NRCI FOURTH QUARTER 2015 EXECUTIVE SUMMARY

Transcription

1 Fourth Quarter 2015 CURRENT NRCI SUMMARY NRCI FOURTH QUARTER 2015 EXECUTIVE SUMMARY Overall Economy Overall Economy Where We Do Business Our Construction Business Nonresidential Building Construction Market Where We Do Business DOWN DOWN DOWN DOWN THE ENVIRONMENT IS TOO CHAOTIC TO PREDICT. REMAIN CALM, ALL IS WELL. Our opening quote is from an executive answering this quarter s NRCI survey: The environment is too chaotic to predict. Remain calm, all is well. To put the comment in context, it is a response to our question about economic uncertainty. The environment is the economy, not the weather or something geological. If you stick your head into the headline news for a few hours, you will understand what the writer means and why he or she felt it was necessary to add, Remain calm, all is well. Douglas Adams an author known best in science fiction and scientific circles might have said, Don t Panic. (Douglas Adams, from the cover of the Hitchhikers Guide to the Galaxy ) Don t panic if you suddenly find yourself careening through outer space with little more than a towel in your possession or trying to pilot a successful construction business in a chaotic economy. Remain calm, all is well. Our Expected Backlog Cost of Construction Materials Cost of Labor Positive Productivity Negative DOWN LOWER LOWER NO CHANGE The NRCI for the fourth quarter 2015 dropped four points from to It is hoped that the opening paragraph will make that drop, the lowest score since the fourth quarter 2013, seem less alarming. Panic sells newspapers or what passes PANIC SELLS NEWSPAPERS as newspapers online but it OR WHAT PASSES AS otherwise never helps anything. NEWSPAPERS ONLINE BUT It is always better to take a closer IT OTHERWISE NEVER HELPS look at the facts. For instance, it ANYTHING. IT IS ALWAYS is true that panelists have dropped BETTER TO TAKE A CLOSER their outlook for the economy in LOOK AT THE FACTS. general this quarter, but they are still within a range expecting growth in the coming year. Some of the reasons for these drops can be seen in our current issues questions concerning uncertainty, optimism levels and shortages of skilled workers. Compared to the same questions last year for uncertainty and optimism, panelists haven t changed their ratings much. They continue to be moderately uncertain about what will happen in the economy in the coming year or so, and, at the same time, they continue to be quite optimistic, but cautiously so. Again, looking at EXHIBIT 1 EXHIBIT 1 (NRCI) Scores From Q to Q (Scores above 50 indicate expansion, below 50 indicate contraction.)

2 Executive Summary continued... the detail behind the overall NRCI score, confidence levels for almost all market sectors have dropped, but remain within positive growth areas (with the exception of the long-range lodging expectation). The median backlog for all respondents is higher than it has been since the beginning of the recession when we started the NRCI, but expectations for backlog growth have gone down. Dropping for two quarters doesn t make a trend, although it should raise concerns. The construction DROPPING FOR TWO industry has been on a good run, and most expect it to continue. However, some think the momentum QUARTERS DOESN T is beginning to slow. Then there is the political season beginning to ramp up where we will be reminded MAKE A TREND, of both good and bad news for the economy. Our own politics in the U.S. are often overshadowed by ALTHOUGH IT SHOULD world events of atrocities and disasters to the point where it is difficult to see anything optimistic, but RAISE CONCERNS. it s there. Perhaps Charles Dickens said it best in his great opening to A Tale of Two Cities. It was the best of times, it was the worst of times... He was writing of a time of revolution when the world was bifurcated between rich and poor, slaves and slaveholders and a world of differences causing strife and war. He suggested the situation might parallel with his times (circa 1859), but there is no way he could have been predicting our times, could he? Don t panic. Read on. Thanks to all of the panelists who help make the NRCI a useful gauge of nonresidential construction activity. We value your opinions and appreciate your taking the time to share your experience. 2

