Where Have We Been? Where Are We Going? An Outlook on the Post-Pandemic Construction Environment
The results of the 2020 Marcum National Construction Survey are in, and the construction industry’s outlook for the remainder of 2020 and beginning of 2021 remains cautiously optimistic despite the COVID-19 global pandemic. Ability to find skilled labor, healthcare expenses, and material costs remain the top concerns for the industry, while “lack of future work” joins the list.
The survey conducted by the national accounting firm Marcum LLP was conducted in the first quarter of 2020 and polled over 400 construction companies and service providers in various sectors of the industry. To account for the effects of the pandemic, the survey separated responses into “pre-pandemic” (responses received before March 15th) and “post-pandemic” (responses received after March 15th).
Some of the key findings of the survey include:
- 90% of respondents reported their ability to receive project financing has increased or stayed the same as compared to last year
- 47% of respondents reported banks required bonding on less than 20% of their jobs
- 82% of pre-pandemic respondents projected either the same or higher backlogs for 2020
- 67% of post-pandemic respondents projected either the same or higher backlogs
- Just over a third of respondents (36%) predicted they will increase expenditures in the next year
- 41% of pre-pandemic respondents chose “securing skilled labor” as the No. 1 threat to their businesses
- 29% of post-pandemic respondents chose “lack of work” as the No.1 threat to their business
- 51% of respondents are increasing compensation to address the shortage of skilled labor
- 85% of respondents said they were applying for loans under the Paycheck Protection Program (PPP) to mitigate impact of the virus on their businesses
- 56% of respondents said their top priority going forward is strategic planning
Marcum has characterized the phase we are entering as the “New Construction Environment.” According to the survey, the pre-pandemic economy was seemingly as good as it has been for many contractors; however, The New Construction Environment, or post-pandemic construction environment, is explained as the “mirror opposite.” Ultimately, in light of current economic trends, the second quarter of 2020 is projected to be the worst economic quarter in modern history.
While the long-term effects of the pandemic have not been fully realized, the pre vs. post-pandemic survey responses shed light on the industry’s perceived risk factors influencing the post-pandemic environment. Some of the identified risk factors include:
Shift and Lack of Construction Work: Lack of construction work climbed the list as one of the top concerns in the post-pandemic construction environment. In the short term, it is foreseeable that private sector building activity may decrease. There may be a reduced demand in construction for commercial office space, hospitality, and residential living space. Similarly, healthcare construction may see a decline as hospitals and healthcare systems experience lower revenue due to cancellation and deferral of elective procedures during the pandemic. Similarly, a decline in tax revenues may lead to a similar reduction in state and municipal public building activity.
Infrastructure Funding: Many states, including Ohio, are planning for infrastructure budget shortfalls. Record unemployment, extended tax deadlines and decreased economic activity, including a decrease in gas consumption, will likely contribute to reductions in future public construction budgets. While there has been bi-partisan interest in a significant federal infrastructure bill, it is less than certain whether relief is on the way.
Skilled Labor Shortage: Although historically a hot issue, the survey indicates that many contractors have become less alarmed by shortages in skilled laborers. Initially, 41% of pre-pandemic respondents listed “securing labor” as the leading threat to their business. But that percentage fell to 23% among post-pandemic respondents, with “lack of work” frequently taking the top spot.
Industry Competition: According to the survey respondents from both groups, the number of bidders per project remained relatively low. However, as new work slows, competition for projects will undoubtedly rise.
Increased General and Administrative Overhead: 36% of respondents overall predict they will increase expenditures in the next year.
Given the uncertainty that lies ahead, there is a newfound emphasis being placed on strategic and organizational planning within construction firms, as evidenced by the more than 10% increase in the number of post-pandemic respondents who selected strategic and organizational planning as the top priority for their upcoming year.
So how can you protect yourself in this post-pandemic construction environment?
- Protect your employees. Now, more than ever, it is imperative that employers review their employee manuals, safety programs/trainings, and emergency plans. Be sure to follow the CDC’s Interim Guidance for Businesses, including best practices for cleaning and disinfecting areas in the workplace, social distancing, and quarantining employees who have confirmed their exposure to COVID-19. If and when an employee has a confirmed case of COVID-19, work to quickly determine all other employees and/or third parties who might have been exposed to the COVID-19 positive employee. The CDC Contact Tracing Guidelines provide that in order to best determine other employees who were at highest risk to COVID-19 exposure, employers should ask the following question: Who worked within 6 feet of the sick employee, for 15 minutes or more, within the 48 hours prior to the sick employee showing symptoms? This has been referred to as the “6-15-48” Rule. Once identified, the CDC recommends that the “6-15-48 employees” of non-critical business self-quarantine for 14 days after their last potential exposure, maintain social distance, and self-monitor symptoms.
- Learn from the past. The construction industry was heavily impacted by economic slowdowns as a result of the 2008 recession, and many of the lessons learned then remain true in this post-pandemic construction environment. During this time, contractors should consider, among other things: (1) implementing flexible work arrangements (and therefore potentially reducing costs for physical space) when possible; (2) reassessing both business and strategic plans; (3) being hypervigilant when reviewing contractual risk; and (4) operating cost-consciously, and exercising disciplined spending when possible.
- Familiarize yourself with your contractual rights. Check the force majeure provision to determine terms governing, for example, time extensions and/or additional compensation. It will be especially helpful to know this information in advance should a project of yours face COVID-19 related impacts. For future projects, remember that COVID-19 is no longer an “unforeseeable condition”, and must be dealt with in future contracts accordingly.
- Promptly provide notice. If your project is impacted by COVID-19, promptly provide notice to any party with whom you are contracted in accordance with the notice provision in the contract documents. In your notice, you should reserve all rights to seek an extension of time (if contractually applicable), and also state with specificity: (1) the scope of the impact; and (2) the date on which the impact began.
- Be particularly mindful of profitability. At the risk of stating the obvious, when deciding what projects to undertake, focus on the work that will not overextend your company, and has the potential to yield a higher than average profit. In an environment where lending requirements may tighten, the number of new construction starts may decrease, and the ability to control schedule may be in flux contractors should resist the temptation to accept work that is below their target profit margin thresholds. This especially rings true for contractors with high overhead costs.
Please contact a BMD Construction attorney if you have any questions regarding the guidance above, or any other construction related questions.