A 2024 Outlook on the Construction Industry: 7 Emerging & Continuing Trends

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.

 

Lingering Inflation

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.

 

Continued Pandemic Hangover

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.

 

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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.

Written by the digital marketing team at Creative Programs & Systems: www.cpsmi.com 

Reviewing Contracts in the Construction Sector

As we conclude the year, it's crucial for those in the construction industry to conduct a thorough review of their contracts, especially for long-term projects. It’s advisable to revisit your contracts to confirm they accurately represent the current state of the project. Any discrepancies should be addressed and documented immediately, rather than waiting for issues to arise.

Key areas for review include the scope of work, ensuring it aligns with the actual construction being undertaken. This includes verifying details, from fixtures to significant additions like a new wing in a building. Changes discussed in meetings should be formally documented in line with the contract's terms to avoid future disputes.

Pricing adjustments are also essential. For contractors working on a fixed price basis, it's vital to include any additional scope in the pricing. Owners should adjust payments accordingly if project elements have been removed. For contracts based on actual costs, the end of the year is a good time to align charges with incurred expenses.

Another critical factor is the project schedule. Both owners and contractors should assess whether the project is on track and address any delays appropriately, including documenting reasons and determining responsibility for any schedule slippage.

Administrative aspects, such as updating the contact person for your company in the contract, should not be overlooked. Contractors should also ensure timely submission of any claims as per contractual deadlines to avoid disputes during litigation.

In summary, instead of considering the contract only at the start, end, or during disputes, it is beneficial for both owners and contractors to proactively review and update their contracts throughout the project's lifecycle to ensure they reflect the ongoing work accurately.

Construction Bonding Specialists, LLC is a distinct surety bond-only agency with decades of bonding experience. We work to discover bond solutions for all types of bond cases, from standard to challenging. Contact us today to learn how we can help you!

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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.

Written by the digital marketing team at Creative Programs & Systems: www.cpsmi.com

Vehicle Dealer Bonds Increased

Since January 23, 2023, the Michigan Uniform Vehicle Dealer Surety Bonds (also known as Michigan auto dealer bonds or Michigan motor vehicle dealer bonds) has increased from $10,000 to $25,000. 

Mandated by Michigan Compiled Laws 257.248, the surety bond requirement has yet to be distributed to all motor vehicle dealers. Any individuals or business entities who sell or deal in five or more motor vehicles within a 12-month period are subject to the code. This ensures the public will receive compensation for any damages if the auto dealer is not in compliance with the dealer licensing law.

 

Regulated by the Michigan Secretary of State, the Michigan legislature enacted the license to guarantee dealers engage in ethical business practices such as remitting payment for taxes and fees. Specific licenses are required for auto dealers by the State of Michigan, depending on the nature of the business. Dealers will need to acquire a license for each type of business they are active in. 

 

The different types of Michigan Dealer Licenses are:

                                 ·            Class A: New Vehicle Dealer

                                 ·            Class B: Used Vehicle Dealer

                                 ·            Class C: Used Vehicle Parts Dealer*

                                 ·            Class D: Broker

                                 ·            Class E: Distressed Vehicle Transporter*

                                 ·            Class F: Vehicle Scrap Metal Processor*

                                 ·            Class G: Vehicle Salvage Pool*

                                 ·            Class H: Foreign Salvage Vehicle Dealer

                                 ·            Class R: Automotive Recycler*

                                 ·            Class W: Wholesaler*

 

*It is important to note that classes C, E, F, G, R, and W are exempt from the surety bond requirement. 

 

The Michigan Department of State requires that existing bonds be increased with a rider amendment document provided at the next renewal. The deadline for filing paperwork to increase the Michigan auto dealer amount is December 31, 2023. Any dealers who do not file the required documents before the deadline will potentially have their licenses canceled.

 

All existing bonds are subject to the increase at the next renewal term, so dealers who have active bonds already on file with the state of Michigan can expect the bond amount to increase by inflated premiums on their next renewal term. Any newly paid renewal invoices should be filed with the state of Michigan.

 

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At Construction Bonding Specialists, we work with new and experienced contractors to find the most satisfactory bond solutions. As a distinct surety-bond-only agency with decades of bonding experience, we work to discover surety solutions for all types of cases ranging from ordinary to challenging. Call us at 248-349-6227 to learn more.

Written by the digital marketing team at Creative Programs & Systems: https://www.cpsmi.com/ 

 

The SBA Works to Break Down Barriers as the White House Disperses $60 Billion to States

 

The Small Business Administration (SBA) is advocating for more small businesses to partner with federal contractors, particularly with the latest advancement to update critical infrastructure throughout the U.S. With the passing of the $1 trillion infrastructure law, the Biden administration made available about $60 billion to the states earlier this month. These funds are earmarked for rebuilding critical infrastructure within all 50 states, including Washington D.C., and Puerto Rico.

The SBA has teamed up with the U.S. Dept. of Transportation to offer additional opportunities and access to capital while removing common obstacles small businesses often face. A new avenue was created for small and disadvantaged businesses to help connect companies with contracting opportunities and be able to access some of these funds. This includes actions such as direct introductions and educating small business owners on how to be competitive in securing contracts.

The much-needed critical infrastructure work ranges from rebuilding roads and bridges to buildings and public transit. SBA administrator Isabel Guzman reports, "That technical assistance is going to give them the how-to in terms of going after, successfully bidding on, and winning contracts in the federal space."  

In 2021, the U.S. infrastructure was given a C- by the American Society of Civil Engineers (ASCE), which is up from a D+ in 2017. Seventeen categories were assessed in 2021, with grades ranging from a B for railroads to a D- for transit.

Small businesses have a difficult time obtaining federal contracts compared to larger entities, in part due to contract bundling. Bundling occurs when multiple tasks are entered into contracts that balloon, causing the contracts to become so large that small and medium-sized businesses can’t take them on.

Another barrier is the lack of history. If a business cannot prove its historical performance, then they fail to compete, making it much more difficult to secure future jobs. This is what the SBA hopes to assist with; connecting businesses with subcontracting opportunities that, in turn, help build up their portfolio and give them a better edge to go after prime contracts.

"It comes down to expanding the number of opportunities and ensuring that small businesses are entering the contracting space, getting certified, and able to know the how-to's of who to connect to, how to present yourself, and how to get money," Guzman says.

The SBA is also assisting small businesses within the transportation sector to get bonds, which guarantee agreements. Most federal contracts require businesses to be bonded. Surety bonds are a type of insurance with a three-party contract in which the surety guarantees a contract's completion, i.e., with the federal government. If a contractor is unable to complete a project, the responsibility falls on the surety company to find a replacement contractor.

It's estimated that about sixty-five thousand contracts were received by small businesses in 2021, down by almost 40% over the past decade. While the SBA and the U.S. Dept. of Transportation have not enumerated a goal, this partnership aligns with the current administration’s objective to advance the equity in government procurement. The federal administration has set an 11% federal contracting goal for small, disadvantaged businesses, with an increase to 15% by 2025.

 

At Construction Bonding Specialists, we work with new and experienced contractors to find the most satisfactory bond solutions. As a distinct surety-bond-only agency with decades of bonding experience, we work to discover surety solutions for all types of cases ranging from ordinary to challenging. Call us at 248-349-6227 to learn more.

Written by the digital marketing team at Creative Programs & Systems: https://www.cpsmi.com/