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DQ1 CommercialUSG CORPORATION U.S. CHAMBER OF COMMERCE2020ConstructionIndexpowered by

TABLE OF CONTENTSusg us chambercommercialconstructionindex1EXECUTIVE SUMMARY2DRIVERS OF CONFIDENCE4 Backlog5 New Business6 Revenue/Profit Margins3QUARTERLY SPOTLIGHT7 Offsite Construction4MARKET TRENDS12 Workforce15 Access to Financing16 Materials & Equipment5METHODOLOGYThe USG Corporation U.S. Chamber of Commerce CommercialConstruction Index (CCI) is a quarterly economic index designed to gaugethe outlook for and resulting confidence in the commercial constructionindustry. Recognizing a need to highlight the important contributionsof this sector to the nation’s economy, USG Corporation and the U.S.Chamber of Commerce partnered to produce this first-of-its-kind index.Each quarter, contractors across the country are surveyed in order tobetter understand their levels of confidence in the industry and top-ofmind concerns.Powered byCOMMERCIAL CONSTRUCTION INDEX Q1 20201

1EXECUTIVE SUMMARYCONTRACTOR OUTLOOK IN Q1 2020 SHIFTS UPWARD.OVERVIEWThe Commercial Construction Index moved up threepoints from 71 in Q4 2019 to 74 in Q1 2020, placing itin the midrange of previous index numbers reportedin the last three years.After the decline of all of the key drivers of confidencein Q4 2019, the latest quarter suggests a more stablemarket. Backlog remains consistent with the previousquarter, while confidence and revenue both increasefour points. See Drivers of Confidence on pages 4–6.QUARTERLY SPOTLIGHTThis quarter takes a fresh look at the potential forprefabrication and modular construction to disruptthe construction industry. In order to understandthat potential, the Q1 2020 survey askedcontractors to indicate whether they expect offsiteconstruction to lead to disruption in the modesof doing business for traditional manufacturersand distributors, caused by the appearance ofvertically integrated companies that provide design,fabrication and construction services. Almost onethird of contractors expect to see this potentiallydisruptive change occur, and among those that do,most expect it to be within a five-year time frame.To provide further context for the survey findings,the report also provides highlights from a new,comprehensive study on prefabrication and modularconstruction published as a SmartMarket Report byDodge Data & Analytics. Focusing on contractorswho use these methods, it reports strong expected2Q1 2020 COMMERCIAL CONSTRUCTION INDEXCCI KEY DRIVERS OF CONFIDENCE743 fromQ4 2019growth in the implementation of common typesof prefabrication and modular construction. Italso highlights healthcare and education as themain sectors in which the use of these offsiteconstruction practices is being most widelyemployed, although many of the contractorsexpect to see wider use of these methods in othersectors, such as hotels. See Quarterly Spotlight onpages 7–11.MARKET TRENDSWith labor shortages still a serious issue, a highpercentage of contractors face challengescompleting work on schedule, and many are alsoputting in higher bids for projects.However, there appears to be growing optimismabout material availability. Fewer report seeingmaterial shortages on their projects and concernsover steel tariffs have declined sharply (even thoughthe survey was conducted before the U.S. agreementwith China was announced). Contractors are hiringmore and investing more in materials and equipment,reinforcing their positive evaluation of their prospectsin the near future. See Market Trends on pages 12–17.Powered by

