Contractors today face a number of challenges: residual effects of ongoing inflation and elevated cost of capital due to a higher interest rate environment; the impact of tariffs driving up the cost of materials; and a tight labor market making it challenging to hire skilled workers. These factors combine to make a tricky landscape for business growth. With a strategic approach, contractors can navigate unpredictable waters and position themselves for growth in the coming months and years. Here are a few key things to consider.
Tight Labor Market
Despite significant tightening from the Federal Reserve, labor markets remain incredibly tight. This means that small businesses are struggling to find quality candidates at prices that they can afford. This is especially true for part-time and seasonal employees. This labor shortage would be exacerbated by any crackdown on the hiring of undocumented labor and the large-scale deportation of undocumented individuals. It is estimated that approximately 15% of construction workers in the United States are undocumented. A significant loss of workers could limit the ability to take on new jobs, while driving up the overall cost of labor, creating a difficult environment for contractors.
Given the tight labor market, contractors should consider investing in new equipment, technologies and business processes that will allow them to operate with fewer employees. Upgrading equipment to reduce manual labor and installing software that can better manage jobs and inventory will allow contractors to do more with fewer staff. Now might also be a good time to invest in equipment before the impact of tariffs cause prices to rise.
For a business’s most critical employees, consider offering additional perks such as flexible work hours, continuing education or opportunities for career advancement. Strong relationships and the ability to satisfy employees’ career goals can help retain critical personnel in tight labor markets.
Tariffs
President Trump has enacted considerable tariffs on the import of foreign goods and materials across some of America’s largest trading partners. Tariffs of this scale and breadth could, over time, make manufacturing in the U.S. more economic relative to importing goods and materials from abroad. However, in the short to medium term, these tariffs are likely to raise the cost of building materials significantly. This is especially true for goods imported from Canada (lumber), Mexico (appliances) and China (iron and steel). Contractors can expect these tariffs to both spur inflation and lower overall consumption, slowing the economy.
Contractors that import critical materials from abroad are already determining if it is possible to source these materials domestically. If domestic production would prove uneconomic, business owners will need to pay close attention to the tariffs being levied and which countries they are impacting most. Working quickly to move production from one country to another would prove valuable should certain countries receive stiffer tariffs than others with similar production capabilities.
Growth and Expansion
Contractors should be judicious in their expansion plans right now. In uncertain economic times it is important to focus on services that provide a demonstrated value to customers. Before expanding services or opening new office space, it is important to thoroughly test the market to determine demand and pricing power. Make sure that anticipated sales will more than cover anticipated expenses and be sure to have access to sufficient capital to cover several months of operating expenses in case sales take longer to materialize.
For contractors who borrow money to purchase inventory, acquire equipment and fund expansion, it is important to maintain multiple financing relationships. Banks have been pulling back from lending to small businesses, and having contacts at multiple lending institutions can help secure the fastest and lowest-cost capital when borrowing is required. The equipment finance market has also been impacted by banks’ reduced willingness to lend, making it more difficult for contractors to finance their equipment purchases. If contractors are having trouble obtaining financing they should:
- Speak to as many potential financing sources as possible
- Work with the equipment vendor to explore financing options through that vendor’s financing partnerships when purchasing equipment
- Talk to the local bank to understand their lending criteria and collateral requirements for commercial loans
If those resources don’t prove fruitful, there are a number of independent non-bank lenders that are willing to lend money quickly, albeit at higher rates than a bank.
Fortunately, businesses with strong credit profiles and a history of financing essential-use equipment have quality options both with banks and non-bank lenders. However, business owners should expect a higher cost of capital than in years past and therefore should calculate the cost of the financing relative to the expected profits that the financing will generate, to ensure a positive return on investment.
Cutting Costs Through Efficiency
There is no silver bullet for cutting costs without compromising efficiency. However, contractors looking to reduce overhead while maintaining or increasing efficiency will likely need to do so through automation. Accessing new technologies that allow businesses to operate with fewer employees and faster processes will make the business leaner and more scalable. Examples of scalable technologies being employed by businesses today include: installing software that can better manage inventory; implementing robotic processing tools to perform repetitive tasks inside warehouses or processing facilities; and deploying AI tools to allow employees to access critical information and draft standard communication faster and more accurately. These investments save time and allow the business to operate with fewer employees, reducing friction created by growth and allowing the business to operate at a lower cost base.
With ongoing inflation impacting the construction sector, it is prudent for business owners to look for ways to lower overhead costs, capitalize on potential efficiencies and consider offerings that may be more appealing to customers in a slowing economy. Here are some final things to consider:
Inventory: Assess current inventory levels and review job needs frequently so that you aren’t holding more inventory than you need to operate.
Cash flow: In uncertain economic times, it is important to pay close attention to cashflow. Contractors should ensure that they have sufficient cash on hand to weather a prolonged period of reduced sales. This means exploring improved payment terms with vendors, working with financing companies to understand what financing is available to the business, and looking closely at ways to turn fixed expenses into variable ones.
