The operating environment today’s construction and engineering professionals face is rapidly changing. Conditions and demands placed on front line workers, contractors, project managers, operational and financial executives and owners continue to evolve. Internal and external factors weigh on all as they work towards the common goal of delivering high quality product in a timely, cost-efficient manner.
This has always been challenging for these professionals but recent economic, operational and regulatory realities present new and/or expanded issues to be resolved. Below are just a few of the issues, as well as opportunities, created by these realities. As Winston Churchill once said, “The optimist sees opportunity in every difficulty.”
Economic
The current state of the economy continues to affect E&C professionals, particularly in relation to increased prices and supply chain management.
Prices
- According to the Bureau of Labor Statistics (BLS), the producer price index inputs to the construction industry as of April 2023 showed a 39.2% increase since February 2020 (pre-pandemic levels).
- Significant inflationary pressures have been seen in the most significant cost categories impacting construction companies, specifically materials, labor, and energy. Not only are those costs impacting profitability, but so too is the cost of money. The Prime Rate, as published by JPMorgan Chase, increased from 3.25% to 8.00% from March 2020 to March 2023. It currently stands at 8.5%.
To combat unrelenting third-party cost increases, principally contractor costs, materials, and energy, companies are becoming more transparent in detailing with subcontractors by sharing cost and capacity concerns that can be mutually addressed. Additionally, hedging opportunities where available are more frequently being considered, as well as procurement policies to maximize cost efficiencies across projects. Negotiating price escalation clauses into contracts, to the extent possible, is also becoming more prevalent.
Supply Chain Management
- While supply chain issues have improved from the early days of the pandemic, material availability, pricing, lead time and logistics remain a significant challenge.
Supply chain management is also a factor to be considered, potentially reducing material costs through utilizing more localized sourcing to reduce shipping costs as well as potential volume discount/rebate opportunities. Vertical integration is becoming more prevalent and can provide a significant return on investment in certain situations. The pace of inflation has slowed recently but is still a significant consideration for all.
Operational
Today’s construction industry faces significant operational challenges related to workforce management, from both a talent acquisition and productivity perspective.
Talent Acquisition
- The BLS reports that as of the end of 2022, approximately 43% of the construction workforce is made up of individuals over 45 years old, including approximately 22% being 55 or older. Many companies report difficulty in attracting new talent and maintaining adequate workforce levels.
The struggle to attract, train and retain employees is a struggle across most, if not all, industries. It is not unique to the construction industry but is a bit more alarming given the Department of Labor Statistics that show the median age of construction workers as a whole exceeds that of many other industries. Considerations need to be given to what the employees of the future are seeking. Companies should prioritize providing varied career paths, an employee wellness focus, enhanced training opportunities and work/life balance. They should also genuinely embrace DEI and sustainability initiatives internally and in the work they do. Companies that do this, as well as optimize the use of technology, will be well positioned to attract and retain the future leaders of the industry. For more information on addressing talent issues in the industry, see the Talent articles in the Construction series: Talent Foundations and Talent Retention.
Productivity
- While arguments exist surrounding the methodologies used to calculate productivity within the construction industry, BLS statistics consistently show flat to declining total factor productivity over the last several decades.
Strong risk management and workforce productivity maximization are both heavily dependent upon the utilization of technology. Streamlining the use of multiple platforms to enhance communication and data sharing, and identifying efficient and effective uses for process automation, artificial intelligence, and digital transformation continues to provide benefits to companies embracing their use.
Of course, with technology comes risk. The availability of real-time, relevant and accurate information is critical for project management to access project results and identify negative performance trends and issues early, to better manage resources and enhance workforce productivity. More time focused on a formal risk management system and the use of technology in the scoping/bidding process, planning and procurement phases as well as through project performance will enhance productivity and results. For additional information on how a focus on cybersecurity and digital transformation is aiding the industry, see the additional articles on Cybersecurity and Digital Transformation.
Regulatory
- Increased governmental focus and funding to the industry including passage of recent legislation such as the Infrastructure Investment and Jobs Act, the Inflation Reduction Act and the CHIPS and Science Act which directly and indirectly increase spending impacting the construction industry. As everyone is aware, with increased government funding comes increased regulation.
Implementation of the above-mentioned items in addition to a strong sense of what’s materially relevant to your stakeholders from an Environmental, Social, and Governance (ESG) perspective can be a differentiating factor for companies. Working towards adopting a formal ESG program allows companies to convey to the public and anyone they intend to do business with how they focus on topics such as efficient resource utilization, worker safety initiatives and good governance principles. Furthermore, companies doing business with the federal government as either significant or major contractors need to be aware of proposed greenhouse gas (GHG) reporting requirements across Scope 1, 2, and 3. The cost of compliance can be significant, but the cost of noncompliance is even greater. Contact our ESG professionals to help guide you through these questions.
About Schneider Downs Construction Services
Led by a diverse group of shareholders and managers, Schneider Downs provides strategic and practical solutions for our construction clients in all facets of their business. Our dedicated team of more than 350 professionals have a wide background of tax, accounting, technological and business experience in the region, specifically in Pittsburgh and Columbus.
To learn more, visit our Construction Industry Group page.
