Navigating the Triple Threat: Inflation, Recession, and Labor Shortage
Construction contractors everywhere are struggling to adapt to the economic and industry effects of a triple threat: inflation, an economic recession, and an on-going and intractable labor shortage. The questions everyone’s asking include when it will end and how do I survive until then.
Before we answer those questions, here’s a brief look at the current state of these three potential threats in the construction industry:
- Inflation – A recent report highlighting the cost increases of construction commodities showed that materials costs rose 6.2% in 2022. A further increase of 4.7% is predicted for 2023. In particular, a shortage of steel, aluminum, copper, and nickel is creating a backlog of electrical equipment orders and raising prices accordingly.
- Recession – The recession is expected to continue into 2023, spurred on by higher prices (see above), rising interest rates, and supply chain issues. ABC’s top economist, Anirban Basu, doesn’t expect the recession to be very deep or last very long, so that’s a bit of good news. Dodge predicts a 9% downturn for 2023, while ConstructConnect forecasts a 4% drop. Construction of hotels and office buildings are down since the pandemic. Travel is still recovering from lockdowns and with so many companies changing to work from home policies, they aren’t investing in new office buildings or spaces.
- Labor shortage – The industry has been suffering from a shortage of skilled workers for the past couple of decades. As older workers retire, there’re no young workers to fill their experienced boots. The pandemic made things worse, as many chose to retire early in the face of temporary layoffs and drastic changes to on site processes and procedures. According to ABC the industry needs to hire an additional 546,000 workers (on top of the normal pace of hiring) to meet the current need.
How to survive, and thrive, in these uncertain times
Although we can’t do much to control the threats we’re facing, contractors can take effective action to protect themselves from the roller coaster that is the current economic climate.
- Economists suggest companies diversify their services and their customers during a recession. Doing so prevents you from taking a substantial hit if one project or customer type slows down. In terms of construction, the following industries are expected to continue to grow: healthcare, life sciences, manufacturing, data centers, and infrastructure. You can also look at taking on smaller projects and working on public works projects (federal, state, and local).
- If your contracting business is minority-owned, get registered at the state and federal level. Minority owned contractors have an advantage when it comes to bidding public works projects, as most projects encourage or require that minorities be included in the project’s subcontracting plan. In most cases you can register for free.
- To protect your business during a slowdown, increase your cash reserves. Having cash on hand will help you keep your company going when revenues are down. One way to save is to delay large cash purchases if you can. Make sure your cash is easily accessible, so you don’t have to wait long when you need it.
- To increase your bid competitiveness, track your project costs. Include overhead and indirect costs that affect all projects. The more detailed your data is, the more accurate your estimates are. With improved accuracy you can tighten up your bids, reducing the need to “pad” the numbers. If you’re still tracking project costs by hand or on a spreadsheet, invest in bookkeeping services or software that can do the tracking and reporting for you.
- To battle rising costs and shipping delays, order materials and equipment as early as possible. This helps get your order into production sooner and reduces the potential for a delay in the schedule. Appliances and electrical equipment are being delayed substantially, so be sure to get these on order at the beginning of the project, if possible.
- Another way to battle high costs is to stock up on the materials that you use on a regular basis. By establishing an inventory, you can reduce the effect shipping delays have on your work. You also save money if materials pricing continues to skyrocket.
- When it comes to recruiting new employees, look to underutilized populations like women and minorities. These populations are under-recruited, so you’re sure to find some new and exciting talent.
- Partner with local unions, apprenticeship programs, and construction schools to offer students and graduates internships or other learning opportunities. The students get real-world experience, and you get qualified and knowledgeable potential employees.
AIA’s Architecture Billings Index has been showing growth since January 2021, except for a slight dip in October 2022. This index measures non-residential projects in the design phase, predicting construction work 9-12 months ahead of time. In fall 2022 architects were evenly split on whether they would see an increase in revenue for 2023: one third expected gains, one third expected declines, and the remaining third expected little to no change.
Dodge is predicting that high materials costs will begin to drop in the second half of 2023. This is good news for contractors and project owners, as both have been absorbing these high costs for the past three years.
The passing of local bonds and the IIFA will help ensure a continuing pipeline of new projects. Contractors who don’t normally pursue public projects may soon be joining the bidders list, increasing competition for all.