Construction Profits Face Uneven Road as Pandemic Recovery Continues

The last few years have been a challenging and confusing time for everyone in the construction industry. However, going into 2023, there was optimism it could be a banner year for contractors, state and local governments, and other stakeholders involved in road and infrastructure development. Among contractors surveyed for the Civil Quarterly, 57% said they were expecting revenue to increase, and 46% said they expected higher profit margins.

However, there have also been growing concerns about the impact of a potential economic downturn. With Q1 behind us, there are still persistent cost pressures and operational challenges that threaten to delay projects and erode profits. Here are a few of the most important trends we’re watching as the industry puts 2023 budgets and plans into action.

5 Construction Industry Cost Pressures to Focus on in 2023

Supply Chain Disruptions Continue

While policymakers and business leaders consider a wide range of options for restructuring supply chains, the effects of the COVID pandemic continue to ripple through existing global production and shipping networks. Issues such as shipping container shortages and backed-up ports have obstructed the flow of raw materials and manufactured parts, while aging roads and bridges are a perennial source of concern

Governments and businesses alike continue to make adaptations to ease the COVID-era logistical crunch and improve the resiliency of critical supply chains. In the short term, bottlenecks and elevated costs will continue to put pressure on budgets and project plans. To address these challenges, some organizations are exploring alternative contracting methods that provide more flexibility than traditional design-bid-build contracts, while others are looking to software solutions for closer tracking of materials.

Labor Markets Remain Tight

The broader U.S. job market has presented a "best of times, worst of times'' story so far in 2023. Large-scale layoffs have grabbed headlines even as the national unemployment rate has dropped to a historically low level. It’s a paradox that emphasizes the complexity and uncertainty of the current economic climate. For some organizations, it’s a matter of scaling back the growth required by accelerated construction timelines during the COVID-19 pandemic.

Ed Zarenski at Construction Analytics has put out some thought-provoking analysis on the relationships between spending, jobs, timelines, and productivity in infrastructure development. One of his key observations: the industry will need to add more labor quickly to implement new spending on planned timelines. If the necessary jobs aren’t filled, projects will face delays that add cost and risk for contractors, governments, taxpayers, and all the people and businesses who rely on our nation’s roads and bridges every day.

The difficulty of hiring skilled workers for construction has steadily increased over the last year according to civil contractors and engineers surveyed in the Civil Quarterly, with more than 70% saying worker shortages are making it a challenge to meet schedule requirements. On the positive side, expectations around rising costs for skilled labor cooled somewhat compared to the beginning of 2022.

Organizations are also leveraging technology at an increased rate to address the challenges brought on by labor shortages. For example, bid openings, which were traditionally staffed by a variety of administrative personnel, have moved almost entirely online. Agencies are finding that using an e-bidding platform for construction projects provides the same (or increased) levels of security as paper bidding without the need for on-premise bid opening sessions.

Federal Infrastructure Legislation Will Drive Demand

The Infrastructure Investment and Jobs Act (IIJA) will fuel a multi-year wave of federal spending, potentially amplifying the impacts of existing tightness in supply chains and labor markets. The majority of the work funded by the law is long-term in nature and will not be “shovel ready” for several years, so its short-term effects will be limited. Nonetheless, the coming surge of government investment will ramp up demand and put pressure on contractors and agencies to complete current and planned projects in a timely manner.

Additionally, these funds bring new projects to the table, and with them, new reporting requirements. The Federal Highway Administration (FHWA) has very specific requirements for project management, reporting, and record-keeping that often drive the need for organizations to adopt a more systematic and sophisticated oversight approach. Organizations will have to balance new funding opportunities with investments into technology that helps teams accurately track and report on federally-funded projects.

Check out our IIJA resource center for more details on what to expect and how to take advantage of the opportunities created by the law.

End of Ultra-Low Interest Rates Raises Costs of Project Financing

Rising interest rates are having a broad impact across the U.S. and global economies, and the effects for the construction industry will be substantial. With large capital requirements, total project costs for construction of roads and other transportation infrastructure will inevitably increase as a result of higher interest rates on government bonds that fund infrastructure. In turn, higher financing costs will increase the pressure on contractors to manage timelines and budgets effectively and transparently.

Legacy Systems and Manual Processes Limit Visibility and Control

The rapid expansion of connected technology has “disrupted” too many industries to count, and complex construction projects have benefitted immensely from the adoption of new tools. However, outdated processes continue to sap time and money as a result of inefficiency and limited visibility between workers in the field and office-based planning and analysis functions.

Increasing efficiency in the road construction sector will require continued adoption and integration of software-as-a-service solutions and mobile applications that enable greater transparency and control over projects, payments, documents, and processes. Many teams are adding the ability to monitor and respond to real-time project data in order to stop issues or inefficiencies in their tracks. As job sites grow increasingly interconnected and empowered by digital technology, project managers and owners are able to do more to keep costs in line with expectation.

Infotech Empowers the Industry with SaaS, Apps and 40 Years of Expertise

Infotech’s 40-year history of serving the industry has equipped us with a deep understanding of how business needs change in response to different types of economic conditions. As the situation develops in 2023, we’ll keep focusing on delivering reliable, cost-effective solutions for all the customers and partners who rely on us to help manage projects and ensure effective stewardship of their communities’ resources and trust.

Our e-Construction software solutions address the construction administration, inspection, and bidding processes in order to add efficiency, eliminate siloed data, and improve stakeholder transparency. If you’re interested in learning more about tools that will help you tackle 2023’s uneven landscape with confidence, browse our product pages to learn more or contact us at info@infotechinc.com.