3 NRCI Fourth Quarter 2015 Highlights Overall Economy: NRCI panelists outlook for the overall economy dropped sharply for Q4, down 12.3 points from to Overall Economy Where Panelists Do Business: The NRCI component for panelists own business dropped less sharply than for the overall economy, from 73.3 to 64.8 this quarter, but still a sign that expectations have been lowered as we head into the new year. Panelists Construction Business: Panelists business, for the most part, is carrying good momentum as business has been improving, but the momentum is beginning to slow to drop this component by 5.8 points to 69.9, still in strong growth territory. Nonresidential Building Construction Market Where Panelists Do Business: While most panelists report their own business as holding strong, their opinion of the general nonresidential construction market is less exuberant this quarter, moving from 75.7 to Cost of Construction Materials and Labor: The component for cost of construction materials was little changed from, improving 1.2 points to 30.6, indicating costs are still increasing. The cost of labor increased less sharply than, but it too is showing more increases. Generally, it is expected that costs will rise as business improves, thus holding down the overall NRCI index number. Productivity: Once again this quarter, there is little improvement in productivity, now at 47.9, or remaining under the midrange of 50. Productivity appears to be the most difficult area to improve, especially when backlogs are growing and it is difficult to find experienced workers to help grow the business. Expected Change in Backlog: Backlogs for those participating in the NRCI survey have reached the highest level since we started this report. Now at a median of 12 months, panelists expect that rate to cool in 2016 as the component score dropped from 68.2 to 62.2 this quarter. Current Issues Uncertainty Level: We asked panelists again this year about their level of uncertainty as it affects their future business outlook and found the results were not much changed from last year at this time. Compared to 2014, uncertainty levels are slightly lower. Nonetheless, on balance, construction executives answering our survey are still experiencing a moderate level of uncertainty about the future of the economy. Optimism Level: Compared with 2014, panelists level of optimism has not significantly changed. They remain much more optimistic than pessimistic about the future of the economy. Skilled Talent Availability: One of the areas that continue to cause concern about current and future growth in the construction industry is the availability of skilled employees to perform the work. We asked industry executives to rate their level of concern in attracting and retaining skilled/ craft trades for several situations. In all cases, it is clear that this it is an ongoing struggle to find talent; however, the highest levels of concern were registered for expectations for the future and as a generational or ongoing challenge. 3

4 EXHIBIT 2 (NRCI) Scores Q to Q The NRCI remains in expansion territory at (Scores higher than 50 indicate expansion, below 50 indicate contraction.) Current Issues Uncertainty Level: We asked panelists again this year about their level of uncertainty as it affects their future business outlook and found the results were not much changed from last year at this time. Compared to 2014, uncertainty levels are slightly lower. Nonetheless, on balance, construction executives answering our survey are still experiencing a moderate level of uncertainty about the future of the economy. Uncertainty is generally characterized as a lack of information about the future, and what we think we know points to a situation that could turn bad or good at any time but most likely bad. Reviewing the comments below, much of the uncertainty comes from global unrest, terrorists threats and economies in distress. As another presidential race begins to heat up, uncertainty grows about our own economic future. One of the interesting, or the least expected, situations that leads to uncertainty is success. We have seen something like this before in a study conducted by FMI in 2008, Profiles in Success How Contractors Define and Achieve Success. As one panelist commented, We are in a very strong market right now, but we are uncertain how long of a run we are in and are concerned with the flow of projects two years out. Our experience or hunches often seem to tell us that if things have been going well for a long time, we must be due for a change in the other direction. With a bit of irony and reassurance, one executive wrote, The environment is too chaotic to predict. Remain calm, all is well. 4

5 EXHIBIT 3 FMI NRCI panelists general level of uncertainty about the future of the economy as it affects the business outlook. (1-10, where 1 is a very low sense of economic uncertainty and 10 is extremely uncertain) Comments on uncertainty concerns: 1) Uncertain about the election outcome and the effect, accordingly. 2) Uncertain about world markets and how those markets will affect the U.S. economy. 3) Uncertain about the perception that material prices are down when, at least in our areas, we aren t seeing measurable discounts when compared to one and two years ago. 4) Uncertain about the next generation of craft and management-level resources being capable and willing to do what it takes to be successful. Calm seas at the moment. A weakening Chinese economy, malaise in Europe, pending interest rate increases and disarray in the Middle East are always on our minds with our economic future. China, volatile markets, Fed action/inaction on interest and concern about the staying power of the construction economy beyond Concern about how long this current pace can continue. Concern about election year coming up. Concerned about the overall economy, the possible residential bubble and the current skilled labor shortage. Depends largely on the outcome of the 2016 elections. Election dynamics could have a significant effect on consumer confidence. Everything is uncertain due to politics, world affairs, price of oil, terrorism, etc. From a recovery model, we are at the slowest rate of recession recovery in our history. What does that mean, and how does that affect our ability to overcome the burden of federal debt? Global issues are more of a concern than local issues. Higher taxes being pushed to overcome income inequality would be disastrous for S-corps and partnerships. 5

