Remodeling contractors specialize in making significant improvements, alterations or additions to the interiors or exteriors of existing buildings. Unlike general contractors who manage construction projects in their entirety, remodeling contractors usually focus on one specific area or task, such as kitchens, bathrooms, room layout changes, home additions, or deck and patio building. While these contractors sometimes take on commercial real estate projects, most of their work is on owner-occupied residential properties.
As part of the larger construction sector, remodeling contractors can be impacted by the knock-on effects of macro-industry trends. In the wake of a pandemic-induced residential construction boom, these contractors now face the potential of a market slowdown related to declining home sales, rising interest rates and inflation, and increasing labor and building material costs and shortages. This article discusses these trends in more detail.
Although many industries experienced economic hardships during the COVID-19 pandemic, some sectors thrived. For remodeling contractors, the unique dynamics of the pandemic economy brought increased business. People were motivated to make various household improvements as they spent more time in their homes than ever.
This shift led to a 25% increase in residential construction during the pandemic years.1 Further evidencing this trend, the remodeling industry saw spending on home improvements and repairs grow by 3% in 2020, despite the overall U.S. economy shrinking by 3.5% during the same period.2 This trend gained steam, peaking in 2022 when spending on home remodeling surged by 16%.3
Moving forward, the remodeling market will continue to be driven by several factors. For example, homeowners continue to have record levels of home equity to support financing renovations. Additionally, energy-efficient retrofits incentivized by the Inflation Reduction Act of 2022 and property repairs prompted by Hurricane Ian will further support growth in the coming year.4
Impact of skilled labor shortages
The construction industry, including remodeling contractors, continues to face significant shortages in skilled labor. In early 2022, it was estimated the industry would need to hire an additional 650,000 workers above its current hiring pace to meet demand.5 So far, that goal isn't being met. In September 2022, after hiring 348,000 new workers, the construction industry still had 412,000 open positions, according to the U.S. Bureau of Labor Statistics.6 In other words, contractors wanted to add more than twice as many workers as they could find.
Several issues are driving these shortages, including an aging workforce, a lack of interest in the trade professions among young workers and increased wage competition from other professions. The number of construction workers ages 25-54 fell by 8% over the last decade, while the share of older workers exiting the profession soared. With an average retirement age of 61 and more than 1 in 5 construction workers being older than 55, 20% of the industry is at risk of leaving within six years.7 Meanwhile, wages are rising faster in competing fields. For example, between December 2019 and December 2021, construction wages grew by 7.9%. However, at the same time, wages in transportation and warehousing rose by 12.6%, posing tempting alternatives for experienced workers and young people entering the workforce.8
Over time, a persistent lack of skilled labor often leads to contractors lowering their job standards and hiring less experienced workers, creating several downstream effects. For starters, because inexperienced workers need more on-the-job training, projects tend to take longer. Second, quality control may suffer, as inexperienced workers could fail to meet performance standards. Finally, inexperienced workers are at higher risk for on-site accidents involving themselves and others, leading to a less safe work environment.9
It's also important to consider that when there are not enough skilled workers available to complete a job, it can lead to a higher risk of mistakes that can result in third-party injuries or property damage. This can lead to an increase in insurance claims, which can, in turn, lead to higher insurance premiums. Additionally, labor shortages may lead to delays in project completion, which can result in additional costs for contractors and may also lead to client dissatisfaction.
To combat labor shortages, remodeling contractors can leverage these tactics:
- Utilize contracted labor. Partnering with a temporary staffing company can help remodeling contractors fill skilled labor shortfalls while lowering workers' compensation expenses. Staffing companies usually provide workers' compensation insurance; in most cases (depending on state laws), temporary employee injuries will not cause premiums to rise on host employers' policies.10
- Provide higher wages. Despite pay hikes over the last few years, there is a widespread agreement that construction wages are still not competitive enough with other professions, making it vital for remodeling contractors to continue bumping up salaries. Along with raising the floor on compensation, it's important to ensure workers with additional experience and higher skill levels are paid more than newcomers.11
- Offer better benefits. Remodeling contractors may need to get creative when structuring job benefits. This might include exploring profit sharing or other forms of equity payments or offering signing, retention or recruiting bonuses.12
- Implement on-the-job training. A valuable nonmonetary benefit is on-the-job training. Research shows today's employees emphasize autonomy, flexibility, support and upward mobility. As such, providing a clear path to advancement can help remodeling contractors attract new employees and retain existing ones.13
- Target new demographics. Currently, nearly 90% of employees in the construction industry are white, and only 11% are female. Such statistics highlight the potential for remodeling contractors to broaden their employee recruitment and training programs to an expanded set of demographics.14
Impact of inflation
While the surge in residential home improvement projects has created more job opportunities for remodeling contractors in recent years, it has also contributed to soaring prices for building materials as demand outpaces inventory. In fact, the overall producer price index for construction rose by 22% in 2021.15
When contractors faced pricing pressures in the past, a typical response has been to offset overruns with belt-tightening around labor costs, which generally account for about 50% of their budgets. This might take the form of hiring fewer on-site professionals. For example, instead of using two separate subcontractors to install plumbing and electrical wiring, a remodeling contractor might hire one multifaceted operation to handle both. Historically, such cost-cutting has led to increased downstream risk, both in terms of bodily injury and property damage.
