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Pivot to pursue growth in the face of macroeconomic headwinds

This post is part of a series sponsored by IAT Insurance Group.

Construction Industry Outlook 2023: Pivot to Pursue Growth in the Face of Macroeconomic Headwinds from IAT

The potential for recession, continued inflation, critical labor and supply chain shortages will loom over construction in 2023. Additionally, many eyes are on interest rates in a virtual wait-and-see mode as to whether they will continue to rise, and by how much.

And yet opportunity awaits for well-prepared construction companies that can pivot under uncertainty. US commitment to national infrastructure improvements[1] and the expected increase in building renovation/rehabilitation work gives hope that construction companies can manage to perform well even through continued uncertainty.

Prepare for the 2023 opportunity by considering the following five trends:

1. Civil & Infrastructure

Total construction starts are expected to be unchanged in 2023,[2] but a significant change in the type of work seems imminent. The construction industry, in pure dollar terms, is likely to see more civil and infrastructure work than single and multi-family housing or some areas of commercial construction that have dominated the construction landscape in recent years.

Along with the opportunity, however, comes the continuing impact of inflation, rising interest rates and other financial factors, so that a project that cost $1 million to build a couple of years ago could now cost 20-30% more. Larger contractors may have the equipment and organizational and financial depth to manage these changes, while smaller firms may need to consider alternatives in an effort to participate more broadly.

Take action!

In response to larger infrastructure projects and/or the potential for increased infrastructure opportunities in general, joint ventures (JVs) can be an attractive way to participate. Traditionally, JVs provide a way for contractors to combine talent, experience, equipment, administrative and financial resources to handle larger projects or backlogs.

For some, entering into a merger or acquisition with a competitor may offer the opportunity to increase your company’s capabilities. If the economics make sense, this can be a tool to add specialized equipment or expertise, or thoughtfully expand into new locations and regions for their business.

2. Renovation & Rehab

The current market presents additional challenges as certain industry segments and owners move away from new construction toward rehabilitation and renovation projects. For example, the conversion of shopping centers and warehouses to other uses was accelerated due to the pandemic and the shift to more online shopping. Mall traffic has slowed in recent years as shoppers choose to visit stores closer to home more often.[3]

Depending on the complexity of a project, rehab work can prove challenging for contractors who traditionally focus on new construction. There is no telling what quality of work was done on the facility when it was built or how often or well the building was maintained. Additionally, based on age, the building may contain a variety of hazardous materials or historic preservation requirements that a contractor may not have anticipated.

From a property and damages perspective, all structural changes add risks. Opening walls also increases risk, as contractors may encounter water damage, fire sprinkler problems, gas line problems, electrical damage, or any number of unexpected issues that need to be addressed.

Take action!

Consider new technologies to reduce risk – laser scanning, hygrothermal wall analysis and computational fluid dynamics modeling, among other innovative equipment and methods.

Contractors should keep up to date on the latest changes in building codes. For example, many retail renovations in the past may have simply changed a store from one store to another. However, because buildings are changing, retrofitting a storefront in a medical or manufacturing facility may require special or unique modifications to handle the needs of these types of businesses.

3. The challenges of the workforce

The labor shortage in the construction industry will continue in 2023.[4] Skilled workers are simply not available to fill the specialized positions that construction companies need.

Another important factor that comes into play in the construction industry is the stigma attached to working with laborers among many younger workers. The average age of a construction worker in the United States is currently 42.5 years.[5] With many Baby Boomers still choosing to retire early after COVID-19, and without a sufficient number of young workers filling these roles, the industry will struggle to grow its workforce in 2023 and beyond.

Take action!

To attract from all parts of the labor pool and upgrade experienced workers, the industry needs to improve communication about the benefits of a career in construction to the younger generation. Here are some ways to do it:

  • Increase outreach efforts. Encourage high school students to attend trade schools and trade school students to join the construction industry
  • Create unique benefits for your employees. This can mean additional total compensation, including benefits, sign-on bonuses, higher wages and more days off
  • Offer entry-level job and safety training
  • Consider ways to re-acquire seasoned workers – today’s cost of living can impact retirement plans, resulting in educated workers willing to re-enter the workforce. Acquiring these older workers can also provide positive training experiences for younger tradespeople and help improve workplace safety.

4. Supply Chain Challenges, Volatile Pricing

A fractured supply chain has slowed some projects to a crawl, while others have been hampered by the ups and downs of fuel and material costs over the past year. It is clear that volatility and inflation are cutting into job project margins. As such, anticipated extended project timelines, price escalation of materials or subcontractors, and additional overhead costs must be evaluated during the bidding phase. One possible solution to dealing with rising material costs is to add a material inflation clause to your contracts that either places the responsibility with the project owner, or at least splits the extra cost between the owner and the contractor. Contractors may also want to consider discussing whether lower cost material alternatives would be acceptable to the owner or his representative.

During the covid pandemic, some construction companies relied on loans from the US Paycheck Protection Program (PPP).[6] to help with overhead costs. OPS was well-timed and helped many entrepreneurs deal with financial uncertainty. Although PPP is over, supply chain uncertainty and inflation are not. Accordingly, it is important that contractors stay current with local, regional and national economic and labor dynamics when pricing their work.

Take action!

To minimize the effects of volatile prices or material shortages, contractors can increase their inventory and buy in bulk where possible. In addition, inventory management is extremely important in a tight materials market. Ensure that all unused materials are returned to your inventory for use in future projects, rather than ending up in the trash or being left behind.

Stay up-to-date on materials, labor and economic trends. There is a tremendous amount of data available in each of these areas, as well as industry insights through various publications such as Associated General Contractors (AGC), Associated Builders and Contractors (ABC) and Engineering News Record (ENR).

5. Threats of cybercrime

As construction companies and other industry stakeholders continue the shift toward technology as an enabler, cybercriminals have followed suit. According to a study by NordLocker, the construction industry was the second most targeted industry for ransomware attacks between January 2020 and July 2022 due to the high success rate of hackers across the industry.[7] Small to mid-sized construction companies are particularly vulnerable to cyber attacks due to the limited resources and defenses they often have devoted to protecting their network environment.

Cybersecurity compliance is important for all government contractors, but expect stronger compliance requirements from all business partners you work with in 2023.

Take action!

Defend your business against cybercrime by obtaining cyber insurance, engaging technology to protect and defend your software and systems, and focusing on employee training and engagement to know and avoid the common mistakes that can lead to breaches.

Looking into 2023 and beyond

There are many challenges for construction companies of all sizes heading into the new year. However, there are opportunities for organizations that can shift gears and capitalize on the larger industry trends while reducing risk and maintaining strong profit margins in the process.

Contact IAT Insurance for guidance on how to manage risks around your construction projects in 2023.

By Thomas Postol and Laura Penhale

[1] The White House “FACT SHEET: One year into implementing bipartisan infrastructure law, Biden-⁠Harris Administration celebrates major strides in building a better America,” 15 Nov. 2022.

[2] Equipment World “Dodge Economist: Prepare for a Rocky First Half of 2023,” 23 Nov. 2022.

[3] CNBC “UBS expects 50,000 US store closures in next 5 years after pandemic hiatus”, 13 Apr 2022.

[4] Construction Dive “5 charts showing what’s ahead for construction in 2023,” 6 Dec. 2022.

[5] US Bureau of Labor and Statistics, 2021.

[6] Construction Financial Management Association, CFMA Building Profits “Impact of Paycheck Protection Program Loans on the Construction Industry,” May/June 2021.

[7] NordLocker “Ransomware Statistics: Who is Targeted Most?” 2022

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