Fighting Capital Erosion

In the first quarter of 2020, prior to the onslaught of the pandemic, the nation’s construction industry was thriving, adding more than $900 billion in gross domestic product (GDP) revenue to the United States economy. Both this revenue and high employment levels were the best the industry had seen since 2008.

Then COVID-19 reached the U.S., causing the industry to lose both billions in GDP revenue and a significant number of workers. Unlike the 2008 recession, the industry seemed well-positioned to weather the economic shock. It appeared that the overall industry had improved since 2008, with better controls over financing, enhanced levels of credit capacity and generally healthier controls over operating costs. The CARES Act and related Paycheck Protection Program (PPP) loans provided many firms with some much-needed financial support. And since then, there have been additional stimulus packages, including the most recent $1.9 billion program that hopes to improve the economy and the construction industry.

Best-in-class contractors made adjustments to operations and took measures to more accurately match new operating costs to the recalibrated construction economy. But, for contractors who were not as stable or proactive, things gradually became difficult to manage. Construction companies that focused on retail, hospitality, entertainment and the education sector were most exposed to the risks and dangers of the crisis.

The entire industry continues to be affected by supply chain delays, permit postponements and increased bidders at bid day, all of which have put a significant amount of pressure on margins. Ongoing capital erosion is a common theme — so how can construction business owners take control in the second half of the year?

Why 2021 Could Create a Rocky Foundation

To compound some of the obvious challenges to the construction industry, 2021 is showing signs that the relative neutrality the construction industry enjoyed may not continue. Lagging economic indicators have revealed the two main challenges to the construction industry: less availability of work and longer bid lists. Contractors must be careful when considering new projects or when seeking refuge with work in new geographic areas, new market segments, job size and the overall risk of financial loss on projects.

Most regions have seen a decrease in project releases, which has dramatically reduced the pipeline of new work in 2021. This delay or disruption in construction projects is compounded by an increase in overall bidding competition. The bright spots to offset this anticipated decrease will likely be carried by construction segments like residential and health care construction, and significant fulfillment-center projects for Amazon and other large public companies. Those sectors continue to see a high level of growth. Additionally, the industry will likely see infrastructure bills put in place to try and jump-start the heavy civil construction segment.

At the same time, a steep rise in material costs and the delayed delivery of those materials from national and foreign producers have thrown a wrench in project timelines. From an international perspective, there will likely be potential supply chain disruption from such events as the massive cargo ship that blocked the Suez Canal.

In addition to notable supply challenges, the construction employment sector, already a challenging issue for contractors prior to the pandemic, has seen a dramatic deterioration in employment of skilled workers.

With Uncertainty Everywhere, Be Ready for Anything

The various stimulus acts, including the $1.9 billion American Rescue Plan Act of 2021 and related PPP loan programs, have provided some relief to the construction industry. But it’s imperative that owners be prepared for any sudden changes to the 2021 market by maintaining cash reserves, line of credit availability and have cost curtailment lists ready to go at a moment’s notice.

Owners and contractors should also have open, frequent discussions with their financial partners, including accountants, banks and surety firms, to communicate current operations. They can avoid problems by discussing potential changes, negative or positive, that could occur down the road. While many contractors may have finished strong in 2020, even with COVID-19 in full force, this year is bringing its own set of challenges. Firms must properly evaluate the current, ever-changing economic impact of this crisis and adjust their financial projections and scenarios for 2021.

Lastly, the biggest mistakes construction business owners and contractors can make right now is not having multiple contingency plans, and not properly evaluating new jobs when bidding. Just one wrong job or bad bid could be the difference between survival and financial distress.

The pandemic continues to be a fluid situation in which things seem to change and shift with each new day. As summer approaches and new projects emerge, cautious optimism should be the best way to help one of the most important industries get back on its feet and help fuel the nation’s post-COVID-19 comeback.