The largest expenditure when constructing a home is framing materials, primarily lumber and steel. The majority of the imported lumber used in U.S. home construction comes from Canada and is currently tariffed at a 14.54% rate, but this could rise by an additional 25% if current tariff exemptions on this product are revoked. Currently, all steel imports coming into the U.S. are charged a minimum 25% tariff. The largest providers of steel to the U.S. are Canada, Mexico, and Brazil. 

Other major home construction expenditures also rely heavily on imported products to meet demand. Concrete is sourced domestically, but also from Mexico. Roofing materials, siding, windows, and doors can all be sourced domestically, but much of this supply currently comes from Canada and China. Many plumbing and electrical components are imported from China, Mexico, Germany, and Canada, and many HVAC systems are imported from Mexico, China, and South Korea.

Including the recently announced reciprocal tariffs, the U.S. is now imposing a 104% tariff on all goods imported from China, 25% on goods from South Korea, 20% on goods from the European Union, and up to 25% on Canadian and Mexican goods that are not specifically excluded from the recently imposed reciprocal tariffs. Brazil curiously seems to have received only a 10% reciprocal tariff.  Given the magnitude of these new tariffs, there is no question that housing will be more expensive to build, maintain, and improve for Americans in the coming months. 

Architectural businesses that import critical materials from abroad should determine if it is possible to source these materials domestically. If domestic production would prove uneconomic, business owners will need to pay close attention to the tariffs being levied and which countries they are impacting most.  Working quickly to move production from one country to another could prove valuable should certain countries receive stiffer tariffs than others with similar production capabilities.

Growth and Expansion

Architectural businesses should be judicious in their expansion plans right now. In uncertain economic times it is important to focus on services that provide a demonstrated value to customers. Before expanding services or opening new office space, it is important to thoroughly test the market to determine demand and pricing power.  Make sure that anticipated sales will more than cover anticipated expenses and be sure to have access to sufficient capital to cover several months of operating expenses in case sales take longer to materialize.

For businesses who borrow money to purchase inventory, acquire equipment, and fund expansion, it is important to maintain multiple financing relationships.  Banks have been pulling back from lending to small businesses, and having contacts at multiple lending institutions can help secure the fastest and lowest-cost capital when borrowing is required. We have also seen the equipment finance market impacted by banks’ reduced willingness to lend, making it more difficult for businesses to finance their equipment purchases. If businesses are having trouble obtaining financing they should:

1. Speak to as many potential financing sources as possible
2. If purchasing equipment, work with the equipment vendor to explore financing options through that vendor’s financing partnerships

3. Talk to the local bank to understand their lending criteria and collateral requirements for commercial loans

4. If those resources don’t prove fruitful, there are a number of independent non-bank lenders that are willing to lend money quickly, albeit at higher rates than a bank

Fortunately, businesses with strong credit profiles and a history of financing essential use equipment have quality options both with banks and non-bank lenders.  However, business owners should expect a higher cost of capital than in years past and therefore should calculate the cost of the financing relative to the expected profits that the financing will generate, to ensure a positive return on investment.

Cutting Costs Through Efficiency

There is no silver bullet for cutting costs without compromising efficiency.  However, architectural businesses looking to reduce overhead while maintaining or increasing efficiency will likely need to do so through automation. Accessing new technologies that allow businesses to operate with fewer employees and faster processes will make the business leaner and more scalable. Examples of scalable technologies being employed by businesses today include: installing software that can better manage inventory; implementing robotic processing tools to perform repetitive tasks inside warehouses or processing facilities; and deploying AI tools to allow employees to access critical information and draft standard communication faster and more accurately.  These investments save time and allow the business to operate with fewer employees, reducing friction created by growth and allowing the business to operate at a lower cost-base.

With ongoing inflation impacting the architectural sector, it is prudent for business owners to look for ways to lower overhead costs, capitalize on potential efficiencies, and consider offerings that may be more appealing to customers in a slowing economy.  Here are some things to consider:

• Inventory: Assess current inventory levels and review job needs frequently so that you aren’t holding more inventory than you need to operate. 
• Cashflow: In uncertain economic times, it is important to pay close attention to cashflow.  Businesses should ensure that they have sufficient cash on hand to weather a prolonged period of reduced sales.  This means exploring improved payment terms with vendors, working with financing companies to understand what financing is available to the business, and looking closely at ways to turn fixed expenses into variable ones.