Aug 15 Construction Industry Update: Trends, Opportunities & Challenges

As we are near the end of Q3, we wanted to touch on a few important topics and updates happening in the construction industry.

Backlog Beyond 2023

It’s no secret that the construction industry often lags a few years beyond the overall economy with regards to economic downturns and other challenges. When the pandemic hit, we projected that the backlog of contractors would remain healthy in the 2-3 years following as many were deemed “essential,” and even with delays, the work on hand would need to be completed. As we’re now halfway through 2022, the average construction backlog is still healthy through 2023.  But moving forward, the construction landscape is still one of competitive bidding, an uncertainty of future new job opportunities, and a high level of competition with respect to those opportunities – and will prove even more so beyond 2023.

More Contractors Transitioning to MBE/WBE

We’re also seeing a number of contractors transitioning to Minority Business Enterprise (MBE) and Woman Business Enterprise (WBE) status. This can help them potentially secure work and better profit margins on publicly funded contracts.

The certification requirements for these designations vary from state to state and, in some cases, city to city. In all cases, though, the purpose is to help companies headed by currently underrepresented demographics gain a stronger foothold in the construction industry. This kind of certification can help a business gain greater access to opportunities like being prioritized for strategic partnerships, unique business development and networking opportunities, and access to the SBA’s 8(a) Business Development Program.

Difficulty Maintaining Employees

While most contractors may have plenty of work on hand, the vast majority find themselves increasingly burdened with the difficulty of retaining employees. Across the industry, employees in roles like estimators, project managers, and financial and accounting roles are demanding higher wages and requesting more flexibility and hybrid work arrangements. Even the level of field laborers is experiencing issues with the more experienced, high-skilled generation opting for early retirement and a significantly reduced population of resources to replace them.

It’s a challenge with multiple causes. Rising material prices cut into profit margins while inflation drives living expenses up, pushing employees to ask for higher wages. Americans’ relationships with their careers are changing, and in a post-lockdown world where the places and processes used for work have changed, companies need to adapt if they hope to attract and retain skilled employees.

NJ/NY-based Companies Head South

The South is hot, and we don’t just mean temperature-wise.

Another construction industry trend we’re seeing is that companies based in New Jersey and New York are heading south to find work. Primarily, they’re heading to Florida, South Carolina, Virginia, and Texas.

This is happening mainly because of the population shifts happening in these states. During and following the COVID pandemic, Americans are moving away from older cities in colder climates and flocking to more affordable up-and-coming cities throughout the South. An increasing population means an increased demand for not just housing but commercial construction and local infrastructure.

Mid-Size Contractors Playing in the Big Leagues

The construction industry continues to be one with limited work opportunities and increased competition.  Another avenue we see mid-size contractors exploring is taking on larger than normal jobs for various reasons:

• To maintain the level of employees and “feed the machine,” – one larger job can take the place of many jobs that the contractor historically performed
• Just because they can – the smaller to mid-size contractors tend to come in at lower prices and margins than the typical larger contractor that would bid the job and therefore have better chances at securing the work.
• To get their foot in the door with a new group of clientele – if successful and done well, these mid-size contractors have now secured a new pool of customers moving forward.
• Because that’s where the opportunities are – more public projects that would have been bid separately in the past are being bundled into “mega” projects.

As with any new venture, mid-size contractors need to be careful of the time, effort, and resources involved in taking on larger contracts.

Banks Cracking Down

Although some industries are feeling somewhat “back to normal” now, others remain cautious about progressing forward with changing landscapes, regulations, and risk factors. Banking is one of these industries. Construction companies are reporting that banks are asking for more detailed financial information and projections than ever before, which can slow down the lending process and ultimately make it more challenging to move forward with new projects.

A few key obstacles construction companies face include lease standard changes and the new “makeup” of financial statements. A trusted financial advisor can help you understand what a bank is asking for and provide accurate statements to help you secure financing.

Cash Flow – Still Key

The only thing that has not changed in the construction industry is the focus on cash flow.

As you can see from the entries above, many in the construction industry face restrictions and feel forced to find creative solutions to issues like staffing shortages and new financing requirements. Even for companies that currently have work, keeping it both funded and progressing is proving to be a challenge for many. Many report that “anything that comes in the door goes immediately out the door.”

If you’ve been in the industry for some time, you know it’s constantly in flux. As we move into the second half of 2022 and beyond, we’re here to answer your financial questions and advise you on the best way to continue growing your business.

About the Author

Missy O’Shea, CPA is a Partner at Sax and a vital member of the firm’s Construction Practice, assisting clients with accounting, auditing, and financial services that are unique to the industry. Her areas of expertise include attest engagements, bonding capacity and bank line consulting, accounting software consulting, cash flow and profitability improvement, tax strategies and planning and additional advisory services.  She can be reached at [email protected].