Construction Downturn – Temporary or Long-Term?
By Warren Hennagin, Partner, Assurance Services
Some construction companies are in a better position than others to weather the COVID-19 pandemic. The CFO of a 100-year-old general contractor recently said, “If somebody did not tell us there was a pandemic, we would not know, because we are so busy.” While that is one perspective, we have also heard this: “We have not won a bid in the last five bid openings.” According to a recent Associated Builders and Contractors analysis of data released by the U.S. Bureau of Labor Statistics, the construction industry has experienced a 56% job recovery.1 As history has shown, the construction industry tends to lag behind almost all other industries when there is an economic slowdown.
When the pandemic first started, we recommended that all of our construction clients submit applications for Payroll Protection Program (PPP) loans. We are happy to report that our construction clients in the California region, for example, obtained in excess of $40 million in PPP loans. They are among the construction companies claiming 15.3% of all PPP loans granted, making the construction industry one of the top industries funded by the PPP program.2
While construction might be an essential business during the pandemic, does that mean there will be new work to bid on, once all of the backlog has been exhausted? No, unfortunately not. The pipeline for construction jobs is longer than most people imagine. Dodge Data & Analytics has reported that the Dodge Momentum Index dropped 6.6% from May to June. This index is the monthly average of new construction planning projects. Within these numbers, if you drill down, institutional construction fell by 11.7%, but commercial declined by only 3.5%.3
Bidding prospects might well be challenging over the next few months. We are finding the number of bidders on projects doubling and tripling. Some contractors bidding projects might even be new to the game. With lack of demand, traditional private work contractors will now enter the public arena. Some contractors are bidding cheaper prices to load up on work now, not knowing what the future holds. Interestingly enough, we are seeing agencies such as the DOT (Department of Transportation) attempting to put out more work, since the roads are being used less and traffic control is easier. While this increases potential projects, we have to wonder if public agencies are putting out more work with the anticipation of lower prices…? All of these factors are going to lead to lower gross profits and fewer bids won by contractors. This could very well continue until the pipeline of new work improves, and that is dependent upon the economy getting going again.
Hopefully, your company was one that received a PPP loan and has used it to cover your payroll over the last 8 – 24 weeks. With forgiveness of up to 24 weeks, it might be worth the calculation to see if 8, 12 or 24 weeks will give your company an extra boost. The second issue is to make sure your full-time equivalent employee requirement has been satisfied.
Other issues we see in the future are insurance rates on the rise. Capacity is shrinking, which will cause rates to increase. There have been health-related behavioral studies suggesting that construction workers on average demonstrate higher risk behaviors. Smoking, drinking, substance abuse, less sleep, and mental illness are all contributing factors that affect the construction labor force. Fewer available workers will also add to a probable insurance rate escalation.
We hope that many of our contractor clients are remembering lessons learned during 2006 to 2008 as a way to navigate through these turbulent waters. The fallout from the pandemic will undoubtedly last for years to come in a variety of forms for the construction industry. As long as companies are smart and proactive in their decision-making, with any luck this will just be another storm to weather.
Consult your Marcum construction professional to discuss options available to your firm.
- “Nonresidential Construction Has Recovered 56% of Jobs Lost Since March Employment Report, Says ABC,” ABC.org, July 2, 2020, accessed July 9, 2020, https://www.abc.org/News-Media/News-Releases/entryid/17849/nonresidential-construction-has-recovered-56-of-jobs-lost-since-march-employment-report-says-abc
- “First Look at Long List of AEC Firms Reviving PPP Loans,” ENR – Coronavirus and Construction, July 7, 2020, accessed July 9, 2020, https://www.enr.com/articles/49678-first-look-at-long-list-of-aec-firms-receiving-ppp-loans.
- “Dodge Momentum Index Loses Ground in June” ForConstructionPros.com, July 8, 2020, accessed July 9, 2020, https://www.forconstructionpros.com/latest-news/press-release/21138266/dodge-data-analytics-dodge-momentum-index-loses-ground-in-june.