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Evolving Hierarchy of the Construction Industry

Mueller Prost CPA Firm - Construction
Caty Beilsmith

November 30, 2020

Even before the COVID-19 pandemic and economic slowdown triggered an array of immediate financial pressures, the construction industry had already begun struggling with ongoing management and operational challenges stemming from a chronic shortage of skilled labor. This combination has led observers to note a perceptible shift in the overall hierarchy of the construction industry—a shift that contractors and subcontractors should consider as they assess long-term business strategies.

Shifting Project Relationships

Historically, general contractors and construction managers were on top of the project hierarchy. In addition to working directly with project owners, architects, and engineers to oversee all aspects, general contractors and construction managers also assumed some risk associated with project completion. The degree and nature of risk varied depending on the nature of the contractual relationship.

As long as there was an adequate supply of qualified subcontractors, general contractors and construction managers could use the bidding process to obtain competitive pricing for each of the needed trade groups and specialties. This structure enabled reasonable profit margins, while still operating within project budget restraints.

In recent years however, the shortage of skilled labor has been steadily eroding this hierarchy. As the number of capably staffed subcontractors declined, contractors found they had less leverage in the project relationship.

The shortage became more acute after the 2008 recession, as growing numbers of disillusioned skilled tradespeople abandoned construction for more stable employment in other industries. Ultimately, the labor market never fully recovered before COVID-19 added new complications to the traditional project hierarchy.

Strategic Responses

As the shortage of capably staffed subcontractors intensified, some general contractors began re-evaluating their place in the project hierarchy, particularly their willingness and ability to self-perform certain project work. Many contractors found that bringing certain trades in-house reduced their reliance on third parties and allowed more control over project risk and profitability.

From the subcontractor’s perspective on the other hand, attracting and retaining the “best of the best” proved to be instrumental in improving profitability. Strong training programs and competitive compensation and incentive programs are essential tools in this effort.

Beyond the changing contractor-subcontractor relationships, today’s construction businesses must also be alert to broader strategic and societal trends. For example, changing attitudes about the virtual workplace and the ongoing shifts in consumer buying habits will directly affect both the nature and volume of projects in coming years.

In addition, many contractors and subcontractors are working to adapt their business plans to include service contracts or other lines of business that offer more stable revenue streams.

We can help you explore strategic options specific to your needs. Contact our team or your dedicated Mueller Prost advisor to schedule some time.

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