Recession Proofing

Preserve cash, build backlog and target federal contracts in case a recession sinks the U.S. economy.

That's the winning game plan for construction pros during these uncertain economic times, sources told Construction Dive.

Whether a recession is here now or is waiting in the wings, industry experts suggested now is the time for construction companies to start shoring up their businesses, just in case. Here are some of their top tips for getting recession ready:

Build what you know. In the face of a recession, contractors should aim for more than 12 months in backlog and to “stick to your knitting,” said Joe Natarelli, construction services leader at Marcum, a national accounting and advisory services firm.

“Now is not the time to go and try different trades,” said Natarelli. “If you’re a mechanical contractor or you’re a general contractor, stick to the jobs you have a track record with [and] where you’ve done well."

Monitor financials. Nick Grandy, construction and real estate senior analyst at RSM US, a Chicago-based accounting firm, said the most important thing a contractor can do during a potential slowdown is to maintain a businesslike approach.

That means continually monitoring the financial health of the company and projects to ensure profitability, communicating regularly with customers, subcontractors and employees and keeping a focus on the firm's specialties.

“The construction industry will likely feel the pain in managing the risk of potential insolvency,” said Grandy. “The separation of winners and losers really comes down to who does a good job finding profitable projects and managing through those projects to get back to economic growth.”

Remember that cash is king. A recession would cause profit margins to squeeze as “contractors would find themselves having to compete more aggressively for work,” said Anirban Basu, chief economist at Associated Builders and Contractors. 

“If contractor leadership is convinced that a downturn is coming, the primary goals are to preserve cash and to shore up financial relationships,” said Basu. “This represents a time to determine whether the firm can cut costs and whether it makes sense to attempt to negotiate larger lines of credit.”

Hold off on large expenses. Defer on large expenditures in order to keep cash on hand, said Natarelli.

“Make sure you manage what we call the work-in-progress schedule. That’s the schedule of the jobs and how the jobs are progressing,” said Natarelli. “Make sure you’re making money on the job and if you’re having problems, make sure you make the necessary adjustments to make the jobs profitable.”

Think twice before shedding workers. While many U.S. businesses look to layoffs during an economic downturn, that may prove to be a costly decision for construction firms, said Richard Branch, chief economist at Dodge Data & Analytics, who told Construction Dive earlier this summer that he expects a potential recession to be fairly short.

“The gut reaction during a slowdown is to shed workers,” said Branch. “This is a huge risk.”

That’s because the current lack of available labor means contractors may not be able to rehire quickly when the economy improves. 

“In the past, contractors have been willing to carry extra team members even during downturns, with the understanding that rehiring talent can be extraordinarily difficult,” said Basu. “Contractors would likely respond to a downturn by trimming their least productive personnel but would strive to keep their most talented team members."

Keep hiring. Indeed, experts say a downturn can sometimes improve contractors’ ability to hire and retain workers. Branch noted successful construction firms will continue to hire, for when the economy does turn around.

“Companies with a growth mindset will be on the lookout to snap up any available labor even if they may not necessarily have the work for them over the short term,” said Branch. “What tends to separate the winners from the losers during the downturn is that success is determined by maintaining a growth mindset.”

Beef up civil work. Grandy noted that work related to federally funded infrastructure projects will be a bright spot in construction no matter what happens with the economy.

“The infrastructure bill should help to sustain continued employment opportunities in the industry,” said Grandy. “Other nonresidential construction opportunities will likely see offsetting declines as demand for services would likely slow in a recession.”

Be on the lookout for M&A deals. A tougher economy produces fewer mergers and acquisitions because such deals require confidence among dealmakers and the availability of financing tends to be truncated during moments of economic stress, said Basu.

However, once economic recovery begins, “dealmaking generally takes off” because many firms find themselves weaker after the downturn and therefore are more willing to be acquired, added Basu. 

Indeed, experts say there’s a tendency to buy new work on the upswing, which should translate to an acceleration of mergers and acquisitions. 

Thus, a positive of a downturn could be the right opportunity to gain market share through acquisition.

