With about a quarter of 2024 behind us, there are mixed economic indicators facing the construction industry. Inflation is coming under control, interest rates have remained high, supply chains have eased a bit, and unemployment is on the rise, even in the construction field.
Entering 2023, the construction industry celebrated a commendable 7% increase in nominal (not impacted for inflation) value added and a 6% rise in nominal gross output compared to the previous year. The third quarter of 2023 saw nominal construction spending maintaining a consistent upward trajectory. However, amidst these positive indicators, a closer look reveals challenges that demand attention. While the nominal figures point to growth, trends in real GDP data from 2022 suggest that much of the industry’s topline expansion is driven by price inflation rather than volume. The construction sector grapples with ongoing inflation, coupled with volatility in material prices and escalating labor costs. The persistent shortage of skilled labor adds another layer of complexity, impacting overall sector productivity. High interest rates and tighter lending standards further contribute to the challenges faced by construction companies.
Challenges Paving the Path to 2024
Persistent Challenges:
1.) Inflationary Pressures:
Continued inflation poses a threat to the industry, affecting both material costs and overall project expenses.
2.) Labor Shortages:
The shortage of skilled labor persists, requiring strategic workforce management and recruitment efforts.
3.) Material Price Volatility:
Fluctuations in material prices add uncertainty to project cost estimations and profit margins.
4.) High Interest Rates and Tighter Lending Standards:
Economic factors such as high interest rates and stringent lending standards pose challenges to construction activity.
Glimpses of Hope: Opportunities in 2024
Legislative Boost and Construction Confidence:
Looking ahead to 2024, there’s a potential boost awaiting the construction industry. Funds from key legislations—the Infrastructure Investment and Jobs Act (IIJA), the Inflation Reduction Act (IRA), and the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act—passed in 2021 and 2022 are expected to flow into the industry. This infusion of funds could particularly benefit manufacturing, transportation infrastructure, and clean energy infrastructure.
Construction Confidence:
Despite the challenges, construction confidence remains high. The Associated Builders and Contractors (ABC) identifies expectations for an increase in profit margins and staffing levels in the first half of 2024. This optimism suggests that industry stakeholders anticipate overcoming challenges and capitalizing on emerging opportunities.
Strategies for Success in 2024
1.) Strategic Cost Management:
Given inflation and material price volatility, strategic cost management becomes pivotal. Implementing efficient project cost tracking mechanisms can aid in maintaining profit margins.
2.) Workforce Development:
Addressing the skilled labor shortage requires proactive workforce development strategies, including training programs and collaboration with educational institutions.
3.) Technology Integration:
Embrace construction technology to enhance productivity and project efficiency. Digital tools and construction reporting software can streamline processes and mitigate challenges.
4.) Legislation-Driven Opportunities:
Stay informed about legislative developments and position your company to leverage opportunities arising from infrastructure-focused legislation.
As we navigate the complexities of 2024, collaboration and adaptability will be key. Together with your accounting partner, we are committed to providing insights and support to help you overcome challenges, seize opportunities, and build a resilient future for the construction industry.
Kimberly Martinez
Director
Professional Experience: Kimberly joined the firm in 2023 as a Tax Director. She started her career at a boutique CPA firm and now has fifteen years of honing her skills in providing clients with tax planning and advisory services in a variety of industries. She also has spent time working in assurance services and brings the analytics skills she developed in that practice to her tax clients and uses them to advise on improving profitability and efficiency.