17 Jan A look at the New Tax Bill’s effect on the Construction Industry
The new tax bill will have both positive and negative effects on the Construction industry. The obvious is the reduction of the corporate tax rate from 35% to 21%. The AIA claims to have influenced the negotiations around the bill to have Architects and Engineers included as part of the reduced tax rate (talk to your tax advisor). Construction companies were included but we do not expect to see any reduction in pricing due to the reduced tax rate. In fact, we expect the contrary for a series of different reasons.
An important inclusion is that businesses will be able to quickly deduct the cost of property and equipment additions. These will be attractive to construction contractors who have a need or desire to make significant investments in expensive equipment such as heavy trucks, earthmovers and cranes.
The repeal of the Alternative Minimum Tax is also a help to all businesses. This is very important for all corporations, especially those in the construction industry. The new tax code will ideally make life easier for accountants, bookkeepers, and business leaders at construction firms.
What has not been cited as part of the bill is the impact on the already understaffed and over capacity construction industry. These changes will require the industry to expand. People will have more money in their pocket and will increase their purchasing activities and part of that money will be spent on travel. This should enable hotels and other destinations to increase their prices to better the returns. Each of these plus more will drive the construction industry to even greater growth.
The downside for Owners and Developers is that the cost for construction services WILL go up. This is inclusive of Design services, Construction services, Materials and Equipment. Our estimates have included a forecast of a 6-8 % increase over the next year. One of our projects was recently repriced by the General Contractor and the overall increase was 6% but isolated vendors (elevators) increased 10%. We predict this is just the beginning of what is to be the norm for the next few years.
On top of this news, the proposed American Energy & Infrastructure Act calls for leveraging public-private partnerships and private investments through tax incentives to spur $1 trillion in infrastructure investment for 10 years. If this holds true, it would mean more funding for renovation projects on highways, airports and railways.
When we build more, we need more. Fortunately, the construction worker is very transient and will go to where the most work is located. The flip side is if there is a great deal of work near the worker’s home – there isn’t a need to travel.
What the industry needs is more workers to fill the construction jobs. In the past this has been filled by immigration (legal and illegal). Today this will be a challenge to find enough workers to fill the empty labor and management positions.
If you have any doubt that the tax code helped US companies, we refer you to the Penn Wharton Budget Model, The Washington Post infographic:
What the graph does not show is how that money will now be used. Businesses tend to reinvest in their plant and equipment and expand to take on opportunities to increase revenue and profit thereby creating jobs. Their plant expansion will be the next wave to the construction industry.
Recommendations for Owners and Developers
If your project is ready to go, lock in your pricing and get started. Many deals will be chasing financing and expect the pricing of money will also go up. For the next two years, things will not get any cheaper.