In light of current economic uncertainties, taking a cautious stance is understandable. However, basing decisions solely on fear doesn’t guarantee accurate predictions for the future.
Over the past five years, small and midsize construction businesses have faced significant challenges due to supply chain disruptions, inflation, and geopolitical tensions, all of which have driven up material costs and intensified labor shortages. Although some market conditions have stabilized since the initial upheaval, many contractors continue to struggle with ongoing difficulties that impact their cash flow and bottom line.
Here’s a closer look at the top priorities and concerns currently facing small and midsize construction businesses.
Inflation: An Ongoing Hurdle
Cash flow management is already a tough task for any construction business, but it remains especially challenging for smaller companies operating on tight margins. Even with inflation rates easing, the cost of materials continues to erode those margins. While prices may be stabilizing in certain sectors, small businesses are still paying much more for materials than they did five years ago, and there are concerns that costs could climb again.
The Consumer Price Index (CPI), a key inflation indicator, has significantly dropped from its 2022 peak (now at 2.7%, down from 8.0%), yet inflation remains a primary concern for contractors. According to the 2024 State of Small Business Survey, 76% of contractors cite inflation as a leading issue, far outpacing other concerns like online transaction security.
Why is inflation still a pressing issue despite the decline in its rate? The CPI remains above pre-pandemic levels, and the prolonged effects of high inflation have further squeezed margins. In addition, ongoing geopolitical and trade uncertainties continue to drive unpredictable costs and supply chain disruptions. For an industry already facing rising prices for materials, labor, and goods, even slight increases in costs can have a profound impact.
A Delicate Balance: Labor Costs and Client Relations
Labor costs are another major concern for small and midsize construction firms, with nearly two-thirds (63%) of contractors expecting further increases. For businesses already dealing with slim margins, higher labor expenses exacerbate cash flow issues and reduce profitability. As a result, many small contractors are forced to make tough decisions, such as reducing the workforce on projects. This can lead to longer working hours, compromised quality, and potential project delays, ultimately eroding client satisfaction and future business prospects. The resulting cash flow crunch may further limit contractors’ ability to take on new projects, creating a cycle that threatens their long-term viability.
In this challenging environment, building and maintaining strong client relationships has become even more crucial, with nearly half of small contractors listing it as a top priority. As economic pressures and labor costs increase, contractors may have no choice but to pass additional costs on to clients to maintain quality. Focusing on customer service and trust can help preserve client loyalty, even in the face of rising expenses. In an industry where reputation is vital, prioritizing customer connections is a valuable strategy for navigating these turbulent times.
Preparing for the Future: Practicality and Caution
Given the ongoing economic uncertainty, it’s natural to adopt a cautious approach. However, basing decisions purely on fear is not a reliable way to forecast future outcomes. While current conditions may not reflect past stability, they also do not signal impending failure. The economy, though not as strong as it once was, remains resilient.
Small contractors will be best served by making thoughtful, strategic investments, focusing on operational efficiency, and enhancing customer service. As the saying goes, “hope for the best, but prepare for the worst”—a balanced approach that combines optimism with careful planning.