usg us chambercommercialconstructionindex76BACKLOG704 fromQ4 2019NEW BUSINESSThe ratio of average current andideal backlogs remains at 76,the same moderate level seenlast quarter. 76 same asQ4 2019 KEY DRIVERS OF CONTRACTOR CONFIDENCE.4 fromQ4 2019REVENUEContractors’ confidence in theability of the market to providenew business in the next 12months has increased to 76,which suggests heightenedoptimism for the near future.Revenue numbers went up fourpoints, reaching 70 again, afterremaining below 70 for five ofthe last six quarters.ADDITIONAL MARKET TRENDS.61%49%HIRINGSKILL LEVELHiring expectations return to Q3 2019 levelsafter a sharp decline in Q4, in line with theimproved backlog and general optimismreported this quarter. See page 12 for moredetails.Concern about skill levels remain nearlyconsistent with the Q4 2019 findings, whichwere below previous quarters. See page 14 formore details.72%54%FINANCINGTOOLS & EQUIPMENTContractors remain optimistic about owneraccess to financing in the near future, withmost expecting it to stay the same or increase.See page 15 for more details.More than half of contractors expect to spendmore on tools and equipment in the next sixmonths, consistent with the levels of optimismand work reported this quarter. See page 16 formore details.Powered byCOMMERCIAL CONSTRUCTION INDEX Q1 20203

2 DRIVERS OF CONFIDENCE BACKLOGContractors report increased backlog in Q1 2020.MORE SEE BACKLOG INCREASESIn the first quarter of 2020, 39% ofcontractors report that the amount ofbacklog at their company increased, asix-point increase over the findings in Q42019. However, as the chart reveals, thisgrowth merely gained back some groundlost between Q3 and Q4 2019, and is partof a larger up-and-down pattern in backloggrowth.Change in Backlog in the Last Three Months2%IncreasedStableDecreasedNot Sure44%39%14%Q3 20191%33%41%25%Q4 201939%40%CURRENT BACKLOGThe ratio of current to ideal backlog is 76%,the same as in Q4 2019, and the averagelength of backlog at 9.7 months is onlyslightly higher than the 9.5 months reportedin Q4.1%20%Q1 2020Current vs. Ideal BacklogAMOUNT OF BACKLOG REPORTED The variouslevels of backlog are all within three pointsof the previous quarter, demonstratingconsistency with earlier findings. Overall,these findings show a shift down from theelevated findings between the third quarterof 2018 and the third quarter of 2019, butstill reveal solid backlog that can help shieldcontractors from the immediate impacts ofmarket fluctuations.76%9.7 MonthsAverage Current BacklogAverage Stated Ideal BacklogAmount of Backlog Reported34%42%24%44%25%Q4 201931%Q1 2020Less Than 6 Months6 to 12 MonthsMore Than 12 Months4Q1 2020 COMMERCIAL CONSTRUCTION INDEX12.8 Months42%Powered by

2 DRIVERS OF CONFIDENCE NEW BUSINESSusg us chambercommercialconstructionindexConfidence levels increase in Q1 2020, but do not reach the high levelsreported in Q3 2019.NEXT 12 MONTHSIn Q4 2019, contractors were nearlyevenly split between those with a highand moderate degree of confidencein the ability of the market to providesufficient business opportunities. Thisquarter sees a shift back toward highconfidence among respondents (54%),up from 47% in Q4 2019. However, thepercentage of respondents reportinghigh confidence remains four pointslower than the high confidence levelsseen in Q3 2019.Degree of Confidence Among Contractors in Sufficient NewBusiness Opportunities58%54%49%47%39%45%3% 4% 1%NEXT 24 MONTHSContractors’ 24-month outlook continuesto be more conservative than their12-month outlook, but it also is far lessvolatile, with the percentage reporting amoderately positive outlook remainingsteady at nearly two-thirds (64%).Q3 2019Q4 2019Q1 2020Next 12 MonthsHighModerateLowNext 24 Months65% 65% 64%VARIATION BY COMPANY TYPE Moregeneral contractors (35%) than tradecontractors (25%) have a high degree ofconfidence in the market over the next24 months.Note: Percentages are based on ratings using a 10-point scale,where the three points at the bottom (1–3) indicate a low levelof confidence and the three points at the top (8–10) indicate ahigh level of confidence.Powered by29%26%30%6%HighModerate9%6%LowCOMMERCIAL CONSTRUCTION INDEX Q1 20205