“Capital tends to dry up during a downturn and with rates rising, the cost of lending is more dear,” said Branch. “That shouldn’t scare companies away from looking to acquire companies that fit in with your strategic growth plans.”

Builders are bullish on infrastructure work this year thanks to federal funding, but expect supply chain snarls and hiring difficulties to persist, according to Associated General Contractors of America’s 2023 Construction Outlook National Survey. 

COVID-19 continues to impact the industry, hitting supply chains in particular. That’s the top concern for builders in the survey, as the uncertainty has caused a variety of negative ripple effects that ultimately mean higher costs and lower profits. As inflation and the specter of a recession continue to loom, contractors are feeling less confident about private sector work. 

Builders have reason to be worried: last year 36% of respondents had projects canceled or postponed but not rescheduled. The main reason given, for about half the projects, was rising costs. The association received 1,032 responses overall, primarily from general contractors.

Although contractors are optimistic overall, that doesn’t mean there aren’t rocky times ahead, said AGC Chief Economist Ken Simonson in a webinar last week about the survey. 

“Even when we’ve had recessions or slow growth expectations for the economy, contractors are by nature optimists,” Simonson said. “But it is notable that in nearly all of these categories, particularly on the private side, contractors have lower net positive readings or deeper negative readings than they did in previous years.”

Here are some other takeaways from the survey:

Supply chains are still broken

Contractors’ biggest concern for the coming year is the supply chain. The ongoing issues cause project delays, time-consuming logistical headaches and price hikes for materials. 

“Supply chain issues and material cost issues will continue, and will continue to have profound effects on schedules and affordability of new projects,” said Mac Caddell, president of Caddell Construction headquartered in Montgomery, Alabama, during the webinar.

To cope in 2022, 70% of respondents accelerated purchases after winning contracts, about half turned to alternative suppliers or used alternative materials or products and 22% stockpiled items before winning contracts.

Hiring will only get harder

Workforce shortages make projects take longer and cost more, and look set to worsen in 2023. In the coming year, 69% of contractors expect to hire and only 11% expect to reduce their headcount, according to the survey. To entice workers, last year 72% increased base pay rates more than in 2021 and about a third boosted bonuses and benefits. 

Despite those efforts, 80% are currently having difficulty finding workers and a majority of respondents expect those difficulties to persist. Plus, 83% of contractors worry the shortage and resulting inexperienced skilled labor pool will pose a challenge to the safety and health of their firm's workers — the biggest threat respondents identified by far. 

Cultivating new workers will take time and effort, according to Pittsford, Vermont-based Casella Construction co-founder John Casella.

“I think a lot of the easy levers have been pulled from a wage and a benefits standpoint, and now we’re really needing to look at all the things that no one’s talking about, with demographics and culture and what our jobs look like,” Casella said during the webinar.

Infrastructure a bright spot

While the outlook is more dim for private jobs, contractors are optimistic about infrastructure and other public work, the survey shows. That optimism is widespread even though only 5% of respondents are working on new projects funded by the infrastructure act, while 6% have won bids but have not started work. Another 5% have bid on IIJA projects but haven’t won awards yet, while 21% said they plan to bid on projects but nothing suitable has been offered so far. 

AGC CEO Stephen Sandherr warned the IIJA’s Buy America and labor stipulations are still unclear, and said that will make it harder for state and local jurisdictions to advance these projects.

“Federal officials need to deliver on the promise of these substantial new investments in infrastructure and construction,” Sandherr said. “To do that, they will need to address much of the regulatory and permitting uncertainty that muted the hoped-for benefits of the bipartisan infrastructure law in 2022.”

Almost all economists and contractors expect some sort of an economic slowdown this year. 

Some have even baked a recession into their current forecasts. But the unanswered question on many observers' minds remains how this downturn will be different.

“Our early signs, like most contractors, is that a slowdown of some sort is coming as our projects are pushing to later time frames,” said George Pfeffer, member of the management committee team at DPR, a Redwood, California-based commercial general contractor. “We’ve been through several of these cycles and what we can say is there’s always something different.”

