Despite being the leader in technology, research, and health sciences, the US on January 14, 2021, was the country with the highest number of COVID-19 cases surging as high as 23.1 million and more than 384K deaths.
Even though we have already entered the first month of 2021, these numbers still have a significant impact on the construction. As the pandemic beginning from Wuhan, China, in December 2019 continued to plague the commercial construction, layoffs, shutdowns, and financial instability were some of the few aftereffects that contractors are dealing with until today.
Usually, construction firms working on the projects practice the idea of freezing the funds for uncertain times while trimming the budget of future projects to ensure cash flow. However, more than 10 months of the pandemic has taken many contractors close to bankruptcy with a consistent test of retaining their business.
Besides this, most construction experts and economists have predicted that the challenges associated with the construction industry will continue to prevail in 2021 making it difficult for contractors to re-establish their grip on projects. However, only those contractors who will have the right potential to overcome some common challenges associated with construction during COVID-19 will be able to grow.
Let us quickly get to understand these challenges which construction contractors will need to tackle in 2021 and learn how they are going to make it more difficult for contractors to find their way to cash flow and sustainability.
Lack of Skilled Labor
For more than two decades, the Construction industry is struggling with a massive shortage of skilled labor. Though the situation started to improve a bit, COVID-19 rushed in to cause shutdowns and slowed industry growth with a large number of layoffs that happened last spring.
And now when construction has been resumed, contractors are calling the labor laid off but most of them have refused to return sharing concern on health, family, and of course, the uncertain unemployment benefits.
Thus, it is very likely that once the construction industry will reach its full phase of recovery, the situation may get difficult with a much wider labor gap, especially in the prime areas of construction such as California, New York, and Texas. Moreover, the labor shifting towards expensive markets to cope up with the past financial crisis would be another challenge for contractors.
Disrupted Supply Chains
Even though construction in most parts of the world was considered an essential business practice, the industry is still falling short with strain on supply chains. As production started to gain pace ever since the restrictions are lifted, the lack of material and equipment were some reasons that are causing continuous damage.
To deal with the situation, many contractors are aiming to create a resilient supply chain strategy by approaching three or more suppliers which in past was restricted to one or just two. As long as it is concerned with large firms, the number has even reached five. However, such practices are looking to be a perfect solution with a consistent decline in shipping and freight taking materials across state or national borders.
Dwindling Project Pipeline
According to the reports shared by ABC, the backlog indicator is falling since September 2020 decreasing to 7.5 months from 0.5 in August 2020. Also, the readings for the Construction Confidence Index were seen to be decreasing in context to sales and profits.
Therefore, the upcoming months of 2021 are looking much helpful to the contractors extending the backlog while affecting commercial construction. And in the light of the statistics and data shared by ABC, a significant decline has started getting visible in all the markets and regions.
Declined Construction Costs
Due to COVID-19, construction costs have declined for the first time ever during the last 10 years. This little decline can be a reason for the decline in profits for most contractors.
The Turner Building Cost Index has signaled a major decline in nonresidential construction falling to 1171 during the third quarter of 2020. This decline in the numbers started during early 2020 which was the first time ever since 2010. Besides this, there has been a significant rise in the competition amongst trade contractors as they had to deal with extensive uncertainty for the future.
Decline in Work
Specifically, when we consider commercial construction, this particular section is likely to struggle a bit more than others even when the economy is gradually moving towards recovery. As the effect of the pandemic is still visible, experts have predicted that the industry will be leaning towards remote work practices than working at the sites.
Even the construction of healthcare facilities is likely to drop due to the social distancing norms and people being more conscious about visiting hospitals. With more and more people dropping the idea of visiting hospitals for non-essential as well as elective surgery procedures, 2021 will be the year that will aim more at alternative medical care.
As people are becoming more hesitant to visiting medical places with large gatherings, there are also chances that travel, hospitality, and sports-related facilities will suffer gaining finances and income through sales taxes, tolls, etc.
Inflation Across the Industry
The next big challenge which construction contractors are very likely to encounter is the sudden price rise. With fluctuations happening for material, supplies, deliveries, and other resources, there will be a significant increase in prices across the industry.
With construction coming back on track around the world, there has been a sudden surge in the demand for the essential construction material which will result in a consistent price rise. This entire situation is the result of sudden deflection and more rapid recovery that has disturbed the demand and supply cycle.
Even though contractors are actively looking for solutions such as expanding their supplier network, it will still be a challenge to counter the inflation happening on such a large scale.
Last but not least, the decline in the construction industry would have a direct impact on the revenue generated by state and local governments. With the projected decline of $167 billion in 2021 and $155 billion in 2020, there would be a major effect on the infrastructure projects led by government agencies. This would include the construction of roads, bridges, and other transportation projects that are funded by the state and local departments.
Ultimately, it would force the government to look for alternative sources of revenue to keep meet the revenue goals of the federal government. Moreover, this decline in the funds could even make the existing and upcoming projects go to a standstill.
The present situation is very natural with MTA losing around $800 million every month due to crisis along with the federal government struggling to meet the projected funding announced for the year 2020 and 2021, under the CARES Act.
With the construction industry taking such a massive toll under the prevailing pandemic, it is crucial for construction firms and federal agencies to work together and find points to rectify.
As most contractors and construction professionals, irrespective of their circumstances have experienced such stress levels at one point or another, the goals must be made to tackle material issues, better project planning, and everything that can help retain cash flow.
All in all, there is no time better than now to plan ahead of the time and make the best use of resources such as construction project management software and other tools to keep things under control.
Ed Williams is the Senior Team Lead at ProjectPro, an integrated construction accounting software. He holds a massive industry experience and is a Microsoft Dynamics expert who is focused on successful implementations. He is a visionary leader and always aim to deliver the best to the construction and project-oriented industries.