Valued at $1.8 trillion, the U.S. construction industry is riding a wave of strong growth, thanks to a surge in infrastructure and manufacturing investments. It’s an exciting time as the sector embraces cutting-edge technologies and pivots towards sustainable building practices. However, it’s not without its challenges. The industry is grappling with significant economic pressures, including inflation and labor shortages. Amid these hurdles, industry leaders are proactively dissecting these issues and devising strategies aimed at ensuring future stability and fostering growth.

Economic Influences on the Construction Industry

In 2024, the construction industry faces a complex economic environment. With unemployment consistently below 4 percent, demand remains strong in both residential and commercial sectors. However, this low unemployment rate exacerbates labor shortages, driving up construction wages by 20 percent in recent years. Compounded by a stubborn inflation rate—3.4 percent annually as of April according to the Consumer Price Index (CPI)—these economic factors are putting significant pressure on construction budgets. The core CPI, excluding food and energy, further highlights the persistent inflation at 3.6 percent.

Input prices reflect these economic pressures, with overall construction input prices rising 2.3 percent year-over-year. Nonresidential input costs have also increased by 2.2 percent. Fluctuations in energy costs add to the uncertainty, evidenced by a 10.6 percent increase in crude petroleum prices and an 8.2 percent rise in unprocessed energy materials, even as natural gas prices dropped slightly by 0.9 percent.

Additionally, high interest rates are intensifying the financial burdens on construction projects. This financial strain has led to an increasing number of developers either canceling, significantly delaying, or shelving projects across various sectors, including apartment buildings, renewable energy installations, shopping centers, mixed-use developments, and office complexes.

Despite these challenges, there is cautious optimism. The Federal Reserve has indicated a potential cut in interest rates this September, which may lower financing costs and spur new investments. However, the construction sector must navigate the current economic volatility carefully, balancing immediate challenges with strategic opportunities that may arise from an easing of monetary policy. This delicate balance will be crucial for sustaining growth and managing costs in a fluctuating economy.

Environmental Impact and Sustainable Practices

Sustainable building practices are becoming integral to the future of construction. Contractors who employ eco-friendly materials and methods are likely to benefit from higher value projects, reduced operational costs for tenants, minimized waste, and easier compliance with stringent building codes. Financial incentives such as the 45L residential energy efficiency credit and the expanded 179D commercial building deduction for retrofits further support this shift towards green building.

The urgency of adopting sustainable practices is amplified by the climate challenges witnessed in recent years. The past year was the hottest on record and saw an increase in extreme weather events like droughts, storms, and wildfires. These conditions are pushing cities to adopt climate-responsive design practices that not only manage extreme temperatures but also reduce carbon emissions and enhance building resiliency. Reflecting a global shift in priorities, 2023 was the first year investments in solar energy surpassed those in oil, indicating a broader trend that is likely to continue through 2024.

Moreover, the construction sector’s commitment to environmental, social, and governance (ESG) strategies is accelerating. Driven by a moral imperative and the promise of market-rate returns, these strategies can help companies minimize risk, enhance performance, and improve resilience against market volatility and disruptive events. As consumer perceptions increasingly link ESG practices to product and service quality—with 50 percent believing ESG significantly impacts quality—the demand from lenders, investors, and other stakeholders for strong ESG commitments is expected to grow, shaping a sustainable future for the construction industry.

Labor Shortages and Supply Chain Disruptions

While the industry progresses in sustainable practices, it simultaneously confronts labor shortages and supply chain issues that shape day-to-day operations. To meet the demands of 2024, it is projected that the construction sector will need to add 501,000 new workers to its payroll, in addition to normal hiring rates. The industry also faces the challenge of an aging workforce, with 20 percent of construction workers over the age of 55, meaning that retirement will continue to shrink the industry’s workforce.

In response to these labor shortages, many contractors have raised wages and enhanced benefits to attract and retain skilled workers. Additionally, the industry has seen an increase in the recruitment of women—from 11 percent of the workforce in 2020 to approximately 14 percent today. Another strategic response has been the collaboration with apprenticeship programs, particularly as many projects now require certain apprenticeship hours to qualify for federal tax incentives.

Supply chain disruptions further complicate the situation. The lingering effects of the pandemic continue to cause bottlenecks, while the Build America, Buy America Act imposes additional strains. This legislation, affecting federally funded construction projects, mandates increased procurement of U.S.-made materials. However, the lack of domestic manufacturing capacity for specific items poses challenges, impacting timelines and costs across projects.

Fortunately, the industry is benefiting from key provisions within the CHIPS Act, the Inflation Reduction Act, and the Bipartisan Infrastructure Law. These laws have alleviated some of the financial pressures caused by labor and supply chain disruptions.

Technological Advancements

Construction technology (contech) offers a path to improve operational efficiencies across all areas—from the back office to the job site. Adopting these technologies can be vital for staying competitive and managing the surge in demand expected across infrastructure, industrial, and residential construction sectors.

Despite the rapid growth of the architectural, engineering, and construction (AEC) technology ecosystem, the construction-specific sector has faced hurdles in adopting new technologies due to its fragmented nature and typically tight margins. This has led many contractors to be cautious with contech investments, often hesitating to modernize their processes.

Some larger contractors have established venture capital divisions to pilot and refine new technologies. Meanwhile, middle-market contractors are leveraging grassroots innovation to adapt and thrive. The increasing use of project management tools and cloud-based invoicing solutions demonstrates the advantages of proactive technology adoption, which includes improved project visibility and accelerated payment processes. As economic pressures are likely to persist, embracing contech is increasingly viewed as essential for boosting productivity and reducing costs over the long term.

“Productivity isn’t everything, but in the long run, it’s almost everything.” – Economist Paul Krugman

Strategies to Navigate the Future

Construction companies can improve their financial stability and operational efficiency by implementing a few “tried and true” strategies, preparing them to meet both current and future industry demands.

Cash Flow Management: Effective cash flow forecasting can help with project management, tracking costs, managing risks, creating budgets, and allocating resources. Key strategies include setting clear objectives to guide financial decisions, regularly monitoring and comparing projected versus actual costs and timelines, and proactively identifying and managing risks like interest rate fluctuations, unexpected events, and cybersecurity threats.

Invoice Timing: Timely payment is critical for maintaining cash flow. In states like Virginia and North Carolina, legislation mandates that project owners pay contractors within 60 days of invoice receipt. Virginia law also requires contractors to pay subcontractors within the same period or seven days of receiving payment from the project owner, whichever is earlier. Such regulations can help contractors manage their cash flow more effectively.

Technology Transformation: Cloud-based platforms and other digital tools streamline operations, enhance regulatory compliance, and reduce costs. These technologies enable real-time communication, reduce manual data entry, and automate accounts payable and receivables processes. These technologies can increase efficiency and profitability as well as ensure smoother financial operations through enhanced visibility and faster transaction processing.

As the construction industry continues to evolve amid economic, environmental, and technological shifts, companies will need to be proactive to ensure competitiveness and sustainability. For personalized guidance on navigating these challenges, contact Jennifer French, Construction and Real Estate Team Leader.