The construction industry has a substantial opportunity in 2024 to focus on enhancing value to its wide-ranging stakeholders: employees, clients/customers and communities.
While revenue growth was strong in 2023, exceeding $1.6 trillion in the first 10 months of the year, a 5.6% increase over 2022, these positive stats belie some serious challenges for an industry that has long been able to thrive without embracing systemic changes.
And even with a backlog of demand in many sectors, especially residential new construction and multifamily housing, persistent economic hurdles have stymied other areas like office construction, where demand has collapsed amid intense wage pressure given the persistent labor shortage.
Here’s a look at some key trends affecting the industry, along with priorities that must be addressed to help ensure that construction firms and contractors are on solid footing for the future.
Insufficient succession plans
A steady pace of retirements with no succession plans in place, a dearth of next-gen leaders and an insufficient number of people entering the trades will all put pressure on human capital in 2024. As difficult as it is to find an adequate number of new hires given the growing pipeline of contracts, keeping people on the job can be even tougher.
The construction industry had 423,000 job openings at the end of October 2023, a slight drop from the prior month, but 25,000 higher than the same time in 2022, according to an Associated Builders and Contractors analysis. A full 5% of positions were unfilled.
Firms have their best chance of addressing the shortfall by making some bold investments to support new hiring and retention strategies. To meet demands, forward-thinking firms and associations are partnering with academia to create programs that provide qualified individuals for specialized construction needs. Firms that develop strong in-house training and professional development programs will stand out from the pack in 2024.
Wages and benefits are important, but offering a pathway to advancement in terms of skill enhancement and growing role responsibilities will improve stickiness. Within those investments, soft skills training is imperative, not optional, and goes hand in hand with a needs assessment at the leadership level. High employee engagement scores are a measure of leadership development. According to Gallup data, the top 25th percentile of companies with high engagement scores has been shown to have higher profitability, higher productivity and lower turnover than the bottom 25th percentile.
Additionally, Gallup engagement data showed leader-level responsiveness and capabilities are directly related to higher engagement-related questions that lead to growth in an organization. Going into 2024, firms would be wise to equip human resources with a framework defining soft skills and the needs within the business. Executive coaching in communication, leadership, critical thinking, listening, adaptability, organization and teamwork should be included and benchmarks set for success.
Linear career paths are becoming a thing of the past as the next generation looks to diversify its skillsets and become upwardly mobile. To find and retain top-tier talent, organizations must consider that many of their candidates may come from adjacent industries that allow work-from-home options. Firms will see the advantage in accommodating some WFH policies. Not only will this increase the pool broadly, but it will also offer diversity, equity and inclusion opportunities.
These same candidates will also be paying attention to the tools contractors are using in the office and in the field, making digital transformation not only a must for operational efficiencies but also recruiting. Technology for project management, building information modeling, drone use, 3D printing, virtual reality and augmented reality are becoming essential to improving efficiency and productivity.
Visibility and representation are important to the future workforce. Construction companies should develop apprenticeship programs and work with local colleges, high schools and technical colleges to spur awareness and interest in construction careers. Hearing from those in the trade about the benefits, both tangible and intangible, can make a memorable impact during students’ pivotal decision-making age.
Integration of data systems
Best-in-class construction firms must increase investment in technology and process improvement to offset labor productivity challenges. Firms can no longer delay appropriate technology adoption and expect to thrive. The pressures of the labor shortage only reinforce the urgency, as it’s no longer possible to hire your way into growth. Productivity gains will come from implementing cloud-based tools, CRMs and ERPs, making sure they speak to each other and that all of their data is aligned.
Firms need a single source of truth for where all their data is housed. The typical firm now doesn’t have a CRM that talks to their ERP, which speaks to their data analytics. No longer can firms afford to spend time reconciling systems with different data structures. The need for speedy, informed decision-making won’t allow it.
As AI and machine learning capture more attention, its inevitability as a driving force may help persuade holdouts that they must be equipped technologically now to compete in the future.
Having good-quality, organized data is necessary to enable the power of AI and for adequate functioning today. The value of available and actionable data in construction has never been higher, so it’s imperative that data governance be aligned with a firm’s tech road map. Firms should focus on having their data warehouse clean, secure and optimized.
Construction firm leadership often rests in the hands of an older generation. This in itself is not an issue; the problem arises when there is no viable transition plan in place.
The absence of a robust talent pipeline, ready and equipped to assume new roles or even ownership, is a significant oversight. This lack of foresight can lead to a leadership vacuum, causing instability and uncertainty within the organization.
It’s crucial for firms to recognize the importance of transition planning and talent development. By nurturing a new generation of leaders, they can help ensure the continuity and longevity of their business. This approach is not just about replacing old with new; it’s about securing the future of the firm and its legacy.
Coinciding with this, firms with solid business acumen will be looking to the open market, as M&A will provide opportunities for growth and talent acquisition. We expect M&A activity to accelerate throughout 2024 due to a lack of next-gen leadership development, viable internal transition options and a more favorable loan landscape.
The absence of a transition plan is not just a mistake; it’s a missed opportunity to foster business growth, innovation and sustainability.
The host of energy incentives available through the Inflation Reduction Act can be game-changing for construction firms. Especially with the uptick in public infrastructure projects coming, thanks to 2021’s Infrastructure Investment and Jobs Act, firms need to include these in their go-to-market strategy. Being able to leverage deductions and credits should be a win for new home and multifamily construction as well as commercial contractors.
In addition, the Inflation Reduction Act has expanded the New Energy Efficient Home Credit (45L), which offers a tax credit for new or substantially reconstructed and rehabilitated single-family or multifamily homes that meet certain Energy Star or Zero Energy Ready Home Program energy efficiency standards.
With changes to the 179D commercial building deduction, the act incentivizes the construction and renovation of energy-efficient buildings. The measures expand the qualification requirements for the deduction and raise the maximum deduction value from the current maximum of $1.80 per square foot to $5.00 per square foot.
All of these put together can support projects that may not have been financially feasible prior. Firms working on mixed-use development will be able to leverage these, and even TIF funding, to create new, environmentally conscious spaces where tenants will appreciate not just the energy savings of sustainable building, but the longevity of a more climate-stable home or business. The evolving needs of the end consumer need to be top of mind; building to suit — and having innovative solutions — are expectations not to be ignored and can inform a solid, long-term revenue strategy.
How Wipfli can help
The economic conditions and related uncertainties facing the construction industry raise various challenges that can threaten your business. Wipfli’s construction team can help guide you through these challenges and provide solutions to optimize your performance and prepare you for the future.
Contact us to learn about our construction industry support services.
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