6 If you go out more than 18 months, it becomes very gray. Looks good for next year to two. Our infrastructure will move as Washington changes administration, but currently funding is inadequate at federal and state levels. Peak markets seem to be cooling off. People seem to become more and more tentative as we approach elections. Political environment and global implications have not stabilized enough to reduce uncertainty factor to any great extent. Political landscape both domestically and globally is a risk to stability and certainty. Politics only, the House and Senate have become ineffective while the president rules with executive orders. Projects are being started at a faster pace, and there appears to be less hesitation in our clients moving forward. Russia and USA in same air space. Need I say more. Live in the moment. Aside from that sort of collapse, we expect normal cycles but not a repeat of State budgets where we do business are in trouble. The federal government and the Federal Reserve continue to try experiments to tweak the economy. QE I through xx are a disaster. Unless the state and federal governments leave us alone, I am concerned about the direction of our economy. Still reluctant to hire. The ACA act is a gift that keeps on coming. The next months look fairly strong, but this explosive boom in Northern California is going to end. Not exactly sure what will end it, but it can t go on like this for much longer. The Obama administration continues to pursue its antibusiness agenda, creating more uncertainty than necessary. The ongoing volatility in the financial market and worldwide instability certainly raise concerns. That said, our local market remains quite strong. We are fortunate to have strong corporations and a demand for multifamily housing fueling our market. We have extended our positive outlook and are not planning for a decline yet. The political disarray and polarization in the U.S., combined with the prospects for international terror and saber rattling, give me great reason for concern. Too much political rhetoric promoting antibusiness, anticapitalistic endeavors. We are based in Illinois where we still do not have a state budget. Not having a state budget has shut down all types of vertical construction funded by the state. It has also affected local school districts and other municipal bodies on their ability to pass a bond referendum. We are in a very strong market right now, but we are uncertain how long of a run we are in and are concerned with the flow of projects two years out. We have an upcoming election. We have slowing growth to no growth overseas. We have had an expanding government deficit and a Congress in near-gridlock. There seems to be uncertainty as we approach four to five years of economic growth in a cyclical economy. The current political dysfunction, which manifests itself as the inability of the two parties to agree effectively on what is best for our country, limits our economic potential. The extremists in both parties have effectively ground the system to a halt where reason and logic are overwhelmed by dogma. The economy is fragile right now. The potential for increasing interest rates from the Fed, the world economy is struggling, and the potential for conflict in the Middle East is ever present. The environment is too chaotic to predict. Remain calm, all is well. The lack of available labor is impacting our growth. 6

7 Optimism Levels: Compared with 2014, panelists level of optimism has not significantly changed. They remain much more optimistic than pessimistic about the future of the economy. Although we found a number of areas that cause uncertainty, we continue to see considerable reasons for optimism from the same group. Compared with 2014, the top-three reasons for optimism are little changed, with a few shifts in importance. For instance, 19% of all responses choose expanding backlog/future business outlook as the top reason for being optimistic. Last year that category was second (15%), and business starting to build again was first (now second in 2015). Most markets are growing was the third choice for top reasons for optimism with 15% of all respondents. Sitting on the border of uncertainty and optimism, one panelist noted: I am not sure if I am optimistic. Most of us have likely had that feeling at one time or another. Those who seem to be the most optimistic are the leaders that grab the bull by the horns, as one contractor commented: We are working hard to develop a strategic plan that allows us to continue to thrive in a changing construction environment. Business is changing, and it will be necessary to change with it in order for a firm to remain relevant. EXHIBIT 4 Level of optimism: Please indicate your general level of optimism about the future of the economy as it affects your business outlook? (1-10, where 1 is extremely pessimistic and 10 is extremely optimistic) 7

