by Jonathan C. Burwood, Partner, Watt, Tieder, Hoffar & Fitzgerald LLP
Published June 2020
I promised myself I would not use the terms “unprecedented” or “new normal” in this article. As you can imagine, it was not easy. I also resolved not to talk about the “return” of construction, given estimates that as many as 70% of projects carried on during the months COVID-19 derailed literally everything else. Most construction professionals were simply returning to the site they left the day before. Though admittedly, those sites look and feel very different than they did several months ago. Things may be new, but they are far from normal. Identifying changes to the post-COVID-19 construction landscape, both significant and subtle, and understanding the forces that drive them, is critical to short-term survival and long-term success. The situation is fluid, the rules are changing, and construction work does not readily lend itself to immediate adaptation. And for those reasons, a focus on construction fundamentals—labor, materials, cash-flow, innovation—is a good place to start in terms of navigating both the obstacles and the opportunities that lie ahead.
COVID-19 Directly Threatens The Construction Workforce, Though May Ultimately Provoke A Labor Revitalization.
Traditionally, construction employment is collateral damage from a broader economic downturn. Financing recedes, new work is shelved, and payrolls are adjusted to equalize supply and demand. That dynamic looms large today. The Association of General Contractors estimates that the construction industry lost 975,000 jobs in April—the largest one month decline ever—and construction unemployment spiked from 4.7% to 16.6%. Though as the industry was absorbing that news, 464,000 of those jobs immediately rebounded in May as the Paycheck Protection Program and the widespread easing of restrictions on non-essential work took hold. That bounce may be short-lived though given the likelihood of a sustained contraction in new projects.
More urgent than macroeconomics, however, is the direct and immediate threat COVID-19 poses to the health and safety of the construction workforce itself. Without question, the industry has responded with a robust and uniform commitment to safety. Governments, project owners and contractors continue to develop, refine, implement and enforce COVID-19 specific safety guidance that simply did not exist months earlier. For the most part, there is enough consistency across the guidance to permit contractors to reasonably plan, budget and implement for compliance. However, not all COVID-19 safety guidance is created equal, which jeopardizes contractor certainty as to compliance and raises the stakes for required certifications. Addressing new and often cumbersome protocols for training, temperature checks, personal protective equipment, social distancing, and hygiene are also impacting costs and schedules. As always, the industry will keep the workforce safe, but construction will be slower and more expensive for some time.
Though no-one benefits from construction unemployment tripling overnight, and the safety risks and mitigation measures are impractical and overwhelming, COVID-19 may ultimately drive changes in the construction workforce that could benefit the industry substantially in the long run. For years the industry has suffered from a skilled labor shortage driven by the elimination of 1.5 million construction jobs during the recession of 2008. Despite significant growth and prosperity in construction over the past decade, the industry has not been able to consistently fill that void as millennials have said “OK Boomer” to construction jobs based on historical perceptions of the industry. Construction’s response to COVID-19 could alter that dynamic with a renewed focus on the workforce itself. Using the industry’s rapid and comprehensive response to COVID-19 as a spring board, further investments and innovation could shed the perception of construction work as simply dirty, difficult and dangerous and attract a vibrant workforce that may otherwise pursue alternative careers.
A successful push in that direction will depend on increased attention to diversity and inclusion. The recent surge of social activism and reform underscores for the construction industry, like so many others, how fundamental it is to recruit, retain and develop a diverse and inclusive workforce, much of which will be drawn from the millennial generation. The construction industry’s biggest clients (transportation, tech/biotech, energy, manufacturing, health care) are already progressive leaders in that regard, and contractors should be actively competing for those employees. Along those lines, the AGC recently unveiled its Culture of CARE (commit, attract, retain and empower) program aimed at fostering construction workplaces where employees are uniformly respected, valued and heard.
Organized labor will also play a role in reshaping the construction workforce. Over the past seventy-five years union membership has steadily declined, though the influence of unions in state and local decisions regarding essential construction work during the height of the pandemic was conspicuous, in the form of both political pressure and in some instances suspensions of labor. With a million construction jobs in the balance, devastating unemployment in other sectors of the economy (including retail, restaurants and travel), and disruption to the traditional college model, common interests throughout the labor pool in wages, hours and safety are likely to increase union membership and influence to some degree as the industry rebounds from COVID-19. This will be particularly true if government stimulus and public works drive the recovery.
Innovation and technology will also continue to play a significant role in reshaping the construction workforce. Uber was transformative in convincing two million working-age Americans to sit in traffic for a living. The construction technology sector is hoping to accomplish the same type of makeover for construction, with exponential investment, implementation and influence in recent years. COVID-19 stands to supercharge the contech movement given its broad and efficient application to safety. Actively and accurately monitoring the health of the construction workforce, while simultaneously decreasing site congestion and personal interaction is tailor made for contech that is available and already in use. Thermal cameras can identify potential fevers, wearables can monitor compliance with social distancing, remote working, meetings and inspections reduce proximate interactions, and lasers, sensor networks, drones and robots can collect data in the field that would otherwise require more personnel. Beyond safety, the fallout from COVID-19 is also likely to accelerate the proliferation of other construction innovations, including lean construction, modular and pre-fabrication, which blur the lines between manufacturing and traditional construction, offer a controlled built environment, and reduce the proliferation of field interactions among suppliers, subcontractors, construction managers, design teams, owners and government inspectors.
COVID-19 Disrupts Material Supply Chains, Though May Further Soften Input Prices.
In late March, with governments restricting travