Economic Uncertainties Continue to Impact the Construction Industry

Today's economic uncertainties are weighing heavily on the construction industry. For example, high inflation rates have caused higher construction costs. Supply chain and labor availability issues cause project delays, ultimately leading to a stunt in the growth of the construction industry across the nation. And despite the labor market's stabilization, uncertainty around commodity prices and labor remains.

A recent poll conducted live during a Construction Executives webinar from ASA Construction Corporation revealed skilled worker shortages as the top challenge for construction companies today (63%), followed by financing project work (15%) and supply chain material issues (12%).

Construction employment, seasonally adjusted, totaled 7,971,000 in July—a gain of 19,000 from June and 198,000 (2.5%) year-over-year, according to data from the Bureau of Labor Statistics. Finding qualified employees is the most common challenge for construction firms. "Industry unemployment rates have been at near-record lows and job openings at near-record highs," said Ken Simonson, chief economist at Associated General Contractors of America. "Even though pay increases for hourly workers in construction have exceeded increases in other sectors, employment shortages are still a challenge."

Rising costs and availability of credit are especially strenuous for owners and contractors. With multi-billion dollar megaprojects in the works, states such as Arizona, Ohio, New York and Texas have become the main centers for manufacturing in the U.S. Because of this centralization, the huge number of projects outsizes the demand for subcontractors and workers.

The ability to borrow money is the lifeblood of the construction industry, said Tom Tolbert, director of FP&A and treasury at Kewaunee Scientific Corporation (Statesville, NC). "The current environment of rising interest rates and tighter access to capital puts new construction projects at risk of being delayed or put on hold," Tolbert said. "Fortunately, we have not seen that up until this point, but it is something we're keeping our eye on as we look forward into late 2023 and 2024."

Though most supply chain issues have eased within the last year, delivery times for supplies are still slower than usual. Simonson said specifically air condition materials and other mechanical equipment, including door hardware, have been problematic. "These labor and material shortages and delays mean projects often take longer to complete than anticipated," he said. "This adds significantly to financing costs and delaying the start of revenue to cover those costs."

Despite the challenges presented, credit managers should try their best to avoid any surprises. Keeping a strong line of communication with your customer can mitigate risk and help you understand any challenges your customer may be facing. Keep up with the latest trends in the construction industry as the economy is quickly changing.

"Changes in demand for consumer goods, office space, urban versus outlying locations and other economic factors can have major impacts on borrowers' ability to repay loans," said Simonson. "It is important to stay current regarding supply chain issues that may affect a particular project or contractor."

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-Kendall Payton, editorial associate