The construction industry consists of companies that construct, maintain and repair buildings and other structures (e.g., roads, bridges and utility systems). This sector plays a vital role in the U.S. economy by keeping residential areas, commercial facilities and local infrastructure in good condition, thus supporting the safety and welfare of communities across the nation. In recent years, the construction industry has faced various ups and downs, largely brought on by fluctuating consumer behaviors, material procurement struggles and project delays amid the COVID-19 pandemic. Yet, the sector has still managed to promote economic growth. According to the latest industry data, the construction sector saw approximately $1 trillion in total gains during 2022, representing a 17% increase from the prior year.
Looking ahead, industry experts anticipate a slowdown in such growth as higher interest rates limit property owners’ abilities to invest in new construction projects, particularly in the residential space. However, recent federal initiatives such as the Infrastructure Investment and Jobs Act and the CHIPS and Science Act are intended to help maintain economic stability within the construction sector by funding a range of future projects, especially in the commercial segment. Regardless, several industry trends could pose concerns in the coming months and years, including labor shortages, ongoing material challenges, economic issues and technology shifts. As such, it’s best for construction businesses to monitor the latest sector developments and adjust their risk management practices as needed. This article provides more information on construction industry trends to watch.
The past few years have been met with labor shortages across industry lines. The pandemic motivated many employees to reevaluate their job expectations, exacerbating such shortages and prompting additional workforce adjustments. The construction sector is no exception to this labor trend. According to the Associated Builders and Contractors, the industry is currently short 650,000 workers. Additionally, a recent study conducted by management consulting company FMI Corporation revealed that the majority (89%) of construction firms consider the scarcity of labor to be the top challenge facing their operations. What’s worse, a growing proportion of construction employees are nearing retirement, creating more job openings as these workers exit the sector. In fact, the latest data from the U.S. Bureau of Labor Statistics (BLS) found that 1 in 5 construction workers are age 55 or older. As labor shortages persist, construction businesses may resort to employing a higher number of new or inexperienced workers. Yet, without proper safety education and skills training, these employees may contribute to increased worksite accident and injury rates, rising insurance claim frequency and severity, extended project delays and compounded operational expenses.
Thus, it’s critical for construction businesses to take steps to combat labor shortages and invest in measures to attract and retain sufficient and qualified talent. These measures may include increasing outreach efforts at community events (e.g., high school job fairs and trade school forums) to encourage a new generation of construction workers; leveraging 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; and attempting to bring employees who recently left the industry back to work with various incentives (e.g., flexible arrangements and career advancement options). It may also benefit construction companies to explore unrepresented demographics to further expand their talent pools. For instance, BLS data shows that women account for just 11% of the construction workforce, highlighting substantial recruitment opportunities within the sector. Additional demographics to consider may include veterans and formerly incarcerated individuals—also known as “second-chance workers”—who can provide evidence of rehabilitation.
In recent years, widespread supply chain disruptions and associated material challenges have occurred across the construction sector. Specifically, inconsistent demand for numerous building materials amid the pandemic, transportation bottlenecks and geopolitical uncertainties (e.g., the Russia-Ukraine conflict) have made many construction materials increasingly difficult to obtain, driving up operational expenses and causing significant project delays. Total construction material costs increased by more than 17% between 2021 and 2022, according to the National Roofing Contractors Association. Materials such as steel, iron and lumber have seen the biggest price hikes. In particular, the cost of lumber has fluctuated between $500 and $1,500 per 1,000 board feet since the start of the pandemic. With this in mind, it’s no surprise that a survey from the Associated General Contractors of America reported nearly three-quarters (73%) of construction companies had listed rising material expenses as a major concern in the year ahead.
While these trends may slightly ease moving forward, many industry experts anticipate that material challenges will press on for the foreseeable future, therefore continuing to affect lead times and overall project profitability among construction businesses. To help reduce the impact of material challenges within the sector, construction companies may want to consider boosting their supply chain resiliency, revising their inventory management protocols and adjusting their project bidding strategies. This could entail preordering certain materials and holding them in secure storage areas; working with local suppliers rather than overseas alternatives to uphold timely deliveries; building strong relationships with suppliers to ensure prioritized access to high-demand materials; obtaining multiple suppliers for the same materials through contingency agreements; requesting contract clauses with stakeholders that limit the financial ramifications of supply chain disruptions; and reassessing project pricing models to better protect profit margins.
Inflation concerns have impacted virtually every industry in the last few years, evidenced by skyrocketing costs for various goods and services. As it pertains to the construction sector, inflation will likely continue to compound already rising material costs and total project expenses, motivating some companies to increase the prices of their services to maintain profitability. The Federal Reserve (Fed) has steadily been hiking up interest rates to help minimize overall inflation issues. Economic analysts predict that the Fed’s efforts will eventually pay off during 2023, with inflation slowly subsiding throughout the year. However, some economic experts have forecasted that rising interest rates and prolonged labor market challenges could lead to a recession—a prolonged and pervasive reduction in economic activity—in the United States in the near future.
During a recession, consumers may opt to cut costs and invest in fewer projects and services, potentially lowering demand and taking away business from the construction industry. Consequently, construction companies without substantial revenues, excess reserves and the additional capital necessary to offset extended periods of loss could be more likely to have to make difficult financial decisions to avoid issues such as bankruptcy or insolvency in the months ahead. To prepare for a potential recession, it’s best for construction businesses to follow practices such as establishing concrete financial plans, scaling back certain operations, promoting steady cash flow, ensuring proper debt management, fostering strong connections with stakeholders and leveraging effective marketing strategies. Further, it’s crucial for construction companies to maintain ample insurance in a recession and secure financial protection against possible losses.
Some construction businesses have begun implementing more advanced industry technology in their operations to help boost productivity levels, combat labor shortages, promote employee safety and offset elevated project expenses. For example, technology such as robotics, artificial intelligence and the Internet of Things (IoT) may help automate certain construction tasks, improve project efficiency, and provide greater visibility of essential worksite inventory and equipment. On the other hand, wearable safety technology and drones can permit construction companies to closely monitor their employees’ behaviors on the job and detect hazardous situations before they cause accidents or injuries.
Additionally, construction businesses can utilize 3D printing to generate building components and—in some cases—entire properties or structures by layering materials such as concrete, metals or polymers in established templates or designs. This technology not only minimizes the need for physical labor and allows for projects to be completed at more efficient rates but also promotes sustainable building practices and reduces total operational expenses. According to the latest industry research, construction companies that leverage 3D printing can experience cost savings of as high as 40%. Despite these benefits, it’s important to note that implementing advanced industry technology can also lead to elevated cyber exposures for construction businesses. For instance, security firm SonicWall reported that IoT-based cyber incidents (e.g., data breaches and ransomware attacks) increased by 77% during 2022, making companies that utilize this technology increasingly vulnerable. What’s more, a recent survey conducted by IT company Forrester found that at least 75% of construction firms have experienced cyber incidents over the past year, totaling nearly $6 trillion in losses.
Considering such findings, it’s imperative for construction businesses that leverage advanced industry technology to review their digital exposures and make adjustments (e.g., providing enhanced employee training on common cyberthreats and installing updated security software) as needed to mitigate possible cyber incidents. These companies should also consider purchasing dedicated cyber insurance to ensure financial protection against potential incidents and related losses.
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. Contact us today for additional, industry-specific risk management guidance.
|This Risk Insights is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice. © 2023 Zywave, Inc. All rights reserved.