For years, the construction industry has been feeling the effects of an ongoing skilled-labor shortage. While it’s still unclear how the COVID-19 pandemic will factor into this, it’s reasonable to conclude that this trend will continue, furthering a shift in the construction industry hierarchy that has seen contractors lose leverage as the number of capable subcontractors has declined. What are the implications?

Shifting Project Relationships

Historically, general contractors and construction managers were at the top of the project hierarchy. In addition to working directly with project owners, architects, and engineers to oversee all aspects of the effort, general contractors and construction managers also assumed some risk associated with project completion. The degree and nature of that 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 get competitive pricing for each of the needed trade groups and specialties. This structure enabled them to maintain reasonable profit margins while still operating within project budget restraints.

In recent years, however, the chronic shortage of skilled labor has been steadily eroding this hierarchy.

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 the COVID-19 pandemic 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.

The shift in the balance of power between contractors and subcontractors is just one of the changing patterns facing the industry. The pandemic’s influence on remote work and changes in consumer purchasing habits will influence the type of projects contractors take on as well as the opportunities available. In response, many in the industry are diversifying their businesses by including service contracts and other offerings that lend themselves to more reliable revenue.

Dembo Jones’ construction industry team can help you optimize your subcontractor relationships as well as explore other avenues for sustained revenue in the ever-shifting construction landscape. Contact us today.