The construction business comes with its own set of challenges.
From scheduling conflicts to weather delays, safety issues and labour shortages, costs can overrun and demand can be unpredictable. And then there’s the issue of choosing the right site to build on in the first place—because everyone knows location is everything in real estate, right?
If you’re a real estate developer or construction industry pro, you’re probably already familiar with these everyday obstacles.. But as 2022 continues, it seems a whole new set of challenges has come into the picture. And the current market realities—from supply chain slowdowns and the war in Ukraine, to rising interest rates and inflation—have left many in the construction industry scrambling. To continue to thrive in this current market, they need the right processes and tools.
So what are these new realities the construction industry is dealing with today, and how can you better manage your construction projects in light of them?
- Supply chain slowdowns and rising interest rates have put the construction industry under pressure, adding to supply shortages, labour issues, shrinking growth and reduced demands.
- Those new pressures have impacted cash flow, costs, timing and budget—meaning developers need to add new efficiencies to their planning processes to keep up.
- Better data-driven decision making, scenario planning and more frequent forecasting—powered by purpose-built technology—can help.
What Are the Challenges and Risks the Construction Industry Is Facing?
Of course, property developers and the construction industry aren’t the only ones feeling the pressures of the current market. Rising interest rates, inflation, supply chain slowdowns and the possibility of a recession around the corner have hit most industries in one way or another. But the construction industry has challenges to face that are unique to them.
If you’re wondering what are some of the ways the current market specifically affects the construction industry and what it means for property developers working in these volatile times, here are four trends you’re probably already experiencing:
1. Lack of Materials
Supply chain challenges have been ongoing since 2021, and development and construction firms have suffered the results. With materials—from lumber to resin to steel—slow to arrive, firms are left waiting. And that can have an impact on cash flow, costs, timing and budget.
It’s not surprising, then, that Statista found that “construction material costs” are the top issue faced by the United States’ real estate development market in 2022. Projects are being delayed and firms are paying more for the materials they do get—all while prices have also gone up thanks to rising interest rates. In June 2022, physical inventory was 20% below pre-pandemic levels, while prices were 12% higher.
These types of impacts can do more than affect project prices and timelines, too. They can also make your reputation suffer.
2. Labor Shortages
According to Statista, the third most significant issue for the United States’ real estate development market in 2022 is “construction labour availability.” The second, meanwhile, is “construction labour costs.” But that concern over labour isn’t a new one. Not when over 40% of the construction workforce in the U.S. is expected to retire over the next decade—and new talent isn’t joining the workforce at the same rate.
Add to that the fact that the first couple of months of the pandemic saw job losses across the construction workforce—and that many of those workers never came back. As of March 2021, there was a shortage of 430,000 construction workers across the U.S.—a shortage that is only expected to continue growing. Meanwhile, labour costs continue to rise. And since developers are putting more money into recruiting, educating and upskilling, that’s not surprising.
3. Shrinking Growth
Of course, combine a lack of supplies and a lack of labour with longer construction timelines and increased costs and it’s no surprise that profit margins are at risk. Price increases are always an option, but demand is also limited (we’ll get to that next) so developers today have a balancing act to manage too.
For some of them, that means that the size of their developments is shrinking—putting them on a slower growth trajectory. Combine that with the fact that many construction firms, in general, operate with limited cash flow, and they also have less money to invest in future projects as interest rates go up.
4. Reduced Demand
It's not just your ability to deliver a project on time and on budget that’s being affected in today’s turbulent market. Demand, in many cases, is going down as well.
After all, higher interest rates impact the affordability of the spaces you’re building too. And if you have no choice but to add to costs to make up for the higher prices you’re paying, buyers may simply be priced out of the market.
That means that managing your costs and keeping a close eye on all aspects of the business is more important than ever. And that starts with better planning, budgeting and reporting—all of which can be helped with the right technology.
How To Keep Your Construction Projects on Track (Despite Supply Chain Challenges and Rising Interest Rates)
So how do you manage your construction projects effectively, in a way that helps meet the challenges of our current market? By adding new efficiencies to your financial planning processes and keeping an eye on the future, you can stay agile and proactive even as the market continues to throw you one curveball after another. Here are a few tips to get you started:
1. Build Your Data-Driven Decision Making Capabilities
The mismanagement of materials and the processes that surround them can add to your costs as well as to supply shortages when the job begins. And that only adds to your timeline and budget as you wait for more supplies to arrive. By keeping a close eye on material data and adding precision to your project-based planning, you can ensure you have the materials you need while keeping job costing in line—helping you better stay on track.
2. Plan for Every Scenario
Through scenario planning and what-if analysis, you can address the uncertainties in today’s market and plan ahead for new challenges still waiting in the future. That starts by determining your key business decisions and identifying the internal and external factors that can affect them—then outlining a strategy for each and understanding the early indicators to look out for. With the right tools to help you along, you can remain ready for anything.
3. Forecast Frequently
Forecasting on a more frequent basis—monthly, for instance, instead of quarterly—can help you maintain a better idea of your budget based on the current market conditions and supply chain concerns. It can help you better understand your expenses and update your key performance metrics (KPIs) so that you always understand how your project—and business as a whole—are performing.
Complete planning technology specifically designed for the real estate and construction industry can empower you to be more agile and proactive in the face of change. By offering you the opportunity for real-time analysis and reducing the chance of human error, the right technology can better enable you to stay ahead of today’s turbulent market.
Reduce Risk to Your Construction Projects by Implementing the Right Processes
The construction industry may have its own set of challenges all of the time, but the current market has upped the ante. And to meet those challenges head on, you need the right processes and tools.
The good news? Forecasting, scenario planning and data-driven decision making don’t go out of style, and neither does the technology that drives them. By making them part of your business processes, you’ll be better able to meet your goals and manage your projects even when the market shifts again—no matter the challenges you’re facing.