Author: Jeff Ash, Vice President, Commercial Banking

Mechanical contractors are heading into the second half of 2026 with full order books and project backlogs that often extend beyond eight months. With some large mechanical contractors reporting record backlogs, strong business demand represents an opportunity to increase profitability. However, labor shortages, material cost pressures and cash flow challenges will continue to test firms in the years ahead.

Let's look at major trends shaping the mechanical contractor market and discuss steps companies can take now to stay ahead.

Key Takeaways

• Data center construction continues to drive strong demand for mechanical contractors.
• Labor shortages remain one of the industry's most significant challenges.
• Material costs and tariff uncertainty continue to pressure margins.
• Long payment cycles can create working capital constraints.
• Treasury and payment solutions can help contractors improve cash flow and financial flexibility.

Strong Demand Creates Opportunities, but Cost Pressures Persist

Demand for mechanical contractors remains strong, driven largely by continued investment in data centers, along with healthcare and manufacturing construction. Recent data from Associated Builders and Contractors (ABC) shows construction backlog remains historically high at more than eight months, while contractors with more than $100 million in annual revenue report an average backlog of just over 12 months – largely fueled by ongoing data center construction. While the outlook remains positive for many larger firms, growth expectations are less certain for smaller contractors that may not benefit from the same project mix.

Material pricing remains a critical factor for large and small firms. While costs have moderated from peak inflation levels, demand from large-scale projects and ongoing tariff uncertainty continue to place upward pressure on pricing, particularly for prefabricated metals and other key construction materials.

Adding to the challenge, tariff policy has remained difficult to predict. With tariffs imposed, challenged and revised over short periods, contractors may struggle to lock in stable material costs or bid projects with confidence.

Material pricing could have a long-term impact on certain construction sectors. Residential starts are expected to continue declining through 2026, while portions of the non-residential market – outside of data centers, healthcare and manufacturing  – may soften before regaining momentum in 2027.

As market conditions evolve, contractors may benefit from re-evaluating project mix and pricing strategies. Expanding into growing sectors or increasing maintenance and retrofit work may help create more stable revenue streams while reducing exposure to market fluctuations.

Labor Shortages Force Contractors to Do More with Existing Teams

According to the Bureau of Labor Statistics, approximately 42,500 HVAC-related positions have gone unfilled annually for more than a decade. That labor shortage shows little sign of easing, particularly as large-scale data center projects continue to increase demand for specialized mechanical talent.

Research from Deloitte suggests that growth in data center construction will require a significant number of HVAC and ventilation specialists, placing additional strain on an already limited labor pool. For many contractors, especially union firms, the challenge extends beyond recruiting workers. Retaining experienced employees between projects is increasingly important in a highly competitive labor market. Contractors may be reluctant to release skilled workers at the end of a project if there is uncertainty about whether those employees will be available when the next project begins.

To navigate these challenges, many firms are focusing on workforce efficiency through:

• Cross-training employees to increase flexibility across projects
• Retaining skilled workers between project cycles whenever possible
• Using workforce management and scheduling software to anticipate labor gaps
• Expanding prefabrication capabilities to maximize existing labor resources

Taken together, these strategies can help contractors accomplish more work without adding headcount.

Payment Delays and Long Lead Times Put Pressure on Cash Flow

According to ServiceTitan's 2025 Commercial Service Market Report, which surveyed more than 1,000 commercial trades business owners and executives, longer material lead times and rising costs rank among the top challenges facing contractors today. Forty-five percent cited rising labor and overhead costs as a significant concern, while 31% pointed to increasing material lead times.

At the same time, slow customer payment continues to pressure cash flow. According to Rabbet's 2024 Construction Payments Report, 82% of contractors regularly wait more than 30 days for payment. For HVAC and mechanical contractors working on commercial projects, days sales outstanding can often stretch from 45 to 90 days.

When cash goes out to secure materials, but collections and product delivery remain delayed, contractors can face significant working capital constraints. Managing these timing gaps effectively can be just as important as winning new business.

Fortunately, a growing range of treasury and payment solutions can help mechanical contractors improve cash flow visibility and accelerate the movement of funds. Digital payment options, automated receivables processes and electronic payment methods can reduce administrative burdens while helping firms gain faster access to incoming payments.

Virtual cards are one example worth considering. Rather than waiting on paper checks, contractors can receive electronic payments accompanied by detailed remittance information, making reconciliation faster and more efficient. For contractors paying suppliers, virtual cards may also provide extended float and opportunities to earn rebates on qualified spending, helping offset some operational costs.

As the construction industry continues to modernize payment processes, digital payment tools can play an increasingly important role in strengthening liquidity and improving financial flexibility.

Positioning Your Business for Long-Term Growth

Mechanical contractors continue to benefit from strong demand, particularly in data center, healthcare and manufacturing construction. However, labor shortages, material cost pressures and extended payment cycles will require firms to remain disciplined in how they manage operations and cash flow.

By investing in workforce efficiency, evaluating growth opportunities carefully and implementing tools that strengthen liquidity, contractors can position themselves to capitalize on market opportunities while navigating ongoing industry challenges.

FNBO works with mechanical contractors to provide financing, treasury management and payment solutions that support growth, improve cash flow visibility and help businesses remain resilient in a changing market. Reach out to our commercial banking team to learn more.

About the Author

As a vice president of Commercial Banking, Jeff is motivated by his clients’ zeal for their business endeavors and finds it rewarding to be a part of their success.  He works with mid-market companies on acquisition and expansion strategies and assists them with their equipment, line of credit, real estate and SBA financing needs.