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Construction contractors, developers, and owners have had quite a year. Optimism heading into 2020 was quickly replaced with public health and economic crisis not seen in 100 years. For its part, construction has adapted well despite significant setbacks, including both project delays and cancellations. Job sites are arguably safer than before, operations are leaner, construction technology adoption has surged, and financial management and oversight have improved. Heading into the fourth quarter of 2020, contractor optimism remains cautious. Construction backlog is down 0.5 months from August and 1.5 months from a year ago. The construction industry is expected to take a two percent hit in 2020 and three percent in 2021. Generally, contractors are not enthusiastic right now but are not overly fearful, either. So, where does the industry go from here?
Optimism Builds in Some Sectors
When state and local government agencies issued COVID-19 shut down orders, construction was deemed essential, allowing work to continue on a limited basis. Every sector experienced a decline but to varying degrees. Healthcare is faring the best, with only a projected three percent decline year-over-year.
Several months into the pandemic, much of this has shown to be true in actual nationwide reporting. The top three sectors with continued growth are, in order, healthcare, government, and multifamily. The residential construction industry is also experiencing positive growth despite declines in consumer income. Sales of newly built single-family homes and new condos are up significantly compared to previous years.
Looking ahead to the future, many construction executives believe that “the market will be back in growth mode by the end of 2021 … [and] that the market will be growing in 12 to 18 months,” according to a report from Engineering News-Record. In 2021, healthcare, education, and manufacturing construction are all expected to grow at least slightly. Construction unemployment is also down, and most experts believe the industry has seen the worst of the COVID-19 side effects. Although the cost of lumber has skyrocketed, material pricing overall has either stabilized or been slightly reduced.
However, the outlook is not as positive for other sectors. Nonresidential construction is still expected to decline approximately 10 percent in 2020 and 2021. Commercial tenants’ changing estate needs are reshaping how commercial office space is used. Office vacancy rates are surging in most major metropolitan areas, and much of the existing space will not work for most companies anymore. So, while new commercial office space construction will mostly continue to decline for some time, there are opportunities for certain contractors with renovation and retrofit expertise.
Public infrastructure is still up in the air without a comprehensive federal spending bill. This year, public spending is still expected to go up about five percent, but not in 2021. When local and state governments are taking in less revenue, the outlook for new construction projects in this sector is unclear. Some sources point to the universal need for better roads and bridges, so core physical infrastructure investment may still increase, while social infrastructure projects are more likely to be put on hold.
A recent survey indicated that upwards of 85 percent of contractors “have been negatively impacted by COVID-19″ and are concerned about the long-term implications. Yet, many are still struggling with continued supply chain disruptions, altered project timelines, and a lack of available workers. Rising material prices is another factor that remains challenging for contractors to work with. Input prices were up again in September, and year-over-year increases in softwood lumber are 81 percent higher. Plumbing fixtures and supplies, nonferrous wire and cable, concrete, and asphalt prices were also up year-over-year.
Image source: Associated Builders and Contractors
How Contractors Can Respond and Adapt
2021 will begin with a cloud of uncertainty for many. The ‘new normal’ will persist for several more months, and the effects of coronavirus are likely permanently changing some aspects of work. Contractors must keep their eyes on the future and look for ways to adapt and thrive. A few areas emerge as ways to stay competitive, including:
- More widespread adoption of construction technology.
- Continuing to diversify supply chain partners and identify local suppliers when possible.
- Focus on construction education, especially for specialty trades as U.S. workers look to a possible career shift.
- Better assessment of financial and operational risks.
- Utilize financial modeling tools like cash flow forecasting to predict future spending.
In addition, contractors need to remain cautious in the bidding process for new work. Avoid the temptation to underbid just to secure the job; profit margins are already tightened, and a bid that is too low can end up costing more in the long run if there are unexpected delays or disruptions.
The COVID-19 pandemic has created unexpected challenges for construction companies but has also opened the door to new opportunities. As 2021 quickly approaches, it is essential to review operations, supplier relationships, contract terms, and scheduled projects to determine where risk lie and steps that can be taken to mitigate them. If you have questions about the information outlined above or need assistance with a tax or accounting issue, JLK Rosenberger can help. For additional information, call us at 949-860-9890 or click here to contact us. We look forward to speaking with you soon.