By Robert S. Posner of Grassi
As the construction industry emerges from the COVID-19 pandemic, new realities continue to impact contractors’ plans and strategies. Unlike past years, however, contractors in 2022 have the advantage of the many lessons the industry has learned over 2020 and 2021 as it battled the impact of pandemic losses and overcame unique challenges.
To better understand these new realities and help contractors plan for success, Grassi’s Construction Team conducted a benchmarking survey of contractors and subcontractors last year to gauge the industry’s current conditions and outlooks. Grassi’s 2021 Construction Industry Survey Report revealed five key takeaways that teach powerful lessons contractors can learn from as they move through 2022.
No. 1. Impact on Revenues and Profits
The initial impact of jobsite shutdowns and economic distress in 2020 will continue to affect contractors well into 2022. More than half (53%) of survey respondents said revenues declined in 2020, and 44% of respondents reported a decline in 2020 profits. While Paycheck Protection Program (PPP) loan funds, other government relief, and existing backlogs kept many of them afloat through 2021, the true impact on cash flow may yet to be seen.
As contractors burn through their backlogs, not enough new work is surfacing, due in large part to a highly competitive bidding field. According to the Grassi survey, almost half of respondents reported competing against five to nine bidders on each project; and almost one-fourth reported 10 to 15 bidders. This crowded landscape has also led to aggressive pricing, which is dangerous to both revenues and profits. Even very large companies are bidding on smaller projects and adding to the competition.
Lessons Learned: Cash flow management, while always a recommended financial tool for cash-heavy businesses, is more critical than ever during these uncertain times.
In addition to cash flow projections that provide a 6- to 8-month outlook of cash flowing in and out of the business, contractors should consider project-centric cash flow as well. When done correctly, these tools will help the contractor identify when and where there could be cash shortfalls (and surpluses) throughout the lifecycle of each project, as well as in the company as a whole. This allows for adequate time to remediate issues and mitigate negative effects before it is too late.
To find success in the ultra-competitive bidding market, contractors should also revisit their pre-qualification process to ensure their bids are presenting the company’s full capabilities and differentiating them from the competition. Savvy contractors will customize the bid to highlight the company’s relevant experience, past performance, safety record, technology investment, financial capability, payment history, compliance with contracts, and other qualifications that will make them stand out from the rest.
At the same time, it is wise for contractors to stick to their strengths and not rush into new market sectors just for the sake of securing work. Without the right experience, the contractor will most likely find little to no profit and an unacceptable amount of risk.
No. 2. Labor Challenges
Going into the pandemic with an already strained labor pool, contractors were faced with even more workforce challenges that will continue into 2022. According to survey responses, the focus shifted dramatically from finding workers to keeping workers safe. The three most significant workforce issues expressed by respondents were as follows: (1) COVID-19 outbreaks among workforce (51%); (2) difficulty factoring costs of COVID-19 into projects (39%); and (3) reduced labor productivity (33%).
Meanwhile, finding talent was still difficult, with respondents saying project managers (25%), skilled laborers (19%), and foremen (19%) roles were the most challenging to fill.
Lessons Learned: Contractors that take a proactive approach to employee retention will have a distinct advantage over those that do not. They should be asking questions such as: What tone is my management setting at the top? Are they communicating adequately and frequently enough for employees to understand the strategic direction of the company? Should I consider an employee stock ownership plan or another strategy to keep employees invested in the long-term success of the company? Do I have a succession plan that clearly lays out the future roles of my key employees?
Contractors with fewer than 500 employees that were impacted by COVID-19 shutdowns or revenue declines should also be looking into the valuable employee retention credit (ERC), which provides a payroll tax credit simply for paying employees during the COVID-19 pandemic. Eligibility is determined on a quarter-by-quarter basis, and the credit can be claimed retroactively for past quarters.
