Top Risks Facing Construction and Real Estate Organizations

As interest rates, inflation and capital and materials costs remain persistently high, it is not surprising that the construction and real estate industry’s top-ranked risk in 2023 — economic slowdown or slow recovery — is the same as it was in our 2021 survey. Higher interest rates make it more expensive for governments, real estate developers and other project sponsors to obtain new project financing. And when development activity slows, construction demand follows suit.

But the good news for the industry is that investments in manufacturing, infrastructure and the energy transition are fueling demand for construction, especially in Asia and North America. In the U.S., the Infrastructure Investment and Jobs Act of 2021 earmarked approximately $1.2 trillion in federal funding to help states and local municipalities upgrade and build new roads, bridges, transit systems, broadband internet infrastructure and more. Meanwhile the Inflation Reduction Act of 2022 directs over $300 billion to investments in green energy innovation, facilities and infrastructure. Investment is, in part, concentrating on manufacturing facilities for electric vehicles (EV) and components as well as public EV charging stations. Worldwide, as more countries step up their efforts to meet net zero targets and update their National Determined Contributions (NDCs) to the Paris Agreement by outlining their climate action plans and emissions goals, more structures—new and retrofitted—to support climate solutions will be needed.

Construction is also surging in countries such as Saudi Arabia, which is investing in tourism-related infrastructure to create new revenue streams, driving the demand for everything from hotels and resorts to airports and utility and transport infrastructure.

Meanwhile, geopolitical volatility is also driving some construction demand. Efforts to reduce dependence on China by diversifying supply chains for everything from pharmaceuticals to semiconductors are dependent upon facilities where businesses can assemble, store and ship components. As with green energy, U.S. federal funding has been earmarked to fund these efforts—approximately $280 billion, via the CHIPS and Science Act of 2022, which aims to boost U.S.-based semiconductor research and manufacturing.

Keeping pace with this demand, however, is challenging. Constructing specialized facilities, especially in alignment with low-carbon building specifications, requires specialized talent and sustainable building materials—both of which are at a premium. Staffing projects with qualified workers is a daily struggle, due to the combined impact of a generation of workers aging out of the workforce and a generation of workers opting to pursue employment in other industries. And while workforce and materials shortages are creating project delays, building materials costs are squeezing project margins.

Current Risks

Failure to attract or retain top talent is indeed a major issue for the global construction industry. The risk not only appears in the industry’s 2023 top 10 risk list, but it is ranked high at number two. Illustrating the dramatic shift in demographics that has taken place, respondents to our 2021 survey did not rank failure to attract and retain top talent in the industry’s current top 10 and placed it in their future top 10 at number 10.

Top 10 Current Risks

1. Economic Slowdown or Slow Recovery
2. Failure to Attract or Retain Top Talent
3. Cyber Attack or Data Breach
4. Commodity Price Risk or Scarcity of Materials
5. Cash Flow or Liquidity Risk
6. Workforce Shortage
7. Major Project Failure
8. Regulatory or Legislative Changes
9. Property Damage
10. Supply Chain or Distribution Failure

The workforce shortage in the U.S. alone was projected to be over a half million in 2023 and estimated at nearly 350,000 in 2024. In 2022, per-month job openings in the U.S. averaged 390,000—the highest ever recorded. Meanwhile the unemployment rate was the second lowest ever recorded.¹ In Canada, which has been hit by a national housing shortage, the job vacancy rate in construction this year also reached a record high: 80,000 vacancies.² And nearly two million workers will be needed in the EU’s construction sector by 2030, according to a recent study.³

Cyber attack or data breach is a top 10 risk because of the increasing digitization of the construction industry. The construction industry is digitizing rapidly to improve productivity, efficiency, safety, collaboration and more. The learning curve is steep, as the industry is relatively new to advanced technology and cyber security compared to other industries. In addition, the growing use of technology on job sites is significantly increasing the cyber exposure of contractors and construction industry participants. Examples of integrated technologies in the industry include electronics for smart or intelligent highways, IoT sensors, and digital modeling known as building information modeling.

A well-known top risk, property damage, has moved up in the rankings since our last survey, which we believe could be influenced by the rise in extreme weather risks. Heavy rains can render build sites unstable and create significant delays; excavated ground could collapse and operating equipment in standing water, for example, is unsafe. High winds can flatten structures mid-project as well as wreak havoc on temporary shelters, trailers and equipment on job sites.

The impacts of the supply chain or distribution failure (ranked number 10) that are afflicting other industries are also creating headaches and significant risk for the construction industry. The proliferation of large infrastructure projects is tied to supply chain risks because these often involve turnkey project contracts known as engineering, procurement, and construction (EPC) contracts under which private contractors agree to provide design and source materials in addition to construction. EPC contracts typically have strict timeframes and budgets, both of which can be threatened by supply chain disruptions and delays. This can result in considerable financial liabilities for the contractor.

Major project failure’s position at number seven reflects the industry’s large number of billion-dollar projects. In fact, projects have grown exponentially in size and value during the last decade. At this scale, a single problem can cost millions, posing potentially existential threats for contractors and other stakeholders.