2 DRIVERS OF CONFIDENCE REVENUE/PROFIT MARGINSProfit margin expectations are steady, but revenue expectations fluctuate.REVENUE EXPECTATIONSIn Q1 2020, contractors are nearly evenlysplit between those expecting an increase(47%) in revenue and those expecting theirrevenues to remain about the same (50%),similar to percentages in Q3 2019. However,contractors report an 11 percentage pointjump (from 36% in Q4 2019 to 47% in Q12020) in those expecting an increase inrevenue expectations.Expected Revenue Changes in the Next 12 MonthsIncreaseRemain About the Same60%59%50% 49%36%47%50%36%PERCENTAGE INCREASE IN REVENUE OVER THENEXT 12 MONTHS Similar to last quarter, overhalf (60%) of those expecting an increaseplace that increase at 4% or more.PROFIT MARGIN EXPECTATIONSWith the exception of Q3 2019, contractorexpectations about profit margins remainquite consistent, with about two-thirds(65%) expecting their level of profit marginto remain the same and around one-third(31%) expecting it to increase.Q2 2019Q3 2019Q1 2020Q4 2019Expected Profit Changes in the Next 12 MonthsIncreaseRemain About the Same66%65%65%59%VARIATION BY REGION Significantly morecontractors from the West (22%) expecthigher profit margins in the next 12 monthsthan those in the Northeast (3%).Note: Percentages for revenue and profit margins are based on ratingsusing a 10-point scale, where the three points at the bottom (1-3)indicate a decrease, three points in the middle indicate it has stayedabout the same and four points at the top (7-10) indicate an increase.6Q1 2020 COMMERCIAL CONSTRUCTION INDEX39%30%Q2 201930%Q3 2019Q4 2019Powered by31%Q1 2020

3 QUARTERLY SPOTLIGHT OFFSITE CONSTRUCTIONusg us chambercommercialconstructionindexAround one-third of contractors are expecting prefabrication andmodular construction to disrupt the industry.POTENTIAL TO DISRUPT THECONSTRUCTION INDUSTRYInspired by increasing industry attentionto the potential of offsite construction,this quarter’s survey focused on whethercontractors perceive the growth in thesemethods to have a potentially disruptiveinfluence on the building productmanufacturers, distributors and suppliersin the industry.First, contractors were asked whether growthin prefabrication and modular constructionwill produce a new type of supplier whoprovides modular, prefabricated assembliesthat will ultimately reduce the quantityof building products and equipment thatcontractors procure from traditionalmanufacturers and distributors. Over onethird believe that this will happen. Mostwho agree expect this disruption to arriverelatively quickly, with 73% expecting to seeit occur in five years or less.In addition, almost one-third (30%) ofcontractors are also expecting to seeincreased modularization lead to the rise ofvertically integrated design/manufacture/assembly companies. This will be a directcompetitor to their own businesses, andmost (65%) expect it to occur in the nextfive years.Powered by38%Believe increasing modularization will createa new kind of supplier who provides modularpremanufactured assemblies that can be designed with andspecified, thereby significantly reducing the quantity of buildingproducts/equipment contractors procure from traditionalmanufacturers and distributors.Speed of Expected ImpactAccording to those who agree53%20%Next 2Years16%3 to 5Years6 to 10Years5%7%More Than10 YearsNotSure30%Believe increasing modularization will give rise toa new class of vertically integrated design/manufacture/assembly companies that provide turnkey building-projectdelivery to owners, significantly disrupting the traditional multiparty workflow and supply chain for building products/equipment.Speed of Expected ImpactAccording to those who agree52%23%13%Next 2Years3 to 5Years6 to 10Years7%5%More Than10 YearsNotSureCOMMERCIAL CONSTRUCTION INDEX Q1 20207

