Five Ways COVID-19 Has Impacted Construction Companies
The COVID-19 pandemic has plunged many global contractors into one of the most challenging times in their history. As countries across the globe introduced lockdowns and other restrictions, the pace of change for contractors has been extreme, with many changing their ways of working overnight.
Global construction output is expected to fall by 3.1% in 2020, according to GlobalData — a sharp downward revision on the 3.1% increase forecast before COVID-19. In Western Europe, output is now forecast to contract by 7.3%; in North America by 1.7%; and in North-East Asia by 0.9%.
Contractors have had to try and complete existing projects while at the same time protect staff on-site, comply with government regulations and travel restrictions, as well as manage supply chain interruptions and project suspensions.
Country-by-country variances in rules and restrictions relating to the pandemic have exacerbated these challenges.
However, contractors are used to adapting quickly and implementing various continuity strategies — for example, as they ramp up for new projects, downsize in some areas, or adapt to changing project timeframes. This agility has placed construction companies in good stead during the pandemic, and will remain vital in future.
Outlined below are five areas of recent change that contractors may find useful to consider while navigating the current challenges, and also when planning for future growth.
1. Resilience, contract structuring, and collaboration
COVID-19's impact was immediate — it was as if the tap was turned off for parts of the business, and supplies to site simply stopped. Within a three- to four-day period, remote working was the norm, with some projects having to be designed from remote locations, forcing contractors to look for new ways of working to ensure productivity.
Since March, the industry has seen much stronger collaboration, including with unions, suppliers, and government bodies. There is a strong sense of unity within the industry, where everyone understands they have a part to play in order to achieve the common goal of delivering projects and keeping sites open.
Working with strategic partners is more important than ever. Contractors are increasingly looking to partner with clients where there is a better balance of risk, more discussion on contract structuring, and an alignment of broader values — for example, on issues such as workplace diversity, wellbeing, and innovation.
Contractors are likely to be more selective in the jobs they bid for, the conditions they’re willing to accept, and the partners they work with. This trend was already emerging before COVID-19, but has increased since. Stakeholders are starting to reevaluate risk allocation in its entirety for projects, including contractual.
The pandemic has highlighted the many potential problems in the "pass-the-parcel" approach to risk sometimes seen within the industry — where risks are passed from client to designers, from designer to the contractor, and from contractor to the multifarious trades — often resulting in the smaller, less resilient companies taking a disproportionate amount of a project's risk.
Globally, some contractors want to reduce the exposure on their suppliers, so simply passing risks down the supply chain — whether they are cost risks, delay risks, or cash risks — may become a thing of the past for some.
2. Supply chain management
During the early months of the pandemic, many contractors were unable to source basic materials — such as sand, cement, and bricks — while also suffering from labor shortages. For example, in the UK, a national shortage of plaster led to significantly increased costs at one point.
For many contractors, paying suppliers early has proved critical, and is likely to remain more of a priority post-pandemic. Often, smaller subcontractors are least able to carry risk, so paying them early may help to ease some cash flow challenges in a changing environment where being able to mobilize quickly is vital. Practices such as "reverse factoring" — where large companies make arrangements with third-party financiers to pay the bills of their suppliers early for a fee — may be reassessed in future.
Like most companies, contractors will reevaluate their supply chain management to minimize future interruptions. As noted above, many companies are looking to engage with a smaller number of well-aligned organizations. They will also look more closely at where their extended supply chains are based (including, where possible, suppliers of their suppliers), seek to diversify them, and avoid having too many suppliers concentrated in any one area.
Some companies may also seek to bring their suppliers closer to home. Overall, creating a flexible supply chain that can adapt quickly to engage alternative suppliers will be key for contractors post-pandemic.
3. Balance sheet and liquidity
Liquidity and cash flow have been vital in recent months. Contractors entering the pandemic with a strong balance sheet and a healthy pipeline of work have typically found it easier to navigate the recent turbulence.
