Construction Challenges

Industry Intelligence from First Research, a division of Hoover's (a D&B company)

Critical Issues For Residential Construction Contractors

Highly Cyclical Demand - Demand for new residential buildings can change rapidly, depending on the economy and interest rates: from 1986 to 1991, annual US home construction dropped 40 percent; from 1995 to 2005, it increased 75 percent; and from 2006 to 2011, it fell 65 percent. In local markets, changes in demand can be even more severe.

Risks of Speculative Projects - Because a large number of homes are built speculatively, builders bear the risk that changing market conditions will produce lower selling prices than they'd anticipated. In some markets, home prices can be highly cyclical. Even in markets where prices don't fall, builders may anticipate getting a higher price than they eventually receive.

Critical Issues For Commercial & Heavy Construction Contractors

Cost Overruns - Costs that run beyond estimates can result in losses for firms. Some of the largest construction contractors have significant numbers of projects based on fixed price contracts, in which they bear the risk for cost overruns. Factors such as raw material costs, economic conditions, and weather-related delays could lead to losses for firms. The longer the term of the contract, the greater the potential deviation from original estimates.

Uneven Revenue, Expenses - Although commercial contractors incur a steady stream of expenses, payments from customers are periodic, including amounts retained until after a project is complete. Bad weather can significantly delay construction schedules, creating uneven cash flow. Prices and availability of major raw materials like lumber, structural steel, and concrete can change rapidly. On large projects, prime contractors handle more complicated cash flows, including progress payments to subcontractors.

Business Challenges For Commercial & Heavy Construction Contractors

Dependence on Few Projects, Customers - Customer consolidation and concentration lead to greater risk for many contractors. As many construction customers merge, projects become larger, but fewer. As a result, construction companies depend on fewer contracts, which increases financial risk. Customer concentration also increases risk, especially for small construction companies that depend on a few customers for the majority of revenue.

Safety Liability - Commercial and heavy construction workers suffer about 5 percent of US work-related deaths, even though they make up less than 2 percent of the workforce. Contractors carry liability insurance to protect against lawsuits brought from injuries and deaths to employees or job site visitors. To help reduce worker fatalities, commercial construction contractors and others in the industry can re-evaluate and strengthen safety training programs. Companies also can better identify, plan for, and eliminate workplace hazards.

High Insurance Costs - Most construction contractors pay relatively high premiums for various types of insurance, including worker compensation, general liability, and surety. Construction delays and defects, accidents by inexperienced or overworked employees, and poor bookkeeping are major insurance issues.

Toxic Buildings - Numerous lawsuits are filed against contractors accused of using toxic materials or poorly chosen building techniques that contribute to "sick buildings." Mold within walls and ventilation systems is a major contributor to sick buildings. Mold, often called "the new asbestos" due to the number of lawsuits, has given rise to law firm specialization in mold litigation and to the mold-removal industry. A growing concern about green materials and processes contributes to toxic-building lawsuits.

Skilled Worker Shortage - During the late-2000s recession, many construction workers either retired or left the industry. As building activity increases, the construction industry is having a hard time finding skilled workers to meet the rising demand. Leaders in the industry are improving training programs and advocating for federal and state funding for career and technical training programs in order to improve workers' skills.

Business Challenges For Residential Construction Contractors

Dependence on Local Economy - Despite national trends, demand for housing can be very volatile in local markets. Even in a large market, demand for new single-family homes can change by 60 percent in just two years; in smaller markets the change can be even greater. This demand volatility is due mainly to population shifts and factors in the economy such as unemployment.

Building Materials, Land Costs Vary - Builders often bear the risk of cost changes because of fixed-price contracts and speculative home construction. The price of lumber can change 30 percent within six months, and land prices, the major cost of construction in some markets, can also change rapidly. Sometimes builders can pass higher labor and material prices to consumers; however, when prices rise quickly, some builders, especially smaller ones with less leverage, can get caught with the costs between the time they agree on a price for a project and the time they finish.

Dependence on Seasonal Labor - Because of the highly cyclical nature of demand in local markets, most homebuilders don't maintain a large permanent labor staff, and must hire new workers when demand increases. Local labor shortages are frequent, especially in rapidly growing communities. Many builders hire immigrant workers to fill the labor shortage. Builders that rely on immigrant labor may be impacted by regulations regarding employment of non-citizens.

Environmental Regulations Inhibit Development - In dense urban and suburban areas, builders are increasingly being forced to construct new homes on "marginal" lots that may abut wetlands, waters, or wildlife areas, conflicting with wildlife preservation and increasing construction costs. Environmental Protection Agency (EPA) and Endangered Species Act (ESA) regulations commonly require costly stormwater management systems and erosion control management.

Competition in Custom Building - Mass production-style builders are vying for the high-end business by advertising as custom builders. Traditional custom builders (mainly small companies that build fewer than 20 homes a year) have had to become more efficient with labor and materials, streamlining the design process to take the hassle out of building a custom home.

Excess Supply, Vacancy - Shifts in the supply of existing homes affect the quantity and types of homes builders construct. Slow housing markets, often the result of high interest rates, property price inflation, or tight credit, typically lead builders to cut construction to prevent holding unsold homes in inventory for extended periods. When a market is oversupplied with spec homes, builders may switch to custom or commercial construction until the market stabilizes. Builders that offer financing may be severely impacted by a mortgage collapse, suffering loss of revenue that can lead to bankruptcy.

Onsite Vandalizing Raises Costs - Damage by vandals and theft of construction equipment and supplies are costly for builders. High prices for construction materials, such as lumber, copper wire, and metals, as well as fuel, have led to increased theft from construction sites. Builders that buy additional supplies due to theft may pay higher replacement costs, cutting into profits. Some builders are protecting jobsites by installing cameras and alarm systems, lighting them, building fences, scheduling just-in-time deliveries of supplies, or securing equipment and supplies in onsite containers.

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