3 QUARTERLY SPOTLIGHT OFFSITE CONSTRUCTIONContractors expecting offsite construction to disrupt the supply chain believethe industry will struggle to adapt to modularization.INDUSTRY RESPONSE TO INCREASEDPREFABRICATION AND MODULARCONSTRUCTIONContractors expecting disruption inthe previous two questions were askedwhether they think it will be difficult fortraditional manufacturers (and theirdistribution channels) to adapt to the riseof new companies fulfilling the demandfor offsite construction. Their responsesreveal that 22% of the total surveyrespondents expect traditional means ofproduct distribution to be challenged bythe need to compete with companies fromoutside the construction industry thatmay be entering this market, or from new,purpose-built companies.As the Dodge study findings reveal (seethe following pages), this may only affectcertain sectors in construction, but forthe sectors like heathcare and hotelswhere the industry expects the use ofoffsite construction to increase, thesefindings suggest that some contractorsare watching to see how this rising trendevolves.8Q1 2020 COMMERCIAL CONSTRUCTION INDEX22%Believe most current building product/equipment manufacturers and their distributionchannels will not be able to successfully adapt to the modularization trend, and the market opportunities will either go tocompanies currently outside the construction industry or to new,purpose-built companies.Speed of Expected ImpactAccording to those who agree53%20%Next 2Years16%3 to 5Years6 to 10Years5%7%More Than10 YearsNotSurePowered by

3 QUARTERLY SPOTLIGHT OFFSITE CONSTRUCTIONusg us chambercommercialconstructionindexContractors expect prefabrication and modular construction to increase.USE OF PREFABRICATION ANDMODULAR CONSTRUCTIONAdditional context for the findings of theCCI survey are provided by a 2019 studyconducted by Dodge Data & Analytics,published in the Prefabrication andModular Building 2020 SmartMarketReport.The study was conducted amongcontractors who use these methodsto better understand trends inimplementation and the benefits ofthese approaches. Explanations of fourcommon prefabrication and modularconstruction approaches are providedat right, but all involve the assembly ofbuilding components offsite from theproject.Contractors using either prefabricationor modular construction expect toincrease their engagement with four ofthe most common approaches (shownin the column at right). As labor marketscontinue to tighten, offsite constructioncan provide relief from the pressure offinding workers, since productivity in afactory setting is typically higher than inthe field.Powered byCommon Types of Prefabrication and ModularConstructionSingle Trade Assemblies: Prefabricated building components carriedout by a single trade contractor, such as plumbing assemblies forlarge public bathrooms.Multi-Trade Assemblies: Prefabricated building components thatinvolve the work of multiple trades such as above-the-ceiling corridorracks in hospitals that include mechanical, electrical and other trades.Panelized Modular Construction: Entire building components likewall modules or roof panels built offsite and installed on the project.Full Volumetric Modular Construction: Entire rooms or buildingsections built offsite and then joined together onsite.Use of Prefabrication or Modular Construction on 25% orMore of Projects(Contractors Engaged in Prefabrication or Modular Construction)Last Three YearsNext Three Years66%55%35%15%PrefabricatedSingle TradeAssemblies25% larConstruction29%32%Full VolumetricModularConstructionCOMMERCIAL CONSTRUCTION INDEX Q1 20209

3 QUARTERLY SPOTLIGHT OFFSITE CONSTRUCTIONHealthcare is currently top sector for offsite construction, expected tocontinue over the next few years.TOP SECTORS FOR USE OFPREFABRICATIONAccording to the Dodge study, healthcareis currently the top sector for usingprefabrication (51%), and future forecastsalso place healthcare on top with 57%expecting to use the technique in thatsector in the next three years.More significant growth in the next threeyears is expected in the use of prefabricationon college buildings/dorms and hotels.Top Sectors in Which Contractors Have Used/Expect toUse PrefabricationNext Three YearsPublic BuildingsNext Three YearsVOICE OF THE CONTRACTORQ1 2020 COMMERCIAL CONSTRUCTION INDEX40%36%30%Top Sectors in Which Contractors Have Used/Expect toUse Modular ConstructionHotelsCollege Buildings/DormsK-12 Schools1028%Last Three Years40%Healthcare[The greatest opportunity for mybusiness in the next 12 monthsis] advances in prefabrication ofbuilding components.—CCI Survey Respondent42%32%College Buildings/DormsTOP SECTORS FOR USE OF care also dominates the use ofmodular construction (40%). Dramaticgrowth in the next three years for hotelsand college buildings/dorms is expected,bringing these two sectors to nearlythe same level of modular use as thehealthcare sector.Last Three Years26%29%24%48%43%41%31%Powered by

3 QUARTERLY SPOTLIGHT OFFSITE CONSTRUCTIONusg us chambercommercialconstructionindexTrade contractors report strong benefits from the use of prefabrication, whilegeneral contractors benefit most from modular.BENEFITS FROM PREFABRICATION ANDMODULAR CONSTRUCTIONThe Dodge study shows that use ofprefabrication and modular construction hasa direct, positive impact on project budgetsand schedules.Decrease in Schedule and Budget on ProjectsInvolving Prefabrication and Modular ConstructionGeneral ContractorsTrade ContractorsPREFABRICATIONparticularly high benefits when it comes toprefabrication, with 73% reporting decreases inproject schedule and 82% reporting decreasesin project budget from using this approach.Trade contractors are most frequentlyproducing prefabricated building elements, andthe bids they submit to general contractorsmay already reflect the schedule and budgetdecreases they are able to achieve.However, even if that is the case, generalcontractors are clearly aware of the benefitsto their projects of these approaches, withover half also reporting improved schedule andbudget performance.82%73%PREFABRICATION Trade contractors report58%58%Project ScheduleProject BudgetMODULAR91%88%MODULAR CONSTRUCTION Nearly all generalcontractors using modular constructionreport that it decreases their projectschedules (88%) and project budget (91%).Notably fewer trade contractors report similarimpact, probably because they are typicallyless engaged when modular manufacturersare used on a project.Powered by36%Project Schedule46%Project BudgetCOMMERCIAL CONSTRUCTION INDEX Q1 202011

4MARKET TRENDS WORKFORCEContractors expect to employ more workers over the next six months.HIRING EXPECTATIONSMore than half (61%) of contractors expectto employ more workers, an increase of fivepercentage points from Q4 2019.Contractor Hiring Plans Over the Next Six Months61%56%Q3 2019Q4 2019Q1 202061%VARIANCE BY REGION AND SIZE Significantlymore contractors in the Midwest (72%)and South (65%) expect to employ moreworkers in the next six months than thosein Northeast (31%). Also, 83% of largecompanies (revenues of 100M and over)plan to employ more workers, compared withjust over half of midsize (57%) and small(53%) companies.35%Employ More39% 36%Keep the SameFINDING SKILLED WORKERSNearly all (92%) contractors report atleast a moderate level of difficulty findingskilled workers, with 55% reporting that itis particularly difficult. Compared with theprevious quarter, more contractors reportmoderate levels (37%) of difficulty thanthose who say it is easy or particularlydifficult.Difficulty Finding Skilled Workers61% 59%Note: Percentages for difficulty levels are based on ratings using a10-point scale, where the three points at the bottom (1–3) indicate ahigh level of difficulty and the three points at the top (8–10) indicatea low level of difficulty.12Q1 2020 COMMERCIAL CONSTRUCTION INDEX55%32% 30%VARIANCE BY REGION Significantly morecontractors in the South (60%) and Midwest(57%) report a high level of difficulty findingskilled workers than those in the Northeast(24%).Q3 2019Q4 2019Q1 202037%7%DifficultModerate11%EasyPowered by8%

4MARKET TRENDS WORKFORCEusg us chambercommercialconstructionindexMore than one-third of contractors report turning down work du

CONSTRUCTION INDUSTRY Inspired by increasing industry attention to the potential of offsite construction, this quarter’s survey focused on whether contractors perceive the growth in these methods to have a potentially disruptive influence on the building product manufacturers, distributors and suppliers in the industry.

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