Where Does COVID-19 Leave Contractors Concerning Future Projects?
There is no shortage of articles and commentary on the impacts of COVID-19 on existing construction projects. These articles have predominantly focused on the recovery of costs and time for COVID-19 related impacts, such as supply chain disruption, project delay, and labor inefficiencies. Unfortunately, there isn't always a clear road to financial relief, as recovery is generally dependent on specific contract terms and individual fact scenarios. An equally interesting question, however, is what impact will this pandemic have on the development of future projects.
Back in the late spring and early summer, economic reports were showing that the construction sector was slowing, which was supported by falling employment figures and the limited number of new construction project starts being projected, as reflected in the Architectural Billings Index, or ABI. AIA states, “The ABI serves as a leading economic indicator that leads nonresidential construction activity by approximately 9-12 months.” The ABI is derived from the share of responding architecture firms that report a gain in billings over the previous month, less the share reporting a decrease in billings, presented as a score between 0 and 100. Any score below 50 means that firms with decreased billings outnumbered firms with increased billings. ABI scores over the past several months had been hovering in the low to mid 40’s. The negative reports, however, seem to be softening and there are some recent indicators that construction activities may be coming back, albeit slowly. Whether this can be sustained is unknown, but there is room for more optimism about the construction industry in general.
One area that has improved, and is showing signs of further improvement, is the large multi-family market. Although the market is certainly not as robust as a year ago, there are new projects coming online in several states. The one caveat is that lenders are often requiring a larger equity stake from owners. In addition, recent price increases in lumber – likely due to reduced production from lumber mills due to COVID-19 – may cause owners to re-evaluate their project budgets and scope. Infrastructure projects (other than possibly new P3 projects) are also showing promise, which is particularly true for road projects. Federal government projects are also moving forward. The healthcare construction market, on the other hand, seems to be more cautious, particularly when it comes to larger projects. This is primarily tied to there being less cash on hand for the major healthcare providers due to losses in revenue from COVID-19. On top of all of this, the fact that the US is in a very volatile election year certainly has some owners more cautious about committing cash, or taking on more debt, to fund capital improvements. Once the election cycle is complete, things should become clearer in projecting new construction activity.
For those construction companies that have a sufficient backlog of work, they are well-positioned to play the wait-and-see game a little longer. For those scrambling to bring in work, it becomes a little more problematic. Any time the construction market contracts, it is important for construction companies not to get caught up in getting work at all costs, just so they can maintain cash flow and keep the business moving. Specifically, construction companies may look to expand into new markets hastily – such as, branching into state and federal public markets, without the requisite experience or personnel – or they take on new work at little or no fee. These were the mistakes made frequently during the 2008 recession. The problem is that these risks (mistakes) often came at a huge price, such as heavy financial losses and bad debt that could not be remedied. As one long-time construction executive said, most construction companies are bankrupt long before they ever realize it; this is largely due to the illusion that cash flow can create. Moreover, these types of risks can have resulting impacts for years on the construction industry as a whole. COVID-19 has already cost the construction industry tremendously; we need to be careful not to exacerbate the problem with hasty decisions.