Here are better ways for remodeling contractors to mitigate the effects of inflation:
- Accelerate schedules. Shorter work timelines can make it easier for remodeling contractors to predict how inflation will impact their projects and allow costs to be managed accordingly. This will involve purchasing as many materials as possible beforehand to lock in prices. Storage costs for pre-bought items may be lower than paying increased material costs months down the road. Architects, engineers, subcontractors and suppliers should be contacted and coordinated early. Project management software can help this process by streamlining communication with project partners and sharing and altering information in real time.16
- Share risk. While contractors usually bear the risk of inflation, there's no reason clients can't share that risk as well. Contracts can include an escalation clause that triggers adjustments in payments when price increases reach certain levels. The National Association of Home Builders offers a sample escalation clause that can be inserted into negotiations.
- Apply lean construction practices. Known as a proven way to lower costs and improve efficiency, lean construction involves contractors planning their projects in separate phases rather than working from one master plan at the start. It allows for more flexibility in timelines so that design changes can occur at any point during projects in response to price fluctuations.17
- Evaluate past projects. Analyzing the result of each job after completion often pays off in savings on future projects for remodeling contractors. After the punch list is worked through, everyone who worked on a project should get together and compare estimates to actual costs, discuss where things went right and wrong, pinpoint what caused problems, and determine procedures and systems that need to be changed going forward.18
Impact of material shortages
As the pandemic's effects subside, the availability of some building materials has improved. For example, signs indicate the prices of iron, steel and lumber are starting to level off. However, shortages and delays of other materials remain common and, in some cases, might worsen.19
Altogether, this means that, despite paying high prices, remodeling contractors often can't be sure when materials will arrive at the job site. In many cases, these contractors have been forced to absorb the resulting cost hikes and then explain unanticipated delays to clients. Additionally, the combination of higher prices and shortages of key materials can impact rates for certain lines of coverage, such as builders risk, where damages are significantly inflated due to the increased cost to repair or replace with like-kind materials.
Further, when high demand results in supply shortages, remodeling contractors may also substitute lower-quality products for traditional building materials, which can negatively impact quality. With this in mind, it's important for remodeling contractors to meet the challenges of material shortages without sacrificing quality control. Here are a few potential strategies for these contractors to consider:20 21 22
- Research and identify suppliers with a good track record of providing high-quality materials in a timely manner. This can help ensure a steady supply of materials and minimize project disruptions. Additionally, it can be worthwhile to explore different sourcing options, such as importing materials from other regions or countries or working with local suppliers who specialize in certain materials.
- Use technology to streamline the procurement process. For example, online platforms can be used to compare prices and availability, and inventory management software can be implemented to track material usage and availability.
- Invest in sustainable practices, such as using recycled or repurposed materials or leveraging materials that are locally sourced and less likely to be affected by shortages. This can help reduce the environmental impacts posed by projects and improve the long-term durability and performance of the materials used. It can also be beneficial to collaborate with other professionals, such as architects and designers, to find creative solutions for using alternative materials or incorporating design features that can reduce the need for certain materials.
- Communicate regularly with clients to keep them informed about project progress and any potential challenges or delays related to material shortages. This can help manage clients' expectations and ensure they are satisfied with the project's final outcomes.
- Implement quality control measures throughout projects to ensure materials are being used efficiently and effectively and that finished products meet the highest standards of quality and durability. Such measures can include regular inspections and testing of materials as well as ongoing training and development for contractors and their teams.
To further navigate material shortages and any other potential concerns that may accompany remodeling contractor trends, it's crucial to secure the right insurance coverage. The amount and type of coverage a business needs depend on the organization itself, but common policies to consider include workers' compensation, general liability, completed operations, commercial auto, commercial property, inland marine, commercial umbrella and cyber liability insurance.
The remodeling industry is constantly evolving, and contractors must stay up to date on the latest trends and developments in order to remain competitive and deliver high-quality results for their clients. By staying informed and adapting to these trends, remodeling contractors can position themselves for success and continue to provide exceptional value and service to their clients.