Key Highlights

Labor shortages

are intensifying, prompting contractors to develop innovative hiring strategies

Tariffs and supply chain issues

are increasing material costs, requiring enhanced communication and transparent contractual agreements to manage escalations

Adopting AI

and new technologies offers efficiency gains but introduces data security risks, necessitating clear guidelines and oversight in contracts

Effective project management

involves establishing strong lines of communication, balanced contracts, and proactive risk mitigation

The construction industry is facing a plethora of changes and obstacles including labor constraints, rising material and labor costs and data security concerns. These consistent challenges have left general contractors, and trade and craft contractors in the housing industry with elevated levels of concern and uncertainty.

In an industry that values project plans, timelines and tight cost controls, contractors at all tiers are in a precarious position as they look to the future. While there is no exact science for navigating general uncertainty, contractors can still

plan for the unknown by implementing contracts and controls that provide more certainty and protection for stakeholders at all levels.

Persistent Labor Shortage

The skilled labor shortage is not a new challenge in the construction landscape. As the current workforce ages and fewer people join the trades, skilled labor is harder to come by. This labor shortage was amplified during the COVID-19 pandemic, as a mass exodus occurred during that time. Recently,

92% of hiring construction companies

have reported that they are having a difficult time finding qualified workers.

This labor shortage and competition is forcing firms to look for fresh and innovative hiring tactics, including partnerships with trade schools, high schools and apprenticeship opportunities to attract young talent.

Tariffs, Price Escalations and Supply Chain Disruptions

Almost all industries are feeling the impacts of consistent tariff changes and market uncertainty, but the construction industry might get

hit the hardest. Fluctuating prices and trade agreements are consistently intersecting with project estimates and timelines, requiring contractors at all

tiers

to increase communication with all parties, enhance transparency and enact tighter controls over materials purchases.

Tariffs on steel, aluminum,

lumber and electrical components have all greatly

impacted trade and craft contractors, as they are the ones submitting pricing, purchasing materials and driving project timelines. Increased prices, as a result of tariffs, require communication and agreement on who will absorb the costs.

The answer to navigating price escalations is not avoidance but rather being prepared for them. In the current state of the construction industry, it’s not “if” price escalations will occur during a project, it’s “when.”  There are a few practices that contractors at all tiers can implement to better maneuver price escalations, change requests and supply chain challenges.

When entering a project, contractors should look to ensure a clear line of communication exists between themselves and the

developers, builders and their suppliers,

to discuss and address potential impacts of materials and labor price escalation.  These lines of communication can help everyone understand price escalation terms, and define which party, or parties, will be responsible for additional costs.

When assessing cost control mechanisms within the contract, all parties should ensure that the agreement is transparent,

fair and balanced. Contractors should also consider including cost control guidelines to their contracts with project owners, as that information can help make those important cost-escalation decisions on a timely basis. Establishing proper controls and lines of communication can add some peace of mind for contractors and help ease any cost-related tension.

The New World of AI and Data Security

Technology and AI are rapidly evolving in the construction industry, leaving room for gray areas and unwritten rules. Adopting these advanced technologies to enhance efficiency,

productivity and safety comes with significant risks that must be carefully managed to protect sensitive information and ensure the integrity of AI systems.

When beginning a new project, contractors should outline how and when AI will be used,

disclose the AI tools that they plan to

use and include a place for human oversight and verification in their contracts. Ensuring that all AI-generated outputs are reviewed and approved before they are used for implementation can be especially important as AI is still a new technology that requires another step of validation.

The increase of AI and technology in the construction industry also raises concern around data security and potential breaches. Using open-source AI programs has a higher possibility of exposing sensitive information. As such, if either party is using an open-source AI program, that should be disclosed in the contract.

With the implementation of these new AI tools and software, it’s important to remember that a significant amount of personal and proprietary information, data and designs are stored within these programs. In standard contracts, data ownership is not typically addressed, as it was not previously considered a significant risk, but now, contractors  need to consider how much access they would like the other parties to have to their data and information.

Looking Ahead

As contractors look at the state of the construction industry, price escalations, AI and technology changes and labor shortages can feel daunting. However, by proactively addressing contract risks and mitigating controls, contractors and subcontractors can set themselves up for success.  Balanced contract terms and strong project controls do not just mitigate risk; they enable smart and more objective construction decisions that will pay

their dividends in the long term.

Robert Zellmer is Director of Development and Community Advisory Practice for Baker Tilly, an advisory tax and assurance firm dedicated to customized business solutions that generate and sustain growth.