Pfeffer points to workforce shortages and volatility in commodities markets. Material costs’ trajectories play an important role in procurement strategies, he said.

For example, electrical manufacturers and distributors told DPR there is currently a $1.5 billion order backlog of switchgear, components required to provide electrical power and distribution on a projects. As a result, DPR expects shortages in metal sockets and bus plugs due to this high demand, said Pfeffer.

“In terms of new work opportunities, we expect a more challenging market,” said Pfeffer. “There is a lot in the mix, and we expect that to be sorted out in 2023, which may mean fewer customers moving forward on projects until there is more certainty.”

Past as prologue

Looking at data from past downturns can help put the current environment in context.

Nonresidential construction employment growth averaged 3.3% in the months leading up to the Great Recession, according to the Associated General Contractors of America. This time around, that number was about 6.3% in the last seven months of 2022. 

“Nonresidential construction has been growing more strongly in the second half of 2022 than in the second half of 2007,” said Ken Simonson, AGC chief economist. “At that time, both single and multifamily residential construction were tumbling, which probably pulled down demand for related retail, street, school and public safety construction, and demand for other types of nonresidential construction was slowing.”

The national unemployment rate sits much healthier now too than in the months leading up to the Great Recession. It hovered at around 4.6% in the summer of 2007, whereas it was around just 3.5% last month, according to the Bureau of Labor Statistics.

The construction backlog in November also reached its highest level since the second quarter of 2019, according to Associated Builders and Contractors, indicating new projects are still coming online now. 

“It’s hard to imagine a significant spike in unemployment that we saw during the Great Recession,” said Jeff Hansen, CEO of Adolfson & Peterson Construction, a Minneapolis-based general contractor. “We have a shortage today and jobs are still being created. I don’t see a significant correction taking place.”

Given those differences, a recession in 2023 will have its own unique markers this time around compared to past economic downturns, said John Fish, CEO of Suffolk, a Boston-based construction contracting company.

“Despite rising interest rates and high inflation, the fundamentals of our economy are still strong,” said Fish. “We have seen upward trends in our GDP, consumer confidence is still high, Americans still have money to spend, and we have seen strong jobs reports with low unemployment rates.”

Interest rates take a toll

At the same time, interest rate hikes remain a concern for the construction industry, said Fish. The Federal Reserve boosted its benchmark rate in December to a range of 4.25% to 4.5%, up from 0% to 0.25% at the beginning of 2022. Meanwhile, two Federal Reserve officials recently said this month additional hikes could push rates above 5%, reports Bloomberg.

“I often describe our economy as a sick patient and the Fed’s interest rate hikes as medication for that patient," said Fish. “Based on the impact interest rates are having on the housing market, real estate development and consumer demand, we are seeing signs the medication is working. But we must be careful we do not overprescribe.”

Raising interest rates too much means fewer construction starts, said Barry Wurzel, president of Wurzel Builders, an Austin, Texas-based general contractor.

“Interest rates will likely continue to go up and there may be some thunderstorms in the near future over the next six months or more,” said Wurzel. “Inflation affects everyone in the chain.”

The amount of debt in the commercial real estate industry that will be maturing over the next two years, given the increase in rates, remains a top concern as well, said Hansen. 

“The real impact is going to be the erosion on the returns for the investors,” said Hansen.“The likelihood of real estate seeing a significantly lower return than current interest rates will create negative leverage and affect the appetite for investors to hold.”

On a similar note, the availability of new debt in the capital markets also will be a top issue for commercial development, said Turner Burton, president at Hoar Construction, a Birmingham, Alabama-based construction company. 

That makes financing commercial real estate projects more challenging, said Anirban Basu, ABC chief economist.

Plan for more supply chain shortages, prices hikes

Analysts expect continued material price escalation over the next couple of years, said Michael Hardman, vice president of Turner & Townsend, a U.K.-based global real estate and infrastructure consultancy. Nonresidential input prices remain 11.5% higher than a year ago, and are up 40% from February 2020, according to an ABC analysis.

