To better prepare for 2023, business leaders in the construction industry can benefit from knowing the trends that impacted the sector at the end of 2022. Like other sectors in the US economy, the construction industry had to grapple with the increasing inflation and economic downturn that characterized the second half of 2022.
Moreover, business leaders had to cope with industry-specific challenges, such as supply chain disruptions, rising interest rates, and a shortage of skilled workers. Construction companies also needed to keep abreast with emerging construction technologies, such as modular construction and the application of sustainable solutions.
These trends will persist in 2023, but proactive business leaders will leverage them to create competitive advantages.
Inflation, Supply Chain Disruptions, and Interest Rates Continue to Impact the Costs
Inflation
In June 2022, the US inflation rate reached an all-time high of 9.1% since 1981. However, the annual inflation rate slowed from July to a low of 7.1% in November. The slowdown was higher than expert projections, which gives hope for better days ahead. How does the inflation rate impact the construction industry?
Inflation leads to a general increase in the price of commodities across the economy. As an industry, the construction sector suffers direct and indirect impacts of inflation. The immediate effect includes an increase in the price of construction materials, while indirect consequences come from consumers’ decreasing purchasing power. The increase in the cost of construction materials affects the profit of construction companies since they have to pay more to the suppliers. Inflation also affects other construction inputs, such as fuel and electricity. In general, inflation shrinks the profit margins of existing projects as the cost of raw materials and inputs rises.
Interest Rates
Interest rates also went up as we closed out 2022 and the trend persists in 2023. An increase in interest rates impacts the cost of construction materials. Increased interest rates also affect cash flows as borrowing funds becomes expensive. In addition, an increase in interest rates affects demand for construction projects.
Supply Chain Crisis
The Covid-19 pandemic disrupted the global supply chain due to the closure of overseas factories. This disruption led to a crisis in the construction industry caused by a shortage of raw materials.
After economic recoveries in 2021, construction companies rushed to get new suppliers to make up for the delays in deliveries. The rush to get supplies worsened the supply chain crisis in the second half of 2022 as it increased port congestion. This trend continues in 2023, meaning the shortage and cost of construction materials will likely remain high.
Construction companies can overcome the challenges of high inflation, fluctuating interest rates, and supply chain disruptions by investing in innovative and sustainable construction approaches. Innovations that enhance efficiency and increase productivity can help companies reduce production costs and use pricing strategies as their competitive advantage. Investing in supply chain visibility solutions can also help construction companies deal with the supply chain crisis.
Labor Shortage Continues to Be an Issue
Despite the challenges caused by rising inflation, interest rates, and the supply chain crisis, the construction industry remains optimistic. Business leaders can still leverage the trends to create a competitive advantage in the coming decade.
The slowdown in the inflation rate will likely stabilize the economy leading to an expansion of the construction industry or at least a resumption to historic levels. However, even as construction companies remain optimistic about growth in 2023, the labor shortage continues to be an issue.
Although job openings in the construction industry declined to 371,000 in October from an all-time high of 440,000 slots in April 2022, the vacancies are still high. If the trend persists in 2023, construction companies will continue struggling with a skilled labor shortage.
Lead Times and Construction Project Timelines Issues
Labor shortage and supply chain crisis continued to affect the construction industry in the second half of 2022. Long material lead times caused by the global supply chain crisis make it difficult for contractors to complete projects on time.
Shortage of labor makes it even more difficult for contractors to stick to project timelines, which impacts customer satisfaction. Since the trend continues in 2023, contractors must develop innovative ways of reducing lead time challenges. The strategies can include attracting and retaining talented workers and enhancing supply chain visibility.
Finding and Keeping the Right Talent
Attracting and retaining top talent in the industry was a challenge in the second half of 2022. Although labor shortage in the construction industry is not new, the aging workforce and the great resignation have exacerbated the situation. More skilled workers leave the industry, with fewer younger workers ready to replace them.
Human resource managers must develop strategies to attract skilled workers. Construction companies can attract the best talents by paying better wages and improving working conditions. They can also partner with educational institutions to encourage younger workers to join the industry.
Emerging Technologies
The construction industry adopted more new construction technologies in the second half of 2022. This trend will continue in the coming years, with more companies applying technologies like modular construction to reduce costs, meet project timelines, and reduce environmental impacts.
A Higher Focus On Sustainability
Like other sectors, the construction industry is moving towards more sustainable construction solutions. Contractors are using recyclable construction materials and technologies that reduce environmental impacts. Project owners want to hire contractors who can incorporate eco-friendly construction strategies that minimize energy consumption and waste production.
Want to Learn More about Construction Trends?
Understanding the trends in the construction industry gives you insights into the second half of 2023 and the coming years. RK Industries can help you prepare, including giving you tips on attracting and retaining skilled workers in your construction company. Contact us today to learn more.