments for suppliers. According to the new law, businesses, including homebuilders, must file an IRS Form 1099 for each vendor to whom they pay more than $600 annually. Even for small companies, compliance could cost thousands of dollars. NAHB also argues that small suppliers will be hurt, since builders may choose to purchase materials from large one-stop shops to reduce the paperwork burden.

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