“What we’re seeing today is the continued impact of the last couple years of inflation and it’s starting to catch up on the marketplace,” said Derek Cunz, executive vice president at Mortenson, a Minneapolis-based construction company. “The last couple of years have seen significant cost increase, that’s starting to make it tougher to get some deals done.”

Inflation rates in 2007 averaged around 2.8%, according to the Bureau of Labor Statistics. In 2022, inflation rates averaged 8%, though the rate has been falling in recent months.

That also leads to higher price tags and uncertainty around accurate budgets, said Burton. For example, Madison Square Garden Entertainment increased the price tag for the MSG Sphere project in Las Vegas to close to $2.18 billion, up from its prior estimate of $2 billion.

At the same time, nonresidential construction input prices slightly ticked down in November compared to the previous month, according to the ABC analysis. 

That’s a good sign for supply chain recovery, said Bert Brandt, managing director of construction for the Americas division at Australian contractor and developer Lendlease. Still, the supply chain market shows signs of going into different directions for different materials, said Richard Kennedy, president and CEO of Skanska USA.

“We have seen a combination of some improvement in the supply chain with architectural and structural product lines improving, while critical mechanical and electrical equipment lead times remain at unprecedented levels,” said Kennedy. “Pricing levels across the board remain escalated with many leading construction indices reporting flattening in the fourth quarter, which would be welcome relief to the industry.”

Lessons learned from past recessions

The key to staying ahead of slowdown in 2023 is diversification, contractors said. 

Though some commercial sectors, such as retail and hospitality, will feel the impact of recession more quickly, that still leaves plenty of resources for more institutional projects to help keep things in balance, said Burton.  Pfeffer agrees, and named the healthcare, life sciences and manufacturing sectors as potential safe havens.

“We need to pursue work that allows us the best opportunity to overcome shortages in skilled workforce as well as the volatility in commodities markets that affect procurement,” said Pfeffer. “We’re looking at the things that have helped us weather previous storms.”

Other sectors slated to do well in 2023 include life sciences, data centers and manufacturing projects, said Fish. Brandt agrees the life sciences sector should remain resilient against an economic slowdown over the next 12 months. Kennedy also added infrastructure projects tend to be executed in an economic slowdown.

“Recessions are a great reminder to remain committed to your business strategy and focus on securing work that is core to your geographies and markets,” said Kennedy. “Otherwise, you may find yourself taking on projects that are not financially right for the business or do not match your organization’s risk profile.”

Construction attorney Eric Singer is a huge Game of Thrones fan, so it’s fitting that he points to the HBO series’ best known mantra when it comes to a potential recession in 2023: Winter is coming.

Like the members of the saga’s House Stark who adhere to that motto, Singer says construction pros today should already be preparing for whatever hardships may come, given predictions of more challenging economic conditions ahead.

Those preparations include reviewing contracts with a potential recession in mind. Critical to the process is knowing what provisions contractors and subs are entitled to, as well as the responsibilities they have to the party on the other side, before a true economic contraction sets in.

“By the time a recession hits, it’s too late,” Singer said.

The wind before the rain

Singer said that in his own practice, he’s seen signs that “winter” may already be here.  

“To me, the biggest leading indicator in construction is a change in the nature and frequency of claims, which we’ve been seeing,” said Singer, a partner at Ice Miller in Chicago. “It’s like the wind that blows up before it’s going to rain. You can sort of smell it coming.”

Those claims have come in the form of what Singer calls “late-in-the-game change orders,” which have picked up as projects that kicked off early in the pandemic now approach their final stages.

“What I'm seeing now is contractors getting significantly into a job and realizing they're losing money, and they try to convert that to a change order,” Singer said. “It’s the contractors that are financially on the margins that are leading those changes. We’ve got a bunch of them.”

Attorney Alex Baghdassarian, a partner at Hanson Bridgett in Los Angeles, has noticed a similar uptick in claims, and a new unwillingness among project owners to accept them as interest rates have increased and capital markets have gotten tighter.