8 EXHIBIT 5 Reasons for Optimism (Choose the Top Three) Comments on reasons for optimism: 1) The market segments we excel at are planning to grow, resulting in more opportunity to bid and perform work in our wheelhouse. 2) We have embarked on creating our lean culture similar to the safety and quality culture we created in order to meet and exceed our customers expectations. Backlog of infrastructure projects beginning to be noticed. Growth of all types of businesses with related spending. Customers are doing well, backlog needed in some sectors. Florida is experiencing huge growth again. Baby-boomer retirements are finally kicking in. Tax revenues are up, which creates government and school spending. Health care is huge in Florida; changes in delivery of care have health providers building new types facilities. Seems endless. Economy and growth in our Florida market are positive for the foreseeable future. I am not sure that I am optimistic. Ongoing good sales, improving fees and good prospects. Our area is in the Marcellus and Utica shale area. Our region is experiencing continued growth; the reason for moderate optimism is impacted by our largest challenge, mass transit initiatives. South Florida seems to be a leading market for European and South American investors, developers and end users. 8

9 The core businesses, institutions and industries in our regional area are all in a growth pattern. Population is growing, and job opportunities for young people are increasing. The economy has seen huge improvement. Unemployment is low, interest rates are low, the stock market (albeit volatile) is very high, housing building demand is high. Solid indicators and signals all around. The market solves problems. Over and over again, the market and American people combine to be incredible wealth generators. We are making much better business decisions. We are working hard at reinventing a business that sat unattended for a number of years. We have put in place great new and young leadership and are working hard to make a reality of our new vision, purpose, values, people and process. We have a strong region with aerospace and technology that is driving our local economy and keeping the demand for commercial construction. A key factor is having the right client base! We need to replace functionally obsolete facilities as well as deteriorating infrastructure. We recently reorganized our company, eliminated the deadwood and nonperforming employees, and have a key fourth generation group that we can train for the future. This has also positively impacted employee morale and customer support. We see some concerns in overall economic growth. It is not uniformly growing, and there are signs that unemployment will not keep going down, but will rise again. We are not creating enough good jobs. We are working hard to develop a strategic plan that allows us to continue to thrive in a changing construction environment. Business is changing, and it will be necessary to change with it in order for a firm to remain relevant. Skilled Talent Availability: One of the areas that continue to cause concern about current and future growth in the construction industry is the availability of skilled employees to perform the work. We asked industry executives to rate their level of concern in attracting and retaining skilled/ craft trades for several situations. In all cases, it is clear that this it is an ongoing struggle to find talent; however, the highest levels of concern were registered for expectations for the future and as a generational or ongoing challenge. Reviewing the responses to the question, What do you believe is the best immediate action your firm can take to address the challenge of building a skilled construction workforce? we found that some form of training dominated the response. While the importance of recruiting practices was often mentioned, it is clear that most expect to have to train new recruits rather than find experienced people who already have most of the needed skills. As one executive noted, We wish there was one BEST immediate action our firm could take... Ultimately, there appear to be few really immediate solutions to finding skilled labor. Those that have been at it for years, are now experiencing better results than most. No doubt, the problem is here to stay for the near future, whether business slows or picks up again. 9

10 EXHIBIT 6 Concerning skilled talent availability, on a scale of 1-10, how would you rate your level of concern in attracting and retaining skilled/craft trades for the following situations? 1 = Of little or no concern, 5 = moderate concern, 10 = Very highly concerned National skilled talent availability Regions where you do the most work For your specific projects Expectations for the future (next 5-10 years) As a generational or ongoing challenge 1 Little or no concern 0% 0% 0% 0% 0% 2 2% 2% 3% 2% 1% 3 2% 4% 2% 2% 2% 4 1% 2% 4% 1% 2% 5 Moderate concern 13% 8% 9% 7% 6% 6 5% 15% 19% 8% 7% 7 29% 11% 17% 7% 11% 8 23% 27% 28% 15% 26% 9 17% 19% 17% 30% 16% 10 Very highly concerned 8% 11% 0% 28% 28% 10 What do you believe is the best immediate action your firm can take to address the challenge of building a skilled construction workforce? 1) We wish there was one BEST immediate action our firm could take to address the building of a skilled construction workforce. There may be other peer firms that get that figured out, and we honor them for getting it done. 2) We have been in an action mode to develop a skilled workforce since the early 1990s. We have stayed on course although the results we expected haven t materialized to date. There are a number of trade associations we belong to that have led the way for recruiting talent at the high school level and even at the middle school level, resulting in measureable gains. We look forward to these programs growing in the future. We are willing to share some of the programs if that will help. Be informed and involved with the industry. Be involved. Knowing where you are at and where you want to drive it to. Better wages and benefits. In-house training. Continue training and support organizations that provide that service. Create employment continuity and invest in a better work environment along with training, pay and benefits. Educating youth to the great career it can be. Make it an honorable skill to be revered by others. Publicize the individuals doing the work instead of just the company, much as we do accountants, lawyers, etc. Encourage the local and regional public education authority to increase the trade schools at the high school level to keep kids in school and prepare them for a goodpaying job upon graduation. Expanding training programs and employee engagement. Find young employees who want to work with us and send them to craft school. Get involved in the local technical schools by teaching construction skills and educating students of the merits of a construction livelihood.

