Growth signals and construction industry trends to watch in 2024

While the backlog of construction projects has begun to ease, builders and contractors continue to expect the industry to grow over the next six months.

Associated Builders and Contractors surveyed its members in late February/early March and reported a Construction Backlog Indicator of 8.1 months in February, a decrease of 1.1 months from February 2023. Meanwhile, its Construction Confidence Index began to dip, but still showed expectations for growth in sales, profit margins and staffing levels.

“Backlog is declining and confidence began to fade modestly in February,” ABC Chief Economist Anirban Basu said in an announcement when sharing the survey results. “While it is far too early to predict an industry-wide downturn, given that confidence readings continue to signal growth along sales, employment and profit margin dimensions, it appears a rising tide of project cancellations and postponements has begun to make its mark.”

Why construction companies are planning for growth.

Commerce Bank, which has a sizable focus on serving the construction industry, is continuing to see its clients plan for growth, according to Nick Hadley, Senior Vice President for Commerce’s engineering and construction services group. Pandemic-era supply chain issues have eased and a significant infusion of federal infrastructure funding is continuing to lead to active projects.

“Most parties are coming off a really strong 2023,” Hadley said. “They’re looking into 2024 and 2025 with strong backlogs, not only from a revenue threshold, but they’re also in seeing an ability to maintain margins again. This is due to supply chain becoming much more predictable.”

Strategies for managing some of the biggest challenges in construction.

Hadley said most construction clients' two highest concerns are labor and financing. Labor will always be an uphill battle, as it has been for the last two decades. Interest rates are at a historical median level, but higher than what businesses have been used to over the past decade. And hiring and retaining workers remains challenging. The industry employed more than 8.1 million people in February, but has an estimated 407,000 job openings, according to the U.S. Bureau of Labor Statistics.

“In February, we saw evidence that contractors continue to add workers, fulfilling expectations,” Basu said when the BLS reported the most recent employment numbers. “Employment growth happened in a variety of nonresidential subsegments, which is quite remarkable given headwinds such as high project financing costs, elevated construction service delivery costs and lingering recessionary fears.”

Construction companies are becoming more adept at forecasting in the higher interest rate environment, but addressing the labor shortage is urgent, said Craig Higginbotham, vice president and national sales manager for Commerce’s growing construction payments division.

“Every role in construction is competitive,” said Higginbotham. “We all need to come together and create enthusiasm around the construction industry so all this great work in front of us can be done.”

One way construction companies can incentivize their employees is to pay them quickly. Prepaid expense cards, for example, allow employees ready access to their per diems and other approved expenses. Commerce Bank also offers DirectCheck Cards as a low-cost payroll solution for workers who don’t have access to direct deposit.

Another strategy for managing the labor shortage is to use technology to make existing workers more productive. Current interest rates mean captive financing and rent-to-purchase options on new equipment can be expensive. So Commerce’s in-house asset management group is doing a lot of equipment underwriting, Hadley said.

“We’re focusing a lot on capital expenditure, or CapEx, discussions with clients,” he said. “What type of new machinery, equipment and tools are they going to be using to potentially help less-tenured individuals act as more-tenured employees.”

In addition to a shortage of skilled trades workers, the construction industry is dealing with a nationwide shortage of accountants. Data shows that people are leaving the profession faster than colleges are delivering graduates, leaving in-house accounting and audit teams to do more with fewer resources.

“This is another area where technology can help,” Higginbotham said. “Many of Commerce Bank’s payment solutions integrate seamlessly into the most popular enterprise resource planning software systems, reducing the time in-house financial teams need to spend on these processes.”

“Banks like Commerce that focus on the construction industry are positioned to help contractors in many ways” he said. “We want to understand the needs and goals of our customers so we can complement their financial strategy with our solutions and strong balance sheet instead of pushing products that may not be a priority.”

Preventing fraud is another critical issue in construction. At Commerce Bank, Positive Pay electronically compares every check to a construction company’s payment file to reduce losses due to fraudsters who alter or forge checks. For electronic payments, construction companies can use ACH Risk Manager to filter or block unauthorized transactions.

“We’re helping our clients structure their overall cash flow, closing the gap between their accounts receivable and their accounts payable; trying to accelerate collections; and make payments more efficiently and securely,” Hadley said. “We’ve adopted a fintech mindset in which we need to provide solutions for problems outside of just the commoditized world.”