The 2024 State of the Construction Industry and the Role of Factoring: A Look Ahead
Written by: Curt Powell, Executive Vice President, CapitalPlus Financial Services
With 2024 bringing high material costs and regulatory shifts, the U.S. construction industry is experiencing both opportunities and pressures. Infrastructure and residential projects continue to fuel growth, yet longer payment cycles and market fluctuations strain contractors' cash flow. Industry-specific factoring solutions provide vital support, enabling contractors to meet demands while managing financial complexities unique to construction.
The Current State of the Construction Industry
Construction spending in 2024 has seen consistent growth, reaching an annual rate of $2.13 trillion as of August, a 4.1% increase year-over-year. During the first eight months of 2024, construction expenditures totaled $1.43 trillion, up 7.6% from the $1.33 trillion spent during the same period last year.
Private vs. Public Spending: Private construction remains dominant, accounting for approximately $1.64 trillion annually. However, residential construction has dipped slightly due to higher mortgage rates, currently around $900 billion. Nonresidential spending, driven by demand for healthcare, educational facilities, and infrastructure, grew by 3.6%.
Public Sector Impact: Public construction spending, particularly on highways, educational facilities, and public safety projects, has increased by nearly 7.8%, signaling a renewed focus on infrastructure development.
Factoring's Role
Factoring remains a critical tool for construction companies managing cash flow, especially with payment cycles elongated by retainage or milestone-based contracts. Unlike other industries with shorter payment terms, construction companies often face delays that can significantly impact working capital while still having to meet payment obligations to subcontractors and suppliers to maintain relationships and secure discount terms.
2024 Year in Review: Significant Developments in Construction
This year has brought several developments affecting the construction landscape:
Policy and Economic Drivers: The Infrastructure Investment and Jobs Act continues to bolster public infrastructure projects, providing a buffer against some of the challenges posed by rising interest rates. This legislation, alongside growing priorities in sustainability and resilience, has increased demand for technologies like modular and offsite construction, which offer greater efficiency and environmental benefits.
Materials Cost Trends: Prices for materials such as steel and lumber have stabilized from the volatile highs of 2022-23 but remain elevated, affecting overall project costs. The Producer Price Index for construction materials showed a moderate annual increase of around 3% in mid-2024. Although this growth is relatively contained, suppliers have adjusted their terms in response to past price instability. Many now require large upfront deposits for orders, and some have ceased offering NET terms at all, opting instead for payment upon delivery.
Shifts Among Traditional Lenders: Traditional lenders, including banks, have become increasingly reluctant to work with construction businesses. This trend, evident during the economic downturn of COVID-19, has lenders not only tightening approval criteria but also, in some cases, ceasing to work with construction clients altogether—even longstanding clients. This shift has led contractors to seek alternative financing options, such as factoring, to bridge working capital gaps.
Factoring Insights
As contractors grapple with delayed payments and rising project costs, the industry's reliance on factoring has intensified to bridge cash flow gaps. Unlike other sectors, where invoice terms are shorter, construction's extended payment timelines make specialized factoring solutions particularly valuable. By leveraging factoring, contractors can accelerate cash flow, improve working capital, and maintain operational efficiency, even in challenging economic conditions.
Additionally, factoring gives contractors the flexibility to increase their funding facilities by working with additional debtors. The more diversified a contractor's portfolio, the easier it is for a factoring company to increase their funding facility. This is because a factoring company places more emphasis on the contractor's clients rather than solely on the contractor's financials. Unlike a traditional lender, which focuses on the contractor's financials and offers a fixed facility, a factoring company can fluctuate their funding based on the client's current and future needs.
What's Ahead: 2025-26 Construction Industry Projections
Looking forward, there are several key trends and challenges likely to shape the industry:
Projected Growth: Lower interest rates anticipated in late 2024 and 2025 are expected to stimulate a rebound in residential starts, potentially increasing construction spending by 5-8% in 2025. Public sector investments in infrastructure will likely drive growth in nonresidential construction as well.
Challenges to Watch: Labor shortages remain a concern, with the Bureau of Labor Statistics predicting continued high demand for skilled workers. Additionally, evolving building codes and regulatory requirements could affect project timelines and costs. The 2024 U.S. election outcome will also shape the construction landscape, particularly in areas related to infrastructure, labor policy, and environmental regulation. New policies on tax incentives, labor rights, and federal infrastructure funding could either stimulate or constrain construction spending. Federal support for infrastructure and affordable housing often depends on political priorities, and any policy shifts could redirect or accelerate funds toward specific types of projects, affecting contractors' pipelines and bidding strategies. Changes to immigration policy could further influence labor availability, especially in regions where immigrant workers are essential to meet demand.
Materials Pricing Volatility: While prices are expected to stabilize, any disruptions in the supply chain could cause fluctuations. Contractors may need to manage these risks by optimizing procurement strategies.
Factoring in the Future
Factoring will likely play a larger role as economic uncertainties persist. As more projects receive federal funding, companies will need factoring solutions that cater to government contract compliance and public works project requirements. This increased activity, however, will require factoring companies to have a deep understanding of legal and financial complexities inherent to the construction industry.
Understanding the Nuances of Factoring for Construction vs. Other Industries
Construction factoring stands out from other sectors due to several unique characteristics:
Longer Payment Cycles and Cash Flow Gaps: Retainage, milestone payments, and lien rights significantly extend the time it takes for construction invoices to be paid.
Compliance and Lien Laws: Factoring companies in the construction sector must navigate the legal complexities of lien rights and bonding requirements, essential for safeguarding contractors' payment rights. Adding to the challenge, lien laws vary by state, making compliance—along with the associated paperwork, filing, and deadlines—a taxing process for those not specialized in this area.
The Need for Industry-Specific Expertise: Factoring companies that specialize in construction, like CapitalPlus, are better equipped to handle these challenges due to long-standing experience and deep understanding of industry-specific risks and legal requirements.
"Construction projects come with unique financial complexities that standard factoring companies are unprepared to handle or simply do not want to deal with," says Curt Powell, Executive Vice President of CapitalPlus. "We often receive referrals from these situations. Because we have been focusing solely on construction for so long, referring companies are confident that we will be able to help their client."
The construction industry in 2024 is marked by resilience in the face of economic headwinds. With spending growth projected to continue, albeit at a slower pace, the role of factoring remains crucial for contractors navigating long payment cycles and rising costs. As companies plan for the future, specialized expertise in construction factoring will be indispensable.
The views expressed in the Commercial Factor website are those of the authors and do not necessarily represent the views of, and should not be attributed to, the International Factoring Association.