How an Economic Downturn Affects Construction

Economic experts have been predicting an economic downturn or recession in 2020. While it hasn’t hit the construction industry yet, there is no doubt that the downturn has arrived. With it, many small businesses worry about what this means for the future. Problems in the economy can affect industries in different ways, depending on what they do to corporations and consumers. Here are some factors you can expect, based on how the construction industry generally reacts during a recession.

Changes to the Supply Chain
It’s hard to say how the supply chain can change as a result of an economic downturn, because it tends to be a little bit different every time. If you are accustomed to getting a lot of your supplies from places hard-hit by COVID-19 like China or Italy, you may already have noticed delays or price increases on materials. Getting goods and services locally may also change over time. A regular supplier may alter the line of work that they do to find one that is more stable, or they may quit the business entirely. The contracting businesses that stay in will need to find new routes to get the things they need, or they too will struggle to thrive.

Slowdown of New Construction Starts
When investors start to worry that the demand for housing or commercial spaces is going to go down, they are less likely to build new structures for these. Worldwide, construction has been slowing down over the past couple of years. That hasn’t been the case for California, which has been focusing on a combination of urban renewal and trying to solve the significant housing shortage. But if investors start to have trouble getting funding for projects, there will be fewer new construction starts.

Failure to Secure Funding for Projects
The housing crisis of 2008 serves as an excellent object lesson in the effects of a recession on the construction industry. While the current economic downturn isn’t related to home values per se, it’s going to have effects on them. When lenders are worried that borrowers and investors aren’t going to be able to pay their loans, they may tighten their lending standards. This may make it harder for builders and investors to get the funding that they need to start a new project. In some cases, it can affect the funding they need to complete existing projects. This underscores the importance of vetting a client’s ability to get funding before you sign a contract. That ability may change over the next several months.

Contract Liability Issues
Although a lot of the long-term effects of a recession may not be felt at the beginning, that doesn’t mean that you won’t encounter issues right away. Watching access to your supply chain vanish or your work force shrink due to COVID-19 can make it much more difficult for you to deliver an ongoing project according to contract. In some cases, this may make you liable and lead to legal issues between your contracting business and the client. This is an excellent time to examine the details of all of your ongoing contracts, and stay in regular communication with your clients about delays.

Focus on Stability, Not Growth
The construction industry has been enjoying a period of almost unparalleled growth over the past several years. As the ability to continue expanding becomes more limited, contracting businesses will need to think about what they need to do to keep going. Trying to expand too rapidly may make it more difficult for you to finish projects that can keep the bills paid. This is why many businesses shift to a more controlled workflow with limits on the types of services they will provide. Focusing on what you need to do to continue your business is a safer bet than taking excessive risks.

If you were wondering when a recession was going to hit, you probably know now. What you do with this information can help keep your contracting business in a better position as you wait for improved economic times. To get started, contact CSLS today!