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
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:
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:
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
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.