Like other industries, it’s clear that the construction sector is experiencing the effects of stagflation. Today’s construction industry leaders are under increased pressure due to rising costs, a slowdown in new construction projects and a workforce shortage of more than half a million workers.

The difference for this industry is that many construction companies have contracted jobs in their backlogs that can generate revenue for the next seven to nine months. Despite the backlog of work, current economic conditions still impact contracted jobs, forcing leaders to identify alternative strategies to increase operational efficiencies and reduce costs. 

By preparing now for an uncertain future, construction leaders can ensure their processes and technologies deliver the labor productivity and organizational agility it takes to remain profitable in a stagnant economy.

Stagflation’s impact on the economy

A volatile market adds a layer of complexity to existing projects in contractors’ backlogs—even if a company’s top line looks promising, its bottom line could suffer. The Architecture Billings Index (ABI) is a leading economic indicator that provides insight into factors of this volatility, like the demand for non-residential construction work for the next nine to 12 months. 

The index climbed slightly in March 2023 after a five-month decline, planting a seed of optimism about future workloads. But the value of new design contracts dropped and inquiries for new projects started to slow down concurrently. This doesn’t come as a surprise given clients’ hesitation to commit to new projects amid rising interest rates and inflation. Supply-chain disruptions and fluctuations in demand have also raised the price tag on both materials and labor, causing overhead costs to skyrocket and placing pressure on companies’ already thin profit margins.

Another volatile obstacle industry leaders face is labor productivity. Older construction workers with years of experience complete jobs more efficiently and cost-effectively than novice workers. But as retirement continues to whittle away at an aging workforce, companies are left struggling to find skilled workers and bring them up to speed. The result is knowledge gaps and operational inefficiencies.

Further, outdated technology coupled with an outdated mindset restricts knowledge sharing between experienced and novice workers. It can also impede recruiting and retention efforts that target younger generations.

These labor obstacles combined with rising costs and uncertainty about the profitability of current and future projects have created a challenging environment for industry leaders. And with nearly 90% of fund managers expecting the U.S. to remain in stagflation for the foreseeable future, this uncertainty isn’t disappearing anytime soon. But by making the right shifts in business, retention and technology strategies, teams can begin to address these challenges head on.

Ready. Set. Success.

Even if they have current jobs in the pipeline, leaders in the construction industry must navigate future months with careful planning to reduce costs and maintain efficient operations. For many organizations, this requires rethinking—and often reconfiguring—legacy processes. Three strategies to consider are:

1. Assess the profitability of every project. Business leaders learned an important lesson from the Great Recession: It's OK to be selective about the projects you take on. Instead of agreeing to take on projects that might ultimately be unprofitable, consider both the potential gains and losses your team might see from a project. Since the industry is evolving, consider that your typical bid rate may no longer be viable, or that your productivity rate might be lower than it was five years ago due to a less experienced workforce.

When it comes to existing work, there are instances in which price increases are significant enough for you to legally renegotiate contracts. You can also refine your purchasing strategy by diversifying suppliers or making more advanced purchases to further reduce project costs.

2. Rethink recruitment and retention. With men making up more than 90% of construction workers (a majority of whom are white), it’s time to diversify your recruitment strategy. Start by reflecting on whether your company culture is in need of a transformation to appeal to a more diverse range of individuals. Cultures in which older generations expect junior staff to follow a traditional route can discourage diversity and limit opportunities for less experienced workers.

Instead, consider implementing mentorship programs that connect new workers with more experienced team members or reassessing the onboarding process to set new workers up for success from the get-go. From there, consider reviewing job descriptions to ensure they’re inclusive and free of bias, or partnering with community organizations like trade schools to reach a broader candidate pool.

The outdated mindset that’s common in construction is also often reflected in the legacy software and processes many companies still rely on. But younger generations expect seamless technology in the workplace—workers can easily submit timecards from their mobile devices or remotely communicate between the jobsite and back office. Manual, analog and outdated processes may drive more tech-savvy workers to firms that prioritize the effective use of technology—and they will almost certainly waste time and slow down onboarding and jobsite workflow.

3. Boost transparency and productivity with data. As you continue searching for ways to boost productivity and reduce operational costs, consider the value data adds to your bottom line. Technology that enables accurate, real-time reporting plays an important role in tracking productivity and profitability. For example, a job-cost processing system can help you accurately determine what your operational costs are at any given point.

With the right software in place, you can analyze metrics like time planned for a project versus time actually spent on that project. If the numbers don’t align, take a more granular approach to ensure your metrics meet industry standards—even something as banal as measuring concrete poured per hour. Access to jobsite metrics also enables you to provide your teams with transparent and actionable performance insights to pinpoint areas for efficiency improvement. Incentive programs to reward teams that finish projects on time and within budget are also effective.

Embrace Change. Stay in the game.

From culture shifts to technology and process upgrades, it’s time to rethink legacy construction operations. The right changes can help your organization access a wider pool of candidates, streamline operations and implement technology solutions that enable you to make data-driven decisions. While it can be difficult to shift away from traditional ways of operating, embracing change can help create a more inclusive and efficient working environment that benefits your workforce and ultimately helps preserve your bottom line.