Underrated Risks

The industry should be very concerned with climate change. Extreme weather events are more severe, frequent and are occurring in locations previously considered low-risk. Because of the many risks associated with climate change — supply chain or distribution failure, property damage, commodity price risk or scarcity of materials, major project failure and regulatory or legislative changes — the consequences of these events are also more costly. Industry leaders should be considering how to best manage this wide-ranging and growing risk, perhaps by creating redundancies in supply chains, using innovative techniques and materials and designing more resilient structures. Additionally, climate change is increasingly a major consideration for investors, so it is in construction companies’ best interests to demonstrate sound sustainable practices, innovation and planning to secure financing for current and future projects.

Closely linked to sustainability and climate change is failure to innovate or meet customer needs, which did not make the industry’s top 10 risk list. As workforce shortages continue, the construction industry is lacking the right specialized talent needed to take advantage of advanced and emerging technologies that are becoming more and more important to the success or failure of a project. Furthermore, digitization and robust cybersecurity require talent with skill sets in great demand across numerous industries; construction companies must ensure they are able to differentiate themselves from their competition.

It is interesting that the risk of supply chain and distribution failure is not ranked higher than number nine and does not appear in the industry’s future top 10 risk list. Given widespread geopolitical volatility, this risk poses potentially grave threats to the industry. 

Future Risks

Future concerns among industry respondents appear to be focused on economic volatility: capital availability and interest rate fluctuation enter the top 10 at number eight and nine, respectively. Meanwhile, more property and material risks—major project failure, property damage, and supply chain or distribution failure—drop out of the industry’s top 10. 

Top 10 Future Risks

1. Economic Slowdown or Slow Recovery
2. Failure to Attract or Retain Top Talent
3. Cyber Attack or Data Breach
4. Cash Flow or Liquidity Risk
5. Commodity Price Risk or Scarcity of Materials
6. Workforce Shortage
7. Failure to Innovate or Meet Customer Needs
8. Capital Availability
9. Interest Rate Fluctuation
10. Regulatory or Legislative Changes

Real estate and development are clearly vulnerable to economic volatility, capital availability and interest rate fluctuations. However, construction is also susceptible to economic conditions. Construction loan rates are often variable, adding uncertainty to future terms. Along with cash flow or liquidity risk (a rank four future risk), the inclusion of capital availability among the industry’s future risks reflects several trends that are expected to continue or worsen in the future: rising costs of material and labor, weakening consumer spending, rising capital costs and tighter credit and lending terms for both commercial and residential construction.

And, importantly, the construction industry is focused on long-term growth, beyond the current spike in infrastructure and energy transition-related building taking place today. To expand and diversify their portfolios of revenue-generating projects, companies will need liquidity and stable, favorable, interest rates to finance those projects.

Respondents also appear to predict that workforce-related risks—failure to attract or retain top talent (ranked number two) and workforce shortage (ranked number six)—will persist as well, given the construction workforce is rapidly aging and efforts to build the pipeline of younger talent will take time to develop. The demand for nuclear engineers, needed for nuclear power plant construction, who were sought after throughout the 1960s and 1970s declined in the following 40 years as the world looked to other energy sources. But in the last few years, as many existing experts near retirement age and there’s a shortfall of younger engineers to replace them, a war for talent has begun — which will exacerbate the existing workforce shortage.

And another risk added to the industry’s future top 10—failure to innovate or meet customer needs, ranked number seven—is highly correlated with workforce shortages and the ability to secure specialized talent. 

How Can Construction and Real Estate Organizations Mitigate These Risks Effectively?

Because shoring up the industry’s workforce is central to its short- and long-term success, companies should have strategies in place to recruit new members into the workforce. Such strategies should include reaching out to a broader pool of workers, investing in training and apprenticeships, and partnering with other organizations to raise awareness of employment opportunities in the industry. Companies should also ensure they have a strong people strategy in place with clearly communicated total rewards and a personalized employee value proposition (EVP)—a key means of attracting and retaining a diverse and talented workforce.

Because construction companies work on a project-by-project basis and face a series of overlapping and interconnected risks, they should view each project as a complex enterprise with risks that need to be identified, assessed, quantified and mitigated. This approach to enterprise risk management comprises risk transfer, thoughtfully ensuring qualified staffing for projects, a thorough understanding of cyber posture and integrating the effects of climate change into operation and supply chain design. 

Finally, contractors should ensure that they are aware of the financial health of their subcontractors so that they understand their liquidity needs and can circumvent potential complications.

Increasing cash on hand can help construction companies mitigate the risks of an economic slowdown by making sure their financial obligations are met if revenues decline. Companies with adequate liquidity can also prioritize investments in innovation and diversifying revenue streams. And whether achieved via new investment strategies or broadening supply chains and customer bases, diversification can help construction companies weather economic slowdowns and slow recoveries.

¹  https://www.abc.org/News-Media/News-Releases/construction-workforce-shortage-tops-half-a-million-in-2023-says-abc
²  https://globalnews.ca/news/9888297/canada-losing-construction-jobs-housing-shortage/
³  https://www.ituc-csi.org/more-than-two-million-workers-will-be-needed-in-the-construction-sector-in-europe-by-2030

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