“Previously, when there were changes or delays on the project, oftentimes owners would be sympathetic and try to resolve the dispute,” Baghdassarian told Construction Dive. “If the contractor was asking for $100,000 in change orders, they may have negotiated it down to $80,000 or $70,000. That is not happening as much.”

Instead, as owners and developers encounter a more challenging funding environment themselves, Baghdassarian said, they’re saying no more often.

“They don’t want contractors to see them as an open checkbook,” Baghdassarian said. “Unless the contractor can convince them these costs are actually driven by something the owner or design team did, owners are telling contractors they’re out of luck, and that they have to absorb these costs.”

Attorney Adam Richards, a partner at Berger Singerman in Miami, says even though construction activity is still robust in Florida, just the possibility of economic slowing has changed the tenor of recent negotiations.

“We’re not quite sure what’s on the horizon, but regardless, the impact is that everyone starts tightening up,” Richards said. “Everyone starts thinking about risk aversion.”

Seeking shelter before the storm

Against that backdrop, and as financing becomes tighter amid higher interest rates, contractors should protect themselves by checking up on the financial health of any projects they’re on today. They can easily do so, in most cases, by making a request via the financial assurance clause contained in most standard contracts. 

“It allows a contractor to ask the owner for reassurance of its capability to continue funding the project,” Baghdassarian said. “The contractor should be entitled to confirm whether the loan is still in place, or if the owner-developer is running into any sort of financial issues.”

Those answers should come as a normal course of doing business. If they don’t, that could be a signal tougher times have already arrived.

“If the owner is nonresponsive, that’s a pretty good indication the situation may be more serious than anticipated,” Baghdassarian said. 

Getting in line

Of course, many contractors and subs get wind of problems on a job in another way: when the checks stop coming, even though they’re still doing work.

Before that happens, contractors need to make sure they’ve already issued preliminary notice to owners of their lien rights to a project, should conditions worsen. That notice not only alerts owners that the property could be used as collateral against unpaid debts if a project hits a roadblock, it also establishes the contractor’s place in line as to who will get paid first. 

“The key in terms of enforcement of liens is who comes first in time,” Baghdassarian said. That means if a contractor gave proper preliminary notice to an owner prior to funding being secured for the project, that contractor would come before even a bank or other lender in terms of getting paid.   

If you didn’t serve a preliminary notice earlier, do so now so that “the value you add going forward is protected,” Baghdassarian said.

Of course, getting to the point where liens are necessary is never a great outcome. Richards advises to make sure you regularly check in on the health of the job before then.

“With every single payment application, you have an opportunity to reconcile the account, and do a deep dive on the project,” Richards said. “Because the outstanding balance can get too large too quickly if you’re not properly tracking it from the get-go.”

Before sending paper, talk it out

When the wheels do come off a project, contractors are often in a precarious position between their subs and the owner they’re trying to get money from (and preserve a relationship with).

In that situation, attorneys universally recommend transparency and open dialogue to keep both owners and subs in the loop, even if a lien is unavoidable.

“Sending something in writing that surprises people is never a good idea,” Baghdassarian said. “Before sending a notice, speak to your owner contact and let them know the situation you’re facing with your own subcontractors. If you’re dealing with people who are honest, that’s usually well received.”

Keep in mind, should you need to file a lien to get paid, doing so is only as good as the owner’s solvency. 

“If the property is worth half as much as there are lien claims, you can expect that even if you win, even if you did everything right, you’re not going to collect everything you’re owed,” Singer said.

That, ultimately, is the difference between boom times and bust when it comes to construction

“When times are flush, money covers over a lot of problems,” Singer said. “When times are bad and the owner has money concerns, they can’t fund that spread any longer. That will grind a project to a halt.”

 

Signs point to decreased construction activity in coming months as financing costs for many developers have become prohibitively high, sources told Construction Dive.

For example, increased interest rates are making construction projects more risky and less profitable, said Nicolas McNamara, director of project management at CBRE, a Dallas-based commercial real estate services firm.