No. 3. Jobsite Technology
In an industry that is known for lagging in technology adoption, many contractors inevitably found themselves regretting this lack of investment when workforces went remote and safety requirements were increased.
According to the Grassi survey, contractors rose to the occasion and implemented technologies that might have otherwise been years in their future. A silver living to the pandemic may very well be that it accelerated the use of technology, a trend that will most likely continue.
The most common technologies adopted by survey respondents were virtual toolbox talks and safety videos (45%) and video conferencing to conduct project walk-throughs (43%), followed by virtual design and construction modeling software (29%), GPS tracking (27%), and drones (16%).
Lessons Learned: Investing in the right technology can keep a construction company competitive, lean, and prepared. The right digital tools, artificial intelligence, robotics, automation, and data analytics can reap significant cost savings. These strategies are designed and proven to reduce redundancies and human error, create safer jobsites, improve efficiencies, and provide data to help contractors make more confident and profitable business decisions. In addition, as contractors look more closely at their pre-qualification process, they can often showcase their technology investments as an additional differentiator to help win the job.
No. 4. Ongoing COVID-19 Impact
From the survey results, it is clear that COVID-19 is still very much top-of-mind. A majority (65%) of the contractors and subcontractors surveyed reported that the pandemic had an impact on their ability to confidently price projects.
In addition to the crowded bidding field and uncertain economy, contractors have the additional costs of the pandemic itself to consider. Contractors rapidly adapted their operations to protect their workers and keep jobs running throughout the health crisis—all without any warning. Among survey respondents, 81% implemented daily health screening; 67% implemented remote working where possible; and 20% implemented on-site COVID-19 testing. A minority (3%) went as far as hiring on-site medical professionals.
Lessons Learned: A critical part of cash flow management is anticipating and quantifying upcoming expenses, and the volatility created by COVID-19 has made that task even more challenging. It is important for contractors to understand the true cost of the pandemic and factor these findings into their business plans, cash flow projections, and bidding. These expenses include some obvious and not-so-obvious ones, such as mandatory paid sick leave and safety protocols, personal protective equipment, job-site screening and testing, productivity declines, rising insurance costs, unexpected technology needs, and expenses related to social distancing as employees return to the office.
No. 5. 2022 and Beyond
When asked to anticipate when the construction industry will make a full recovery, nearly half of respondents (46%) predicted 2022; while 22% thought the industry would rebound by the end of 2021, and 23% anticipated a full recovery by 2023 or later. General contractors appeared more optimistic than subcontractors about 2021 revenues.
Lessons Learned: Uncertainty about the future of the industry is still high, but there is significant optimism that conditions will improve in 2022 or sooner. This could be fueled by both the massive potential of the infrastructure bill and the many opportunities contractors are finding to mitigate risk and improve efficiencies. Some of the more positive trends respondents reported seeing in the industry include: increased emphasis on escalation clauses in contracts to cover unforeseen cost increases; increase in public/private partnerships and joint ventures; investments in emerging technologies; supply chain diversification; and more general contractors developing their own in-house services previously performed by subcontractors.
As one of the contractor’s most trusted advisors, surety bond producers can use these same takeaways to advise clients, spot red flags, and minimize their own company’s risks. COVID-19 will continue to be a “known unknown,” but learning from what we do know can help secure a more confident future for contractors and the industry alike.
To download a free copy of Grassi’s comprehensive 2021 Construction Industry Survey Report, click here.
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Robert S. Posner, CPA, is a Partner in Grassi’s Construction Practice, where he specializes in helping contractors, subcontractors, and architecture and engineering firms comply with regulatory requirements and plan for future growth and success. In addition to audit and tax compliance, Posner provides management advisory and strategic planning solutions, including cash flow management, tax credits and incentives, technology consulting, succession planning, and bonding. He advises banks and bonding agencies on accounting matters specific to financial institutions, such as accounting of loan portfolios and current industry pronouncements. He can be reached at [email protected] or 516.918.5957.