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.
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
