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Understanding Construction Backlog: The Hidden Impact on Contractors

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One of the biggest challenges for contractors is establishing a well-balanced, healthy backlog of work. A backlog is an indicator of financial health and stability for your business based on the total projects you have in the pipeline. Too much in the backlog and you could face problems like cash flow issues, increased projects costs, and scheduling obstacles. Too little? Your business is stuck in survival mode, scrambling with profit fade and retaining employees. Either way, profit margins are increasingly under pressure as project owners face high borrowing and project costs in the context of a slowing economy. 

We’ll take a deep dive into current trends influencing backlogs, how construction backlog affects contractors, steps to better manage your backlog for business stability, and how STACK supports a healthy pipeline of work.

Current Trends Influencing Construction Backlogs

The Associated Builders and Contractor’s (ABC) Construction Backlog Indicator reports the average backlog is 8.6-month average for commercial, 7.5-month for infrastructure, and 4.8-5-months for residential. Trends currently affecting these sectors include: 

  • Infrastructure Projects: The influx of government-funded infrastructure projects from the Infrastructure Investment and Jobs Act, including roads, bridges, and renewable energy initiatives, has increased backlogs, particularly for contractors involved in public sector work. 
  • Labor Shortages: Ongoing labor shortages in the construction industry are contributing to extended project timelines and higher backlogs, as firms struggle to hire skilled workers to meet demand. 
  • Supply Chain Disruptions: Although easing somewhat since the pandemic, supply chain challenges still impact construction timelines, adding to project delays and extended backlogs. 
  • High Interest Rates: Higher interest rates have a direct impact on the residential construction sector and have made borrowing more expensive for both homebuyers and builders, slowing the pipeline of work. 

Why You Should Analyze Your Backlog’s Health

  1. Cash Flow Challenges 
    Longer backlogs can result in delayed payments. When the average payment terms are already 120 days, you face reduced liquidity and increased financial strain. On the contrary, if there’s not enough work in the pipeline you’ll struggle with an inconsistent revenue stream.
  2. Increased Project Costs 
    Prolonged project timelines caused by backlogs can lead to cost increases for materials, fuel, and labor. When you have fixed-price contractors it’s unlikely clients will take on those costs, reducing your profit margins.  
  3. Impact on Reputation and Future Work 
    Extended delays in starting or completing projects can lead to strained relationships with clients, potentially affecting future business and referrals. 
  4. Project Cancellations or Postponements 
    In times of economic uncertainty, longer backlogs can result in project cancellations or postponements. Clients may decide to hold off on new projects until market conditions improve, leaving contractors with idle capacity. 
  5. Scheduling Complexity 
    Longer backlogs can complicate scheduling and leave you juggling overlapping projects. This can lead to inefficiencies, delays, and increased operational costs. 

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Steps to Effectively Manage Your Backlog

While maintaining a reliable backlog is challenging, there are steps you can take to stay financially and operationally stable when building your pipeline of work.