“Increased financing costs remain a concern around construction.” said McNamara. “Developers are challenged with projects that simply are not penciling due to increased rates.”

Recent uncertainty in the banking industry is compounding that issue for construction firms, he said.

The impacts of those headwinds are already visible. Construction backlog decreased to 8.7 months in March, its lowest level since August 2022, according to Associated Builders and Contractors.

Meanwhile, the Dodge Momentum Index, a benchmark that measures nonresidential building planning, tumbled 8.6% in March, a fall that Sarah Martin, Dodge’s associate director of forecasting, tied to banking insecurity.

“Lending standards for small banks in particular have substantially tightened as banking insecurity intensifies,” said Martin. “As a result, owners and developers are more likely to pull back in the short term.”

This uncertainty will cause big banks to either be cautious in lending or to mitigate risk with higher rates, said Todd Burns, president of project and development services at Chicago-based JLL, a real estate services company. These large banks, such as JP Morgan, Citi and Morgan Stanley, tend to set the market price for the cost of capital.

“The increased interest rates and the cost of capital will continue to influence financing negatively,” said Burns. “If the cost of capital is high, then financing will obviously be high as well.”

That trend is fueling increased concerns about access to capital in general, and the development of a vicious cycle where lenders charge more to limit their risk, and developers won’t or can’t pay higher interest rates to achieve their targeted returns. The result could trigger a long-talked about recession, said McNamara.

“Banks do face asset issues, such as unhedged exposure to government securities and exposure to falling real estate values,” said McNamara. “The current situation could lead to tighter credit conditions and the possibility of a moderate recession in the second half of 2023.”

Focus on yield

Another factor influencing financing availability is the focus on yield, said McNamara. Developers are now required to achieve higher unlevered yield on cost — a property’s return after purchasing costs and renovation expenses — to move forward with projects due to this changing financing landscape.

This creates challenges for new projects to meet their financial goals and may lead to fewer projects being approved, he added. McNamara said to expect “seeing projects getting canceled entirely or significantly phased or cut back to be able to be financed.”

At the same time, owners and developers are showing a willingness to wait out these interest rate fluctuations, which further slows down building starts, said Burns. When projects do pencil out in the current environment, it’s only after considerable diligence.

That delay ultimately leads to more costs, said McNamara.

“If they are penciling, it’s after a significant round of time and preparation has happened,” said McNamara. “Then additional escalation is required for rising construction costs.”

For instance, Shopoff Realty Investments paused construction on its approximately $550 million Las Vegas Dream Resort due to construction financing issues, according to Bill Shopoff, its president and CEO, in an email to Construction Dive.

High interest rates and unfavorable capital markets also pushed Vornado to delay its Penn Station project for another two to three years, according to Michael Franco, its president and CFO, during the company’s most recent earnings call in February.

“Capital markets are now making it almost impossible to build new,” Franco said.

Long lead times

Long lead times for materials since the start of the COVID-19 pandemic are compounding these lending challenges.

“Longer lead times increase the cost to carry the goods for contractors and developers,” Burns said.

Lead times remain at “unprecedented levels,” especially for critical mechanical and electrical equipment, said Richard Kennedy, president and CEO of Skanska USA. Although some materials have become more readily available, the overall supply chain still remains in a fragile state, according to a first quarter CBRE market trends report.

For instance, Harrington Industrial Plastics, a Chino, California-based supplier, reported experiencing supply issues for all materials, according to a recent report from XL Construction. Meanwhile, Ryan Herco Flow Solutions, a Burbank, California-based supplier, recently ran out of one type of piping supply, resulting in additional delays, according to the XL Construction report.

That, in turn, only inflates the actual cost of capital even more.

“That cost has to be covered by financiers,” said Burns. “This could potentially lead to banks continuing to charge high rates for cash thus prolonging economic headwinds.”

