Over the past five years, small and midsize construction businesses have been hit hard by supply chain disruptions, inflation, and geopolitical pressures that have driven up material costs and intensified labor shortages. While some market conditions have stabilized since the initial upheaval, many contractors still face persistent challenges, affecting their cash flow and bottom line. Here’s a closer look at their top priorities and concerns today.
Inflation: A Persistent Challenge
Managing cash flow is tough for any construction business, but it’s an especially stubborn challenge for smaller construction businesses with tighter margins. Inflation, even at a reduced rate, continues to erode those margins. Even as prices stabilize in some areas, small businesses are still paying significantly more for materials than they did five years ago, and concerns are growing that costs could rise again.
The Consumer Price Index (CPI), a key measure of inflation, has fallen significantly from its 2022 peak (now at 2.7%, down from 8.0%), yet inflation remains the primary concern for construction and contracting companies. According to the 2024 State of Small Business Survey, 76% of contractors rank inflation as a top issue, well ahead of other concerns like online transaction security.
So why is inflation still a major worry despite its decline? First, “better” doesn’t mean “good” – CPI remains above pre-pandemic norms. The cumulative effect of several years of high inflation has squeezed margins, while ongoing geopolitical and trade uncertainties keep costs and supply chain pressures unpredictable. In an industry already facing rising prices for goods, materials, and labor, even a slight cost increase can have a significant impact.
A Delicate Balance: Labor Costs vs. Client Relationships
Rising labor costs are another pressing concern for small and midsize construction companies, with nearly two-thirds (63%) of contractors expecting further increases. For businesses already navigating slim margins, higher labor expenses worsen cash flow challenges and reduce profitability. In response, many small contractors are forced to make difficult choices, such as limiting the workforce on a project which can lead to longer hours, quality issues, and even project delays, eroding client satisfaction and future business opportunities. A resulting cash flow crunch may further restrict contractors’ ability to take on new projects, creating a potential downward cycle that could threaten business viability.
In this climate, prioritizing strong client relationships has become essential, with nearly half of small contractors identifying it as a top priority. As economic pressures and labor costs climb, contractors may be forced to pass costs onto clients to avoid compromising quality. Building trust and emphasizing customer service can help contractors maintain client loyalty, even as rising expenses are felt across projects. In an industry where reputation is key, a strong focus on customer connections becomes a valuable asset for navigating turbulent times.
Preparing for the Future: Pragmatism and Prudence
Given today’s economic uncertainties, it’s understandable to adopt a cautious approach. But relying on fear alone doesn’t predict future outcomes. While current conditions may not reflect past strength, they also don’t signal impending collapse. The economy, though not as strong as it once was, remains resilient. Small contractors will be best served by practicing judicious spending, focusing on operational efficiency, and investing in customer service. As the saying goes: hope for the best, but prepare for the worst — a balanced approach that combines optimism with prudent foresight.
