Construction: Supply and Demand 101

In the previous article, I wrote about the business side of contracting. For better or worse, these days contracting is more of a ‘business’ than ever before. In the old days, a tradesperson could lean heavily on the crutch of their craftsmanship and not concern themselves too much with the business side of things. But these days, to survive and thrive as a contractor in the construction industry, you really need to get the business aspect down pat. Part of this is getting a good grasp on the economics of the industry.

Let’s brush up on some business theory and take a look at one particular aspect of construction economics that may surprise a lot of contractors in the early days: Supply and Demand dance to a different beat in the construction industry. Here’s why…

Construction: Supply and Demand 101

Supply & Demand - but not as You Know it Versus Reward - but not as You Know it

It’s no secret that in most business types, demand is affected by price changes. We know that demand for a service or product will usually increase quickly if there is a drop in price – or – it will decrease quickly if prices rise. This, in turn, usually affects supply. But construction is a little different, and contractors need to be aware of the relationship between supply and demand in their backyard.

In construction contracting, demand drops if prices increase. And when we say ‘prices’ we’re talking about the cost to owners or “customers” for our services, not the price of labour or materials. So why does this happen? Well, because the decision to build a new home or commercial property is a huge commitment, it’s considered at length, costs are carefully compared, and ultimately the project can be delayed or altered if the timing or market isn’t right. Meaning owners can decide to hold off on building until the market is better – or even consider alternatives such as renting short-term or renovating an existing property. 

However, this doesn’t mean that ‘supply’ – i.e. the number of contractors in the game – is equally impacted. You don’t see contractors pulling up stumps and putting down the tools because demand has lessened. These are tradespeople who have committed years of their working life to learning their trade and gaining experience – and they’re not as likely to be considering a career change when they’ve committed so much time and training to their trade. So the supply-demand phenomenon differs a bit there in comparison to other industries.

And it’s for this same reason that you don’t see a rapid increase in contractors – or  ‘supply’ – when demand goes up. There are no quick ways into contracting in the construction industry, no shortcuts. You can’t simply do a weekend course and become a certified and skilled professional in this industry. And let’s face it, we don’t see as many kids these days chomping at the bit to get into an apprenticeship in the construction trades. Industry statistics show that proportionally, there are fewer kids entering construction apprenticeships today than there were 20 years ago. 

However, interestingly enough, there are substantially more construction companies and contracting firms these days than there were 50 years ago. With the rise of university degree-wielding construction professionals with little-to-no field experience – you can see how this has come about despite a drop in apprenticeships. 

With so many more construction companies in the game – and the fact that many apprentices or employees will eventually go out on their own and start their own business – it’s highly unlikely we’ll see a drop in ‘supply’, and therefore competition. So naturally, we contractors have more competition but less profit to be made due to the need to remain competitive – which usually results in decreased profit margins. 

Construction: Supply and Demand 101

And then, there's COVID, Wars, and Materials/Supply-Chain Disruption

As if we didn’t have enough to challenge us, 2020 threw us a global pandemic-sized doozy, that lasted two years and is ongoing, followed by a terrible war in Europe.

Covid has brought on this paradox of increased demand coupled with restricted supply, however, this wasn’t entirely caused by covid alone. You see, the Australian construction industry has been battling a whole host of pressures since well before the pandemic. And interestingly, the government’s attempts to help builders and their customers through this period have – in some ways – added more pressure with unpredictably popular initiatives like HomeBuilder. We’ve seen a huge increase in global demands for building materials as well as restrictions and delays on global freight movements. As a nation, we’re left with trade and materials shortages, and the recent War in the Ukraine, and world instability will continue to complicate this matter even more.

Do Your Homework

So what does this all mean for you on your construction journey? Well, we can’t do all that much about a global pandemic, or warring nations. As much as we contractors love a challenge, we can all agree that that much of these global catastrophes are for the most part out of our hands. But at the end of the day, we can really nail the stuff within our control. Simply put, you need to do your homework – there’s no way around it if you want to get into this game for the long haul:

  • It’s all about the Law of Cycles: Having solid, efficient systems in place means your work cycle runs smoothly – the better your business runs, the more quality work you get done, and the more business you get through the door.
  • In a world of mega-corporations and big players, be a nimble efficient and effective operator: Even though you may be small, you can still beat those that are large and clunky and slow. Not only do you need strong systems for smoother running, but you need to maintain the speed and efficiency needed to get quality projects done on time and within budget.
  • In addition to these points, you need to take an informed and disciplined approach to price and estimating. With such high competition, it can be tempting to cut down your profit margin in order to get the job, but can you really afford this? Constantly revising your estimating process will help too. You can’t afford to be caught out with unexpected costs or take on jobs that aren’t beneficial to your business. 
  • Another thing to think about – risk. There’s a reason the term ‘calculated risk’ exists. Risks are not all equal. You really need to look at the level of risk in a project and how this can impact both the job, financially, and your overall business, professionally. Learning when to say no to a job is part and parcel of running a successful long-term construction business.

A bit of contracting business theory to help you navigate the world of construction contracting applied consistently can go a long way. Making the leap from start-up to a successful company isn’t the easiest journey of your life, but I still stand by my original claim: you are still a part of the best industry in Australia. And as a certain orange guy with a red tie and bad hair once said, ‘Nothing is easy, but who wants easy?’

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