Nevertheless, the Federal Reserve’s liquidity support during the Silicon Valley and Signature Bank failures, and the implied guarantee of uninsured deposits at other banks could begin to stabilize the situation, said McNamara. The International Monetary Fund also said April 11 that bank failures last month may cause a credit squeeze that bolsters central bank efforts to curb price pressures.

In addition, many observers think the banking failures could ultimately force the Federal Reserve to put the brakes on interest rate hikes. In March, it raised rates a quarter percentage point but indicated the increases could come to an end.

McNamara added the industry likely is not facing a crisis like 2008, though admits it is “too early to be certain.” That’s because although the regional bank failures in the U.S. were significant, international contagion remains limited.

“The silver lining is that it may help the Fed restrain a buoyant private sector and combat inflation. Interest rate rises are still expected, but moderate rate cuts could begin in the fourth quarter,” said McNamara. “A moderate downturn is more likely than a hard landing, given stronger consumer and business balance sheets, the absence of a major construction boom and a healthier international economy compared to 2008.”

A Lutherville, Maryland-based general contractor just posted its largest backlog in company history.

MacKenzie Contracting’s construction arm projects its 2023 revenue to hit $48 million, an increase of about 45% from last year, according to Marty Copsey, its president and chief operating officer. The construction firm specializes in healthcare, retail, office and senior living projects.

That mirrors an overall industry trend. Construction backlog increased 0.2 months to 9.2 months in February, hovering around highs not seen since the start of the pandemic, according to Associated Builders and Contractors.

But while backlog remains at a historically elevated level, fading economic momentum could hamper both the future construction pipeline and confidence.

Here, Copsey shared his concerns with Construction Dive that continued rising costs of materials and labor, combined with unsettled interest rates, might stall certain projects.

Editor’s note: This interview has been edited for clarity and brevity.

CONSTRUCTION DIVE: What are some major headwinds that could put a dent on MacKenzie’s strong backlog?

MARTY COPSEY: With many companies embracing remote or hybrid work arrangements, there has been a dramatic decrease in office construction. In the Baltimore-Washington, D.C. region, this has been offset by robust activity in the medical, healthcare, education, retail and senior living categories.

Retail is growing with quick serve restaurant chains including Raising Cane’s and Bojangles now entering the Greater Baltimore market.

Senior living is a market that does not see any down time, and in Maryland, there is definitely a senior moment occurring now.

The Silver Tsunami is in full swing with more than three million people retiring on an annual basis and that also translates to more people entering senior living facilities and retirement communities. These projects are packed with amenities.

The most challenging issues we currently face are learning to navigate the new normal with regard to longer lead times for materials, unpredictable pricing and labor shortages. The industry is currently strained by this.

What is the sentiment on materials pricing? Is the expectation that this will get worse before it gets better?

Some materials such as lumber and steel are leveling out, while other material costs are continuing to creep up. Copper piping has increased more than 10% since the start of the year.

Lead times continue to be a challenge, led by electric panels and switchgear which take 26 to 30 weeks for delivery while rooftop air handling units are 48 to 52 weeks for delivery. Also, solid wood core doors are taking 20 to 24 weeks to obtain.

Ongoing communication with the customer, as well as anticipating problems, is always the key in avoiding potential delays.

I’m hearing from others in the construction industry a rising concern around financing for construction projects. Is that an issue MacKenzie sees happening as well?

Construction financing is harder and more expensive to obtain. Rising interest rates along with increased materials and labor costs are sidelining some projects already underway as well as stalling the start times for some new construction projects.

We are involved in smaller scale projects and interior renovations that are not seeing a drastic effect from rising interest rates and costs right now. But that can also change overnight.

Are there any other trends going on in construction you feel are important to mention?

Initiate architectural design services earlier to plan for the current elongated construction timelines.

Also, the growing presence of women in the workforce is being felt. Women now comprise nearly 11% of the workforce at a construction site in the United States, and women working in construction and trade earn 30% more than those working in more traditional, women-dominated jobs.

Additionally, construction companies that employ women have a 25% possibility of achieving above-average profitability, compared to firms without women. MacKenzie Contracting Company is doing our part with a workforce that is approximately 30% women.