Each year our agency puts together a report to look at trends of profitability, backlogs, and overall competition in the California construction industry based on the proprietary data of our contractors. This data is unique to our agency, and to our knowledge, there is no other report published quite like it.
Riding the Rollercoaster
One of our customers compared the experience of running a construction company to riding a rollercoaster, and how true that
is…especially over the last few years. What is interesting is we see our contractors being on all different parts of the rollercoaster this
past year – some are up, some are down, and others are sideways. During 2023, there has been great improvement in the percentage
of our contractor customers with operating profits excluding PPP loan forgiveness and Employee Retention Credits. However, some
contractors, particularly subcontractors, have faced continuing challenges with work getting delayed or projects getting cancelled,
leading to difficulty generating revenue from their backlogs.
Fortunately, material costs are less of an issue than they were previously. Recent Producer Price Index reports show that many construction material prices have stabilized, and some have dropped although they remain significantly higher than prepandemic levels overall. According to the Associated Builders and Contractors Chief Economist, Anirban Basu, he predicts that most construction material prices, not including energy prices, should remain stable in the coming months. Most of our contractors have given us similar feedback. However, oil prices are sharply up as of late, and some material still has long lead times, which is part of what continues to cause project delays.
Overall, both gross profit and net profit margins are healthy and returning to pre-pandemic levels. Backlogs remain strong and signs are pointing to a strong finish for 2023.
Despite the challenging first half of the year due to the heavier than normal rains, job delays, and lingering material issues, we expect the full year 2023 to be good. The results will certainly vary among different types of contractors, but overall, it should be a decent year for most contractors.
Next year is a bigger question mark. While contractors should have strong backlogs heading into the year, private work is definitely starting to slow down. There won’t be much, if any, further benefit from Employee Retention Credits, which will start to separate the truly good operators from those who were relying on the government stimulus. As Warren Buffett says, it’s only when the tide goes out, do you see those that are swimming naked. Over the next year or two we’ll get to see who’s been skinny dipping, and it might not be pretty.
Download the full 2023 Construction Market Outlook Report
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