The Top 3 Challenges Facing Contractors

The past several years have been marked by unprecedented growth for construction contractors, but also by unprecedented and ongoing challenges. How will your construction company face those challenges and still prosper?

Labor shortages, lack of a skilled workforce
Many industries have faced labor shortages, but it has been more challenging for the construction industry. Many workers retired due to the COVID-19 pandemic, and others found less strenuous employment. Those workers are not coming back to the construction industry even though there is more work now than ever before. As well, the construction industry is not attracting talented individuals to meet current demand, and workers are aging or retiring faster than younger people are coming into the industry.

Some things to consider in dealing with the shortages:

• Partner with nearby educational facilities: This option has been mostly overlooked, but offering apprenticeships or internships could help cultivate a next generation of workers. Partnering could be a win-win: a student graduating has a job and you have an opportunity to evaluate the skill of the student.
• Temporary labor: It might not be ideal for many contractors due to the complexities of the contractor’s business, but temporary workers could help fill a gap while you pursue more qualified labor.

Recession
When it comes to the dreaded “r” word, construction is unique. Due to existing contracts and other building that needs to be done no matter the circumstances, many contractors have at least a year’s work before what they see as a potential recession and the related slow down in new contracts. Whether a recession is coming is debatable—some think we are already in one—but no matter the circumstance, there are a few things that contractors should not do before a potential recession:

• Take on more debt: Taking on debt could require using working capital to pay down the newly acquired debt. That working capital will be needed in other areas of the business, such as marketing and payroll, that are necessary to generate leads and retain employees to complete current or new jobs.
• Cut marketing: Closing down or cutting back marketing efforts that bring in new business just because of their cost is not advisable. If your marketing has been successful in bringing in jobs, don’t stop it. Instead, review your marketing to determine which efforts are productive and which are not and could be changed or cut.
• Retain break-even or worse profit centers: If the profit center isn’t making money, or is just breaking even or close, it must go. Even if the economy turns around, you’ll need a compelling reason to add back that profit center when your efforts could be directed at increasing profitable work.

Supply chain issues
You don’t have to be a contractor to be aware of the impact of today’s supply chain interruptions. Your lead times for completing work can extend well beyond what they have been in the past when you can’t get your hands on the resources you need. Price volatility has added to this problem causing some construction contractors to try to stockpile certain resources, which could lead to other problems. A substantially increased inventory might not be covered by the builder’s risk policy if not locked up in a certain way, and could require additional insurance and the related cost. Excessive inventories also can tie up cash you need for other activities and operations. There is hope that supply chain issues will lessen in the later part of 2022, but 2023 could still be a bumpy start when it comes to resources.

Options for dealing with supply chain issues include:

• Talk with your network and share data: Communication is key for businesses internally but also externally. Partnering with your suppliers and sharing relevant data could help everyone in the chain.
• Increase inventory minimums: As mentioned, adding inventory can cause cash flow or insurance problems. But using just-in-time methodology can leave you sitting idly waiting for supplies to complete a job. Analyze your data and make determinations as to what levels of increased purchases might not cause cash flow issues. Advance planning could keep you from having to use funds from one job to pay for another, which as contractors know, usually results in the demise of the business.

Contractors need to take a hard look at their businesses and make some determinations on the labor they have and will need moving forward, how to ensure they can stay afloat if a recession occurs, and how to keep jobs moving and stay profitable when their supply of materials could be limited. Construction currently is going strong in many parts of the country, but with all the issues contractors face now and could face moving forward, they must be careful not to overpromise and under-deliver. Harming your reputation could be more damaging than all three of the challenges we have discussed.

Consulting a trusted financial advisor can help you make good financial decisions and work to ensure you are here for many years to come. The construction industry experts at HBK Construction Solutions can help. You can contact me with your question or concerns at 772-287-4880, or by email at rmishock@hbkcpa.com.