11 Grow our own by reaching nontraditional populations. Hire apprentices. Hire experienced workers for immediate help and inexperienced workers to train for future help. Hire tradespeople on a semipermanent basis, even though they are part of a union labor pool. Hire young people. Immediately, we have structured pay to accommodate those wanting to advance their careers, so there is a definite path for skilled workers. In addition, we are currently working to collaborate with community colleges and technical colleges within the state to educate students and further encourage them to enter our industry. Also, these colleges are looking to alter curriculum to be more accommodating to our industry. Improve talent management and development expertise. In critical positions, pay above union scale. In-house training. Increase our education of current employees. Increased investment in scholarships, internships and entry-level hiring/training. Indenture more apprentices and improve on in-house training and development programs. Inspire from within as fast as possible. Internal craft training and association training. Internal training. Internal training ties to education and trade organizations. Involvement in each local market to advocate for our industry, involvement and support of the local community/ technical colleges, promotion of better wages and benefits for the craft worker, and promotion of vocational training in high schools. Make sure we are training and retaining a good core of craft foremen and workers. Look down the road and retain with a longer-term view in mind rather than simply cutting during the valleys. More in-house training of existing labor and new hires. Network and constantly be on the lookout for quality people. Putting a strong training program and career path development plan in place that attracts the best workers. The field must be emphasized. Raising awareness of participants in our industry that we need to take ownership of our pipeline and focus on a long-term solution working with educators/ parents/communities to make students aware of the opportunities in our industry and the pathways to get to those opportunities. Recruit new young people into trades. Recruiting. Recruiting directly from the local high schools. Put on mandatory after-work training and safety programs. Require subs to pay workers a fair wage, pay overtime and train all workers for safety and skills, join C3 initiative in Houston. Run a high-quality firm that treats people right; our reputation will attract the people we need. Slow/steady growth. For both employees and subcontractors, pay our staff well and rely on relationships. Solve our own problems. Build internal training programs that attract, retain and develop talent for the key positions that we need. Strong partnership with organized labor to recruit and train future workforce. Support ACE and trade development programs. Supporting career education at the secondary school level is paramount. We are fully engaged in that. This is a generational issue. Part of the demand for skilled labor can come from the immigrant community, but training of laborers will be vitality important. We need to invest in training of skilled laborers but also start promoting construction skilled labor at the earliest stages of young people s academic years. Even in the primary grades, an introduction into the construction industry is essential and then developing this further in secondary education. Those plans were laid during the recession in maintaining our skilled workforce and management team. That was an investment. Finding A players in this market is difficult at best. Those skill sets are already here. Training programs need to be established now to be ready to handle the influx. The younger generation will not migrate to the construction trades industry until there is a substantially larger pay differential over a comparatively skilled job in an air-conditioned environment. That rise in labor rate probably needs to be in the 25%-30% range (at least in the Southeast), which will have a significant adverse impact on project budgeting/funding. 11

12 Training, spend more to train and retain. Wages need to improve, and word needs to get out to the schools that construction uses technology in the field more and more, and that it is a challenging and rewarding career. We are beginning to work with the local AGC chapters to create a Build Illinois website and start working with the local school districts and labor unions to start attracting middle school and high school age students into our industry. We are doing it in concert with the unions. We are requiring more and more training for both apprentices and journeymen. We are using incentive plans and engaging our field employees in the recruitment of others. We are working hard at articulating a vision and purpose that will attract a great workforce. From there, we are working hard to support individuals through a robust performance culture in providing them the tools and training that will align their talents to that of our organizational needs. We have tried pretty much everything we can think of, with limited success. We must support the pipelines that can identify and develop the skilled trades that we need for the workforce of the future. Workforce development initiatives. Work with existing unions and create learning environments specifically for our firm. Work with schools and promote construction programs. Also, increase our support for apprenticeships and private training facilities. 12

