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Top 10 Threats for Construction Companies

Cynthia Cline
February 3, 2023

Construction companies face numerous challenges in their daily operations, and these risks and threats can negatively impact their operations and profitability. If not well-managed, they could threaten the firm's long-term viability. Financial challenges can put some construction firms out of business and lead to increased costs on construction projects for business and consumer clients.

To remain successful, construction companies must become increasingly proactive in assessing and handling these potential threats to increase their business resilience in the face of challenging times. The following ten issues represent significant threats for construction companies, affecting both commercial and residential firms.

1. Competition

Competition can force companies to bring their “A” game, but it also threatens construction firms because of the pressure it puts on already thin margins. Companies must stretch existing resources to become more innovative, efficient, and profitable.

Firms must fend off rivals competing for the same projects by differentiating on project quality, improved cost structure, and better project management and delivery times. Improving in these areas can present significant challenges, especially for already strapped companies.

2. Skilled Labor Shortages

A lack of skilled labor causes construction firms to deal with project delays that lead to higher costs, lower productivity, and black marks on their reputation. Competition from other firms can drive up the cost of wages, and if the company hires less experienced staff to keep jobs moving, it faces a potential decline in work quality.

If a construction company finds it hard to attract quality personnel, that puts them at a disadvantage compared to competitors who can attract and retain higher-quality staff and produce better project outcomes. Short staff or a lack of skilled labor can also prevent firms from being able to guarantee project completion dates or high-quality work, making it more challenging to win new work contracts.

3. Health and Safety Concerns

Health and safety are essential issues in construction due to the industry's high injury and illness rate. Construction firms with higher injury, illness, and fatalities rates experience a high workers’ compensation claim rate, increased insurance premiums, and exposure to potential litigation and financial losses. Construction companies also face an ethical challenge if fatalities happen on the job.

Taking steps to keep workers safe, enforcing safety regulations, training workers on safe equipment operations, and other efforts can increase worker safety. They can also make the work environment more secure and productive and enhance the company’s reputation. Companies that do not comply with health and safety regulations may receive fines and see their reputation damaged.

4. Materials Costs

The rising cost of materials can cause significant threats for construction companies as it cuts into a project's overall budget and profitability. Transportation costs can become prohibitive, particularly if materials must be shipped to a remote job site or delivered overseas. Natural disasters can cause interruptions in the supply chain, making some materials increase in price or become unavailable.

Changes in tariffs and trade policies can also affect the cost of imported materials, which triggers fluctuations in the market’s supply and demand. Rising or falling prices make it difficult to budget accurately and stay within budget on projects.

Firms can respond by using cost-effective materials like magnesite to stay within budget. What is magnesite good for? It’s a durable construction material that works well for outdoor decks and flooring, among other uses. The material is heat and fire-resistant and stronger than concrete, pound-for-pound. It is also highly resistant to water, oil, weathering, and abrasion.

5. Delays Due to Weather or Unforeseen Events

Weather-related project delays can cause several problems, including higher costs for labor, equipment rental, and materials. Missed deadlines and lost productivity can lead to frustration and reduced morale among workers and subcontractors. When weather or unplanned events impact the project’s timeline, the firm could miss its project deadlines, leading to financial penalties and a damaged reputation.

Project delays can also cause disputes and possible legal claims between construction companies and other parties involved. These events further prolong the project and escalate costs.

6. Litigation

Litigation is one of the significant threats for construction companies because it can lead to large financial losses and substantially negatively impact the company’s reputation. The risk of litigation comes in different forms, such as contract disputes. These can involve clients, suppliers, or subcontractors and concern issues like payments or contract terms.

Accidents, injuries, and fatalities can also result in lawsuits when they take place on the worksite. Additionally, construction companies risk litigation claims regarding defects in the construction or design of a project, environmental issues such as air and water pollution, or destroyed natural habitats during or after construction.

7. Economic Downturn or Recession

Recessions and economic downturns cause consumers and businesses to cut spending in all areas, including construction. The lower demand for new construction projects drives revenue shortfalls and decreased profitability for construction firms.

In challenging economic times, financing for new construction projects may become less available, slowing construction activity even more. Construction companies could have a harder time keeping their staff employed and might need to respond by cutting spending and laying off workers. Recessions and a tough economy force some firms to go out of business.

8. Cost Overruns and Budget Constraints

Cost overruns happen when a project’s actual costs exceed the budget or estimated costs. The overall costs might increase due to unexpected material price increases, poor project management, unexpected conditions on the construction site, or changes in the project’s scope.

If costs exceed the project plan, the construction firm might need to cover the additional expense, which could significantly impact its profitability. If the excess costs are significant, covering them could put the firm’s financial stability at risk.

Budget constraints refer to the limits of funding or resources to complete a project. When a client’s budget does not cover the estimated costs, the firm may need to reduce the project scope or delay the project while waiting for additional funding. The company might also need to use lower-quality materials to stay within budget constraints.

The issues that come with working on a tight budget can lead to project delays, lower-quality work, and client disputes. The firm’s reputation may suffer, making it hard for them to win new business.

9. Changes in Government Regulations and Policies

Regulatory or policy changes can cause threats to construction companies because they increase the complexity and cost of projects. Policies and regulations enforced by the government usually dictate construction standards, such as building codes, labor laws, and environmental standards for construction work.

If these standards change, especially mid-project, the adjustments required to adhere to the new practices could be costly.

Government policy changes can also affect the funding available for construction projects. This change can lead to fewer opportunities for construction companies to bid on new projects if, for example, the government cuts funding for new infrastructure projects.

10. Natural Disasters and Extreme Weather Events

Natural disasters and extreme weather can disrupt construction schedules and damage equipment and construction sites. In severe cases, the events can cause work to stop altogether, resulting in a loss of project work and resources for the construction firm.

After the event, construction companies must bear the costs of cleaning up the site and making repairs. Clients may file lawsuits if the event damages a completed structure, and insurance premiums may rise for construction companies operating in disaster-prone areas. Each of these events takes a toll on the company’s profitability and ability to continue doing business.

Natural disasters and extreme weather can have effects outside of the construction project. The supply chain for materials may become disrupted, causing a shortage of materials and equipment, leading to increased costs and delays in projects.

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