How do rising interest rates affect the construction industry?

How do rising interest rates affect the construction industry?

The issue of rising interest rates has home builders concerned about inflation, higher building costs, and challenges to the economy, which are expected to last for the next few years. The Consumer Price Index (CPI), the broadest measure of inflation, shows an increase of 7.9% in inflation over the last 12 months, the highest in 40 years.

In an effort to stall inflation, the Federal Reserve has been lifting interest rates this year, which has had a ripple effect on all industries. Here are some construction industry challenges that have been caused by higher interest rates.

Supply chain issues and increased costs for building material

Although interest rate increases can help with controlling inflation to a certain extent, it can also exacerbate supply chain issues, driving up prices for building materials. Higher interest rates mean that overall, construction projects will become more expensive, particularly affecting the building material market.

Rising construction costs have resulted in an increase in pricing for materials like lumber, steel, concrete, and oriented strand boards (OSB), beginning during the pandemic and continuing to this day. In fact, data from the Bureau of Labor Statistics points to an increase in building material prices by 20% year-over-year—that’s 31% more than January of 2020.

Add to that the limited availability of various building products, which has not been able to keep up with demand. Along with rising construction material costs, builders waiting for longer periods of time for materials to be delivered have caused a record number of new homes under construction to be delayed and remain pending.

To combat increased costs due to higher interest rates, construction firms will have to adjust their project pricing and realign their resources accordingly.


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Impacted cash flow

The amount of working capital that a construction firm has to work with is often limited, so when interest rates rise, companies have even less flexibility with cash flow. When the additional money needed for contingencies and loan repayments just doesn’t exist, construction firms either need to delay payments or self-fund (neither of which are ideal).

The best way to deal with this issue is to be rigorous with receiving payments from customers, ensuring that invoices are sent out as soon as possible and that they’re paid on time, following up with customers when an invoice is due. You may also want to consider reviewing any lengthy payment terms, reassessing whether it’s viable given your current circumstances.

Rising interest rates can change the way you deal with suppliers as well. It’s better to fix prices for acquiring raw materials while they’re still relatively low, committing to a certain amount with a supplier rather than relying on fluctuating rates to get the best possible price.

More expensive loans and difficulty securing funding

It’s not uncommon for companies to borrow when interest rates are low to invest and increase profitability, earning the money back on projects to pay off the loan and turn a profit. Rising construction costs due to higher interest rates mean loans will be more expensive.

While smaller businesses with fixed rate loans will be impacted less, company owners that take out loans with fluctuating interest rates may have greater difficulty repaying them. This can discourage companies from taking out loans as it makes it harder to secure funding, ultimately lowering profit margins.

As a result, businesses will have to reconsider where they’re directing their project resources, which could involve moving away from investment and innovation.

The possibility of stagnant industry growth

Home construction costs rising means that companies will be less likely to expand and invest, slowing down industry and company growth due to lack of available funding.

There’s also the concern of higher mortgage rates possibly impacting the demand for new housing. Rising housing costs are already a major problem for would-be buyers—interest rate hikes are likely to knock potential buyers out of the market completely. In fact, new home sales declined by 2% in February 2022, and it’s estimated that lack of housing affordability was a major contributor.

Future sales are expected to drop further, with declines creating concern for decreased demand, which could significantly impact the construction industry. For now though, this remains an issue to be further surveyed.

The level of housing demand, affected by mortgage and interest rates, will be a great factor in the construction industry’s future growth.


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Combat rising interest rates with Bridgit Bench

To keep up with rising construction costs and interest rates, you’ll need a way to efficiently manage your resources and optimize your workforce utilization. One of the best ways of doing so is by modernizing your workforce management process and adding to your existing tech stack with Bridgit Bench, a workforce management solution that allows you to track project progress and manage construction personnel.

Our cloud-based organization dashboard allows you to plan your workforce strategically, grow and retain your top talent, and realize the full potential of your employees while leveraging historical project data and making informed bidding decisions.

Access valuable insights like unfilled roles to know which project roles are unfilled, filtering results to prioritize allocations. Reporting lets you view workforce utilization rates by title, region, or your own parameters, and a project breakdown shows you your workforce allocation on current and upcoming projects.

Worried about your project’s resources? General contractors can use Bridgit Bench to optimize their construction resource planning and management. A robust allocation dashboard gives you immediate access to daily resource allocations, plus the resource statuses of current and future projects.

Plus, our platform integrates with various project management, HRIS, and CRM platforms, including Salesforce, Procore, bambooHR, Autodesk, and HubSpot.

Benefit from centralized labor data, consolidating your project and field operations into one easy-to-use solution.

Choose Bridgit today!


Michel Richer - Content Marketing Manager

Michel Richer

Michel Richer is the Content Marketing Manager at Bridgit. He got his start in the construction industry at an early age with a local restoration company. Michel is driven to propel the construction industry forward by helping to eliminate outdated, ineffective processes.

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