Even before COVID-19, many contractors were very focused on cost. The pandemic has exacerbated this trend, with balance sheet and cash management now an even larger consideration. Major construction firms across the world have suffered sharp drops in market valuations during the COVID-19 outbreak, reflecting a more challenging environment and the major ongoing disruption.
Going forward, there are some positive signs, with the project pipeline expected to be healthy in a number of regions, particularly for infrastructure projects. Government stimulus packages will look to bring confidence back into the sector, with many public authorities attempting to advance spending on infrastructure plans. But, as always, such projects will need to be fully designed and well-planned — and only then brought on-site and delivered.
4. Diversification and innovation
Global contractors with diversified business models, across different geographies and business sectors, have generally fared better during the pandemic. This is likely to be a lasting lesson for many global contractor firms.
Diversification will become even more important for the industry and contractors are more likely to explore how they can work in different streams, particularly with the retail and residential sectors slowing down in the immediate future. The retail, leisure, and hospitality sectors have been some of the hardest hit, so a knock-on effect on construction in these areas is likely. Commercial real estate is also expected to experience some challenges as demand and design plans may need to adapt.
More generally, environmental, social, and corporate governance (ESG) will continue to drive innovation within the industry. Digitization will also continue to be a key strategic pillar for many contractors.
From the start of the pandemic, contractors have thought of alternative ways to work and remain productive. Many businesses have initiated new taskforces to understand COVID-19’s impact on business, and implemented new ways of working.
For example, one joint venture adapted its working patterns to include nighttime shifts, to make up for the fewer shifts allowed during the day. Other companies have used QR codes to track workers on-site — allowing them to know exactly who was where from an incident and COVID-19 perspective — while others have installed on-site COVID-19-test vehicles.
Meanwhile, an air purifying paint used by a global contractor on some of its sites has been shown to kill a certain strain of coronavirus (although further testing is required). The paint is also anti-bacterial and anti-mold, and actively purifies the air of pollutants and odors. We expect to see more of these innovations in the months ahead.
5. Cyber security
The widespread surge in remote working induced by the pandemic has created various security implications for contractors. These include protecting the new connectivity options deployed, considering the security of devices outside the safety of protected office environments, and better managing bring your own device policies.
Contractors have needed to think of ways to identify and authorize incoming connection requests from a range of new sources, lock-down sensitive remote workstations, and deploy endpoint protection that ensures machines are malware-free.
Increased remote working has also increased reliance on collaboration tools, and cloud technology, for which security is sometimes only a secondary consideration.
Collectively, these adjustments have greatly altered contractors’ security architecture, the repercussions of which may be felt for many years to come. Companies have been pushed to accelerate their digital processes — making changes over the space of six months that would have normally taken three to four years — which has in many cases created "digital debt."
In other words, in recent months many companies have accepted more cyber risk — whether they are aware of it or not. This increased exposure will either need to be remediated, or might later be exploited by cyber criminals.
Even before the pandemic, companies’ confidence in their cyber defense was at an all-time low before the pandemic, down from 36% in 2017 to 31% in 2019, according to the Marsh Microsoft 2019 Global Cyber Risk Survey.
Contractors should consider conducting a post-COVID-19 risk assessment, to understand how changing work patterns have affected their cyber security.
The pandemic has, of course, focused all companies’ minds on their workforce, particularly employee wellbeing. Before the pandemic, the construction industry already had above-average rates of divorce and suicide; mental health therefore needs to remain a focus for the industry once the worst of the pandemic is over.
On a positive note, the industry could potentially use the recent changes to ways of working to diversify its workforce. The pandemic has plunged the industry into the quickest and deepest possible experiment in flexible working — which has proved a success. Construction companies’ ability to adapt to these changes, and so quickly, could make the industry more accessible and attractive to a larger talent pool.
More generally, companies that embrace the current challenges to develop and adopt new processes and capabilities to protect their workers, minimize future project disruptions, comply with government regulations and restriction, while managing clients and suppliers, will be best suited to weather the storm and may actually emerge stronger. With the current turbulence comes an opportunity for positive long-lasting change.