13 Exhibits 7 through 12: Detailed component results for FMI s Fourth Quarter NRCI survey EXHIBIT 7 Detailed Results by Market Sector Overall Third Quarter 2015 Overall Fourth Quarter 2015 Improving over last quarter Remains the same as last quarter Worse compared with NRCI Q Improving over last quarter Remains the same as last quarter Worse compared with NRCI Q Business Outlook - Three Months Commercial 35.8% 59.3% 4.9% % 68.8% 2.5% 63.1 Education 25.6% 64.0% 10.5% % 61.7% 14.8% 54.3 Health care 44.7% 48.2% 7.1% % 54.2% 7.2% 65.7 Lodging 44.8% 47.8% 7.5% % 53.5% 8.5% 64.8 Manufacturing 36.4% 51.5% 12.1% % 65.6% 3.1% 64.1 Office 35.8% 56.8% 7.4% % 68.7% 9.6% 56.0 Other 65.6% 31.3% 3.1% % 47.4% 0.0% 76.3 Business Outlook - One Year Commercial 40.7% 56.8% 2.5% % 60.0% 5.0% 65.0 Education 36.0% 57.0% 7.0% % 48.1% 13.6% 62.3 Health care 55.3% 37.6% 7.1% % 44.6% 6.0% 71.7 Lodging 34.3% 61.2% 4.5% % 52.1% 11.3% 62.7 Manufacturing 44.8% 47.8% 7.5% % 56.3% 3.1% 68.8 Office 41.5% 52.4% 6.1% % 61.4% 8.4% 60.8 Other 67.7% 32.3% 0.0% % 31.6% 5.3% 78.9 Business Outlook - Three Years Commercial 30.8% 46.2% 23.1% % 52.5% 13.8% 60.0 Education 40.0% 45.9% 14.1% % 43.8% 21.3% 56.9 Health care 49.4% 39.8% 10.8% % 50.0% 11.0% 64.0 Lodging 25.0% 45.3% 29.7% % 58.0% 23.2% 47.8 Manufacturing 35.4% 52.3% 12.3% % 52.4% 12.7% 61.1 Office 35.0% 50.0% 15.0% % 60.2% 18.1% 51.8 Other 40.6% 46.9% 12.5% % 31.6% 21.1% 63.2 NRCI Scores > 50 indicates growth (better) < 50 indicates slowing (worse) * A note on the use of the diffusion index: Do not interpret diffusion index values in the same manner as averages, because a simple increase or decrease in a diffusion index does not necessarily imply an improving or declining result. For example, if a diffusion index moves from 31 to 35 this quarter, it does not imply the market has improved. A reading above 50 indicates improving or expansion, 50 indicates remaining the same, and below 50 indicates worse or contracting. Therefore, if a reading goes from 31 to 35, then the result still implies a decline from the previous quarter because 35 is below 50; but the decline is not as great as the previous decline because 35 is above 31. As another example, if the diffusion index changes from 31 to 65, it implies improvement over the previous quarter, not because 65 is above 31, but because 65 is above

14 EXHIBIT 8 NRCI Component Indexes Comparisons of Results: Q to Q NRCI components Q NRCI components Q NRCI components Q NRCI components Q The overall economy The overall economy where panelists do business Panelists' construction businesses Nonresidential building construction market where panelists do business Cost of construction materials Cost of labor Productivity Expected change in backlog Median Median Median Median Approximate current signed backlog in months Note: NRCI scores and component scores are based on a diffusion index where scores above 50 represent improving or expanding, a score of 50 represents remaining the same, and a score below 50 represents worse than or contraction. EXHIBIT 9 Size of the Organization in Annual Revenue EXHIBIT 10 Type of Contracting Business EXHIBIT 11 Primary Region in Which Panelists Work 14

15 EXHIBIT 12 (NRCI) Component Results Q to Q NRCI Component Results, Quarter 3 for 2015 NRCI Component Results, Quarter 4 for 2015 Improving over Staying the same as Worse compared with NRCI Q Improving over Staying the same as Worse compared with NRCI Q Overall Economy 43.1% 54.9% 2.0% % 66.7% 8.3% 58.3 Overall Economy Where Panelists Do Business 49.5% 47.6% 2.9% % 64.3% 3.1% 64.8 Panelists' Construction Business 55.3% 40.8% 3.9% % 50.0% 5.1% 69.9 Nonresidential Building Construction Market Where Panelists Do Business 54.9% 40.2% 4.9% % 55.1% 7.1% 65.3 Backlog in Months High Median Low High Median Low Approximate Current Signed Backlog Grow faster than Stay about same as Shrink compared with Grow faster than Stay about the same as last quarter Shrink compared to last quarter Expected Change in Backlog 48.0% 41.2% 10.8% % 55.1% 10.2% 62.2 Higher than Same as Lower than Higher than Same as Lower than Cost of Construction Materials 46.1% 49.0% 4.9% % 46.9% 7.1% 30.6 Cost of Labor 74.8% 25.2% 0.0% % 37.8% 0.0% 18.9 Improving over Same as Declining compared with Improving over Same as Declining compared with Productivity 4.9% 85.4% 9.7% % 79.2% 12.5% 47.9 NRCI Scores > 50 indicates growth (better) < 50 indicates slowing (worse) * A note on the use of the diffusion index: Do not interpret diffusion index values in the same manner as averages, because a simple increase or decrease in a diffusion index does not necessarily imply an improving or declining result. For example, if a diffusion index moves from 31 to 35 this quarter, it does not imply the market has improved. A reading above 50 indicates improving or expansion, 50 indicates remaining the same, and below 50 indicates worse or contracting. Therefore, if a reading goes from 31 to 35, then the result still implies a decline from the previous quarter because 35 is below 50; but the decline is not as great as the previous decline because 35 is above 31. As another example, if the diffusion index changes from 31 to 65, it implies improvement over the previous quarter, not because 65 is above 31, but because 65 is above

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17 HOW TO BECOME AN NRCI PANELIST If you are an executive for a construction firm in nonresidential building markets and would like to become a panelist for the, please send your information or questions about this survey to Phil Warner at [email protected]. The survey is sent to panelists quarterly and should take approximately 10 minutes to complete. Panelists will receive the full quarterly report free of charge. CONFIDENTIALITY All individual responses to this survey will be confidential and shared outside of FMI only in the aggregate. All names of individuals responding to this survey will remain confidential to FMI. ABOUT THIS REPORT The data in this report is presented as a sampling of construction industry executives voluntarily serving as panelists for this survey. The responses are based on their experience and opinions, and the analysis is based on FMI s interpretation of the aggregate results. All trends are based on a limited series of data that may or may not represent the larger population. We must caution that major decisions should not be made without additional investigation and research of specific geographic and construction market segments.

18 About FMI Founded in 1953 by Dr. Emol A. Fails, FMI is the leading management consulting, investment banking and people development firm dedicated exclusively to the engineering and construction industry. FMI professionals serve all sectors of the industry and combine more than 60-plus years of industry context and leading insights to achieve transformational outcomes for our clients. We have subject matter experts in the following practice areas and serve clients throughout the U.S., Canada and internationally: Management Consulting Investment Banking People Development Strategy Market Research Business Development Operations and Project Execution Risk Management Compensation Peer Groups Performance Management M&A Representation Valuations and Fairness Opinions Private Capital Placement Ownership Transfer Planning Organizational Leadership Development Leadership Training Executive Coaching Succession Planning Training and Talent Development Denver 210 University Boulevard Suite 800 Denver, CO Raleigh (headquarters) 5171 Glenwood Avenue Suite 200 Raleigh, NC Scottsdale 7639 East Pinnacle Peak Road Suite 100 Scottsdale, AZ Tampa 308 South Boulevard Tampa, FL The Woodlands 9303 New Trails Drive Suite 350 The Woodlands, TX Copyright 2015 FMI Corporation Notice of Rights: No part of this publication may be reproduced or transmitted in any form, or by any means, without permission from the publisher. Investment banking services provided by FMI Capital Advisors, Inc., a registered broker-dealer and wholly owned subsidiary of FMI.