Heading into 2024, construction professionals encounter familiar hurdles: recession worries, ongoing inflation, higher interest rates, labor shortages, and supply chain issues. Despite these challenges, there are strategies to navigate them successfully and position your company favorably. Here are seven key trends and solutions to consider.
Labor Shortages Remain
The construction sector faces a growing skilled labor shortage, which is expected to intensify in 2024. In 2023, the industry needed over half a million extra workers to meet labor demands, exacerbated by fewer young people entering trades and an aging workforce, with nearly a quarter over 55 years old. The industry must enhance its appeal and recruit more effectively to combat this. Strategies include partnering with trade schools and high schools, engaging with trade associations, offering on-the-job training, and retaining talent with incentives for career growth and a supportive work environment.
Increased Subcontractor Default
In the past year, subcontractors faced over $97 billion in extra costs, leading to cash flow issues and heightened risk of default, a problem compounded by labor shortages, rising interest rates, and recession fears. This has resulted in increased claims due to subcontractors not meeting their financial obligations.
To address this, contractors should thoroughly vet subcontractors, requiring surety bonds, seeking references, assessing experience, and discussing financial stability. Leveraging surety relationships for subcontractor assessments and ensuring favorable contractual terms, such as “paid-when-paid” clauses, can also help. Diversifying the subcontractor base reduces dependency on a few and minimizes risk.
Unpredictable Interest Rates
Rising interest rates have exacerbated cost inflation in the construction sector, with financing becoming more expensive and driving up the costs of materials and labor. This has affected project budgets, with over 82% of construction materials experiencing price increases averaging 19% since 2020.
To counteract these challenges, strategies include reducing exposure to interest rates, avoiding debt, managing cash flow wisely, and securing favorable contract terms. Paying for equipment and materials in cash, negotiating better terms with suppliers, adjusting retainage rates for improved cash flow, and seeking upfront payments for materials to minimize reliance on bank financing are effective approaches.
The construction sector is facing significant cost increases in materials, labor, insurance, and administrative expenses, further stressed by the volatility and unpredictability of material prices. Despite a decrease from the 8% inflation rate in 2022, economic uncertainty remains in various construction markets.
To navigate these pressures on profit margins, it’s advisable to work closely with insurance brokers and agents to reassess coverage and secure the most advantageous insurance rates, using a clean claims history as leverage. Additionally, a detailed review of expenditures, especially administrative costs, and regular financial monitoring are essential for identifying opportunities to manage or reduce expenses more effectively.
The construction industry still faces challenges from the COVID-19 pandemic, including delays in project starts and funding uncertainties, which have led to extended timelines and difficulties in backlog management. Supply chain disruptions and funding issues have impacted both private and public projects, with nearly 40% of contractors in 2022 reporting project postponements, and over a third experiencing cancellations or indefinite delays. In 2023, 13% noted postponements in the year’s first half.
To minimize these issues, it’s crucial to meticulously document project delays and management strategies to safeguard against liabilities such as liquidated damages. Documentation should cover delays outside contractors’ control, like late material deliveries, to prevent unfair penalties.
Before engaging in contracts, verify project financing in the private and commercial sectors, requesting proof of funds to lessen the risk of delays from financial issues. Work closely with suppliers to understand material lead times, identify potential shortages, and secure materials early, even at a higher cost, to prevent delays. Exploring alternative materials with project owners can also provide solutions to potential scarcities.
Increase Private Equity Firm Buyouts
The trend of private equity firms purchasing construction companies has risen significantly, with their involvement in the sector increasing from 16% in 2016 to 41.5% in 2021. While the influx of capital from these acquisitions can be positive, the long-term effects are uncertain, particularly regarding the sustainability of these firms without the original owner’s expertise. The future of these new portfolio companies—whether they will prosper, struggle financially, merge with other entities, or take different routes—is an ongoing concern with unpredictable outcomes. Furthermore, the temporary nature of many portfolio companies under private equity could lead to conflicts in financial management practices with creditors, surety companies, and banks.
It’s advisable to secure key personnel through contracts of a particular duration, ensuring the retention of essential expertise and knowledge for the company’s continuity and stability during transitions. It is also crucial to align the business strategies of the acquired construction company with partners like sureties and brokers to maintain smooth operations and relationships.
Repurposing Large Construction Projects
Thanks to the Infrastructure Investment and Jobs Act and rising construction demands, a diverse mix of projects is on the horizon, shifting focus from traditional retail and office spaces to warehouses, multifamily housing, and mixed-use developments, including transforming old retail locations into warehouses. Despite challenges from higher interest rates, the construction sector is poised for growth, with significant gains expected in certain areas.
In 2022, U.S. construction projects reached nearly $1.8 trillion in value, a figure projected to decline by 2025. Nonetheless, spending has been on an upward trend, driven by both residential and non-residential construction. The U.S. Infrastructure Bill, allocating federal funds to various projects, is set to boost demand for construction services, equipment, and materials.
For businesses looking to navigate these changes, starting with smaller projects can provide valuable experience in new construction areas. Partnering with specialized subcontractors ensures high-quality work in unfamiliar domains. Moreover, updating risk transfer methods to match new project types is essential, including securing adequate insurance coverage to mitigate specific risks.
Stay Flexible and Strategically Positioned for Success in 2024
Despite the uncertainties associated with the trends mentioned, construction firms that are prepared and flexible stand to benefit significantly. The U.S. dedication to improving national infrastructure and the expected increase in renovation and rehabilitation projects present substantial opportunities. Thus, through resilience and strategic planning, companies can navigate periods of uncertainty and excel amidst continuous challenges.
At Construction Bonding Specialists, we work with new and experienced contractors to find the most satisfactory bond solutions. As a dedicated surety-bond-only agency with decades of bonding experience, we strive to discover surety solutions for all types of cases, ranging from routine to challenging. Contact us online or call us at 248-349-6227 to learn more.