Pivot to sustain growth in the face of macroeconomic interventions

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

Construction Industry Outlook 2023: Poised to Continue Growth in Face of Macroeconomic Headwinds from IAT

Recession, persistent inflation, complex labor shortages and supply chain issues will weigh heavily on construction in 2023. Also, the view of many is on a virtual wait-and-see mode as to whether interest rates will continue to rise, and by how much.

Still, opportunity awaits well-prepared construction companies that can move forward in the face of uncertainty. US commitment to national infrastructure improvements[1] And the expected rise in building renovation/rehabilitation works gives hope Construction companies can perform well even in the face of constant uncertainty.

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

1. Civil & Infrastructure

Total construction activity is expected to be flat in 2023.[2] But a significant swing in job categories is immediately apparent. The construction industry, in pure dollar terms, is likely to see more civil and infrastructure work than the single- and multifamily housing or commercial construction segments that have dominated the construction landscape for the past two years.

However, with opportunity comes the continuing impact of inflation, rising interest rates and other financial factors, meaning that a project that was built at a cost of $1 million two years ago may now cost 20-30% more. Large contractors may have the equipment and organizational and financial depth to deal with these changes, while smaller firms may need to consider options in an effort to participate more broadly.

Take action!

Joint ventures (JVs) may present an attractive avenue for participation in large-scale infrastructure projects and/or in response to the potential for increased infrastructure opportunity in general. Traditionally, JVs provide a way for contractors to pool talent, experience, equipment, management and financial resources to tackle large projects or backlogs.

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

2. Renewal & Rehabilitation

The current market presents additional challenges as some industry segments and owners move from new construction to rehabilitation and renovation projects. The conversion of shopping malls and warehouses to other uses, for example, has accelerated due to the pandemic and the shift to online shopping. Mall traffic has declined in recent years as shoppers frequent stores closer to home.[3]

Depending on the complexity of a project, rehabilitation work can be challenging for contractors traditionally focused on new construction. There is no telling what quality work was done when the building was built or how often or well the building was maintained. Also, based on age, the building may have different hazardous materials or historic preservation needs that a contractor may not have accounted for.

From a property and casualty perspective, any structural changes add risk. Opening up walls also adds risk, as contractors may encounter water damage, fire sprinkler issues, gas line concerns, electrical damage, or unexpected problems that need to be addressed.

Take action!

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

Contractors should stay abreast of the latest changes in building codes. For example, many retail reorganizations in the past may have involved moving a store from one retail store to another. However, as buildings are repurposed, converting a storefront to a medical or manufacturing facility may require special or unique modifications to handle the needs of these types of businesses.

3. Labor challenges

Labor shortages in the construction sector will continue into 2023.[4] Qualified workers are not available to fill specialized positions required by construction companies.

Another major factor at play in the construction industry is the stigma of blue-collar work among many younger workers. The average age of a construction worker in the US is currently 42.5.[5] With many baby boomers still opting for early retirement post-Covid, the industry will struggle to grow its workforce in 2023 and beyond without enough young workers to fill those roles.

Take action!

To attract experienced workers from all parts of the labor force, the industry needs to communicate the benefits of the construction industry to the younger generation. Here are some ways to do that:

  • Increase Outbound Efforts. Encourage high school students to enter trade schools and trade school students to enter the construction industry
  • Create unique benefits for your workers. This can mean additional total compensation, including benefits, sign-on bonuses, higher pay and more vacation days
  • Provide entry-level job and safety training
  • Consider Ways to Reacquire Experienced Workers – Today’s cost of living can affect retirement plans, resulting in trained workers willing to re-enter the workforce. Acquiring these legacy workers can help create positive training experiences for younger tradespeople and improve workplace safety.

4. Supply chain challenges, volatile pricing

The coming-up supply chain has slowed some projects to a crawl, while others have been hampered by fluctuations in fuel and material costs over the past year. It is clear that volatility and inflation cut into the job projection margins. Therefore, extended project timelines, material or subcontractor price increases, and additional overhead should be evaluated at the bidding stage. One possible solution to deal with rising material costs is to add a material inflation clause to your contracts, which places responsibility on the project owner, or at least the owner and contractor share the additional cost. Contractors may wish to consider whether lower cost material options are acceptable to the owner or their representative.

During the COVID pandemic, some construction companies relied on US Paycheck Protection Program (PPP) loans.[6] To help with overhead costs. PPP was timely and helped many contractors manage financial uncertainty. Even at the end of PPP, there is supply chain uncertainty and inflation. As a result, contractors need to keep up with local, regional and nationwide economic and labor dynamics by pricing their work.

Take action!

To minimize the effects of volatile prices or stockouts, contractors can increase their inventory and buy in bulk as much as possible. Also, inventory management is critical in a tight commodity market. Make sure all unused items are returned to your warehouse instead of ending up in the trash.

Stay current on material, labor and economic trends. A wealth of data is available on each of these fields through various publications such as Associated General Contractors (AGC), Associated Builders and Contractors (ABC) and Engineering News Record (NR).

5. Threat of cybercrime

As construction companies and other industry stakeholders continue to move toward technology, Cybercriminals followed suit. According to a study by NordLocker, construction 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 and medium-sized construction businesses are particularly vulnerable to cyber-attacks because they often have limited resources and defenses dedicated to protecting their network environment.

Cybersecurity compliance is critical for all government contractors but in 2023 you can expect stronger compliance requirements from any business partner you engage with.

Take action!

Protect your business against cybercrime by obtaining cyber insurance, deploying technology to protect and secure your software and systems, educating employees and committing to knowing and avoiding common mistakes that lead to a breach.

Looking forward to 2023 and beyond

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

For guidance on how to further manage risk in your construction projects in 2023, Access IAT Insurance.

By Thomas Postel and Laura Penhale

[1] White House “Fact Sheet: One Year After Enactment of Bipartisan Infrastructure Act, Biden-Harris Administration Celebrates Great Progress in Building a Better America”. November 15, 2022.

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

[3] CNBC “UPS Expects 50,000 US Store Closures in Next 5 Years After Pandemic Pauses” April 13, 2022.

[4] Construction Dive “5 Charts That Show What’s in store for Construction in 2023” December 6, 2022.

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

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

[7] NordLocker “Ransomware Statistics: Who’s Being Targeted Most?” 2022



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