District Bonding Publications

Is the Construction Industry Experiencing COVID-19 Side Effects?

Description

At the beginning of the pandemic in early 2020, while the majority of people stayed home, construction contractors (mostly deemed essential businesses at the beginning of the pandemic) benefited from lower traffic, readily available resources and longer project lead times. In-person pre-bids, kick-offs and status meetings took place over video conferencing. 

 

As the rest of the world adjusted and slowly returned to normal, the construction industry started to see the real impact of COVID-19 on business towards the end of 2020 and into 2021, and are now experiencing it even more in 2021. Over the past year, contractors have expressed concerns with the following: 

  • safety concerns with the virus spread in workplaces;
  • price escalations on material, additional costs, loss of revenue and payment delays;
  • construction contracts not factoring in material price;
  • material delivery delays and shortage of material;
  • project delays/cancellations; 
  • labor shortages in an already tight job market; and
  • delays in inspections and permitting.

The key question now is how long will these COVID-19 “side effects” linger? According to a PricewaterhouseCoopers CFO Pulse Survey taken in April 2020, the top three concerns engineering and construction companies had with COVID-19 included financial impacts, potential global recession and the overall impact on workforce. 

Many contractors were able to take advantage of Payment Protection Program loans, which in many cases helped strengthen their financial position. In many cases, however, PPP loans are the sole reason construction companies are in business today or not experiencing a significant loss in 2020. With jobs getting pushed back to 2021 and beyond, the PPP money is what kept employees paid and kept the company running while everyone else was staying at home. 

While the second round of PPP financing has been helpful in 2021, construction firms should be prepared for a potential economic downturn. Retention of earnings and refinancing of any current debt to take advantage of historically low interest rates will help stretch out payments and keep money in the company to withstand a challenging year or a bad project. 

While contractor balance sheets are still strong and qualifiable, obtaining a bank line of credit or increasing a current BLOC would be wise, especially during the pandemic, and well after while trying to ramp back up. Contractors shouldn’t wait until the company needs a line of credit to get one, as its often too late by the time they apply. 

Another side effect of the COVID-19 pandemic has been an increase in material prices. This has caused some projects to move quickly (to lock in pricing and push projects along before they increase) and in some cases, projects getting cancelled/delayed as they wait for the prices to level. Ensuring the construction contract includes price-escalation clauses for any changes in material pricing could help mitigate a spike in material pricing. 

While there are historical similarities in economic booms and downturns which contractors can come to expect, there are always new issues that arise which they cannot prepare for. Despite the unknown, preparing the company to withstand a challenging time is controllable and can help the company survive during a troubled time. Taking on profitable work, tracking projects properly, retaining earnings at year-end and maintaining an active and healthy dialogue with trusted advisors will help ensure the company’s success for years to come.