Despite economic difficulties, such as shifting consumer behavior, material procurement struggles and project delays, the construction industry has continued to stimulate economic growth — $1 trillion in total gains in 2022, a 17% increase from 2021.
However, economic uncertainty has experts anticipating a slowdown of this growth due to increasing interest rates and their impact on property owners’ ability to invest in new construction projects. Fortunately, recent federal initiatives, such as the Infrastructure Investment and Jobs Act and the CHIPS and Science Act, aim to maintain economic stability for the construction industry and fund future commercial projects.
Construction leaders should stay current on several industry trends (e.g., labor shortages, material challenges, economic issues, technology shifts) that could pose future concerns, monitor the latest industry developments and adjust risk management practices accordingly.
Construction Developments Your Company Can’t Afford to Ignore
Impacts of Economic Uncertainty
Concerns of a potential recession have become a primary burden for construction leaders as inflation continues to heighten already rising material costs and total project expenses. Some leaders have elevated the price of services to maintain profitability.
The Future of Interest Rate Hikes
The Federal Reserve (Fed) has progressively increased interest rates to lessen overall inflation issues. Economic analysts predict inflation will slowly subside as the year progresses and that the Fed’s efforts will ultimately pay off. Alternatively, other economic experts forecast that escalating interest rates and prolonged labor market challenges could lead to a recession.
Recession’s Impact on the Market
A potential recession could influence consumers to reduce costs and finance fewer projects and services. This could lead to sinking demand and business for the construction industry. Companies without substantial revenues, excess reserves and capital are necessary to offset extended periods of loss could be forced into difficult financial decisions (e.g., bankruptcy, insolvency).
Planning for a Slow-Growth Economy
Proactively respond to economic insecurity by:
Addressing Ongoing Labor Shortages
In the past few years, every industry has been affected by challenges in the labor market. Motivated by the pandemic, employees began to reevaluate their job expectations. This trend exacerbated workforce shortages and prompted workforce adjustments. Currently, the Associated Builders and Contractors report the construction industry is short-staffed by 650,000 workers. The management consulting company FMI Corporation’s recent study found most construction firms (89%) consider this labor deficiency a top operational challenge.
Concerns for an Aging Construction Workforce
A growing proportion of construction employees are approaching retirement, which will generate even more job vacancies. Recent U.S. Bureau of Labor Statistics (BLS) data discovered that 20% of construction workers are age 55 or older. A persistence of labor shortages could force construction leaders to rely on more new or inexperienced workers. Inadequate safety education and skills training increase the opportunity for worksite accident and injury rates. It also expands the frequency and severity of insurance claims, extends project delays and compounds operational expenses.
Potential Attraction & Retention Strategies
Your construction company should initiate steps to prevent labor shortages and invest in the attraction and retention of qualified talent. Potential opportunities include:
- Expanding outreach efforts at community events (e.g., high school job fairs, trade school forums) to inspire a new generation of construction workers.
- Upskilling and reskilling initiatives to continue educating existing employees and build upon their professional abilities.
- Providing ongoing safety training to workers of all ages and experience levels.
- Offering more competitive wages and benefits packages.
- Bringing employees who recently left the industry back to work with various incentives (e.g., flexible arrangements, career advancement options).
You could also expand the talent pool by exploring unrepresented demographics. For example, BLS data shows that women account for only 11% of the construction workforce; this is a substantial recruitment opportunity. Also, consider additional demographics such as veterans and formerly incarcerated individuals — also known as “second-chance workers” — who can provide evidence of rehabilitation.
Volatile Building Material Challenges
Inconsistent demand for building materials amid the pandemic, transportation bottlenecks and geopolitical uncertainties (e.g., the Russia-Ukraine war) have made construction materials difficult to obtain. The sector is experiencing skyrocketing operational expenses and significant project delays.
The Rising Cost of Construction
Common industry materials (e.g., steel, iron, lumber) have undergone significant price increases. The National Roofing Contractors Association discovered that total construction material costs soared by 17% between 2021 and 2022. A major threat to the construction sector, lumber expenses have fluctuated between $500 and $1,500 per 1,000 board feet since the beginning of the pandemic. A recent report from the Associated General Contractors of America reveals that 73% of construction companies designate rising material expenses as a primary concern in 2023.
Resilient Material Approaches
Experts don’t anticipate relief from material challenges anytime soon. Your company should brace for impacts to lead times and overall project profitability. In response, consider enhancing your supply chain resiliency, modifying inventory management protocols and altering project bidding strategies by:
- Preordering certain materials and holding them in secure storage areas.
- Working with local suppliers rather than foreign alternatives to maintain timely deliveries.
- Creating strong relationships with suppliers to ensure prioritized access to high-demand materials.
- Establishing multiple alternate suppliers for similar materials through contingency agreements.
- Requesting contract clauses with stakeholders that limit the financial ramifications of supply chain disruptions.
- Evaluating project pricing models to improve profit margin protection.
Emerging Reliance on Technology
Advanced innovations have become a favored option for construction companies looking to boost productivity, combat labor shortages, promote employee safety and offset expenses Technological advancements, including robotics, artificial intelligence (AI) and the Internet of Things (IoT), can automate specific construction tasks, improve project efficiency, and increase worksite inventory and equipment visibility. Wearable safety technology and drones can closely monitor employee behaviors on the job and detect potentially hazardous situations.
Implementing 3D Printing
Many construction businesses are applying 3D printing processes to generate building components. In some instances, entire properties or structures are being constructed by 3D printers by layering materials, such as concrete, metals or polymers, in established templates or designs. This innovation reduces labor needs, increases project efficiency, promotes sustainable building practices and lowers overall operational expenses. Industry research suggests construction companies that leverage 3D printing may experience 40% in cost savings.
Construction Cyber Risks
It should be noted that any advanced technology can increase the risk of cyber exposure. For example, security firm SonicWall reported that IoT-based cyber incidents (e.g., data breaches, ransomware attacks) expanded by 77% during 2022. A recent survey conducted by IT company Forrester discovered that 75% of construction firms experienced cyber incidents in 2022, totaling $6 trillion in losses.
Risk Mitigation Opportunities
Although cyberattacks are prevalent, construction companies can take several steps to minimize their risks, such as:
- Conduct training. Educate employees on ways to recognize potential cyberattacks. Provide clear instructions for workers if they believe a cyberattack has occurred.
- Prioritize supply chain management. Identify the risks of working with external organizations. Consider establishing legal contracts with contractors and third-party businesses that address cyber risk management.
- Develop and practice a cyber incident response plan. This should include identifying an internal and external response team, clarifying key team members’ roles and responsibilities, and anticipating critical business continuity measures and workplace safety issues.
- Purchase proper insurance. Speak with a trusted insurance broker to secure specific coverage for cyber losses.
We’re Here to Help the Construction Industry Continue Finding Operational Success
Overall, there are several trends currently impacting the construction sector. By staying on top of these developments and taking steps to mitigate their associated exposures, construction businesses can effectively position themselves to maintain long-term growth and operational success. Connect with a member of our team for additional industry-specific risk management guidance.