2022 has continued to bring the same uncertainty as the past couple of years — with both familiar and brand-new reasons. While there are continued pockets of pandemic-related fallouts, most notably supply chain issues and increasing inflation, the war in Ukraine has further destabilized the global markets and supply chains.1
This article highlights changes and updates from 2022 and dives into their impacts and other expectations as we head into 2023.
The Federal Reserve
This time last year, the Federal Reserve had taken the position that the inflationary pressures felt across the country were transitory.2 It has since changed course and increased the federal funds rate (as of publication) six times in 2022 as a way to combat inflation.3 The effects in the construction industry include increasing costs of capital for construction contractors as well as financing difficulties for owners.
Updates From Washington
Infrastructure Investment & Jobs Act
Signed into law in November 2021, the Infrastructure Investment and Jobs Act4 provides approximately $550 billion in additional funding for public infrastructure.
The effects of this bill have yet to be seen by many, but there is optimism as funds are beginning to be released and projects bid.
Inflation Reduction Act of 2022
In August 2022, the Inflation Reduction Act of 2022 was signed into law5 and contains more than $5 billion to incentivize the use of low-carbon building materials in public infrastructure projects.6 Additionally, the bill expanded federal energy efficient tax incentives — the 179D Deduction and a new alternative, as well as 45L Tax Credits, as amended by §13303 and §13304, respectively.
179D Deduction: Energy Efficient Commercial Buildings Deduction
The 179D Deduction allows for government-owned building owners to allocate special tax deductions to the architects, engineers, and contractors responsible for designing the building’s energy efficient systems that have been modified.7
The prior credit amount of $1.80 per square foot8 is modified by §13303(b)(2) of the Inflation Reduction Act of 2022 to a base of $0.50 plus $0.02 for each percentage point by which the total annual energy costs of the building are certified to be reduced by more than 25%. In addition, the total amount cannot be in excess of $1.00.
If the taxpayer also can show certain apprenticeship and prevailing wage requirements have been met, those amounts are increased from a base of $0.50 to $2.50 and from $0.02 increment increases to $0.10 allowing up to $5 per square foot total. Deduction amounts are limited to the total cost of the energy-efficient property
Alternative Deduction for Energy Efficient Building Retrofit Property
There is also a new alternative to the 179D Deduction called the Alternative Deduction for Energy Efficient Building Retrofit Property (also presented in §13303).
In order to qualify, the building must have been in service for at least five years before the retrofit plan is established and be located in the U.S. Eligible retrofit costs include interior lighting; heating, ventilation, and air conditioning (HVAC); and hot water systems or building envelope.
The retrofit plan must call for at least a 25% reduction in the building’s energy use and certain milestones by a qualified professional. The Alternative Deduction for Energy Efficient Building Retrofit Property can only be claimed after the building is in service for one year and the reduction in energy is known. It is also capped at the cost of the retrofit expenditures made and is only effective for property placed in service after December 31, 2022.
45L Tax Credits: New Energy Efficient Home Credit
According to §13304 of the Inflation Reduction Act of 2022, the 45L New Energy Efficient Home Credit is extended through 2032. The credit had expired at the end of 2021, but the old 45L credit is extended for homes sold by the contractor in 2022.
The new credit amounts and other modifications will apply for dwelling units acquired from the contractor after 2022. This law creates a new category of qualified dwelling units that are eligible for a $5,000 credit, which is a home that qualifies as a zero-energy ready-made home under the Department of Energy guidelines. Most other single-family units that qualify will receive a $2,500 credit.
Dwelling units that are part of a multi-family building are eligible for smaller credits unless certain employment and wage standards are met. Under the prior New Energy Efficient Home Credit, the maximum credit was $2,000.
Bipartisan Infrastructure Law
In addition to these changes, there continues to be increasing regulation at the state and federal levels. The Bipartisan Infrastructure Law includes Build America, Buy America guidance that expands domestic sourcing requirements, known as Buy America, for construction materials on all federal-aid transportation contracts, among other things.9 Given current supply chain issues, the Buy America provision could have unintended consequences.
Ongoing Supply Chain Challenges
The supply chain challenges appear to be ongoing for all industries, particularly construction; the many layers of the construction supply chain include labor, materials, finished materials, subcontractors, and consultants. Organizations should understand their own specific supply chain, identify and understand their risks, and implement procedures where possible to reduce those risks.
Materials procurement is an issue with which all construction financial professionals (CFPs) have likely been dealing. Prior to the pandemic, raw or finished materials would be ordered and delivered to the jobsite when expected. But now, materials need to be ordered with significant lead times to ensure that jobs stay on schedule. In addition to long lead times, contractors need to scenario plan for slipping delivery dates on material and equipment. Thanks to chip and other component shortages, delivery dates are consistently missed. This has presented additional challenges with inventory and material management, tracking, and purchasing.
Often, it is the PM’s responsibility to procure the various materials for their respective jobs. As a result, each PM may use a different supplier and get different pricing. Additionally, PMs are now spending more time than ever to ensure materials arrive to jobsites on time to avoid project delays. There can be a silver lining to this in that previously, some prefabrication and modular techniques didn’t generate significant savings. Because these techniques save time, they are now being looked at more than ever.
Centralized Procurement Function
At first glance, a company may shy away from a centralized procurement process because of the perception that the additional overhead associated with a dedicated procurement function is not affordable. However, construction companies that have been thoughtful in implementing a centralized procurement function have found cost savings, as there is often waste and inefficiencies in a decentralized process.
There is also additional purchasing power with suppliers and the opportunity for better and more reliable terms. Many construction vendors are beginning to request more unfavorable payment terms, and sometimes a significant down payment is required for materials and equipment. Because of this, it is difficult to pass along the change to the owner or other trade partners.
A centralized purchasing function allows PMs to devote their time to managing the various aspects of the projects, so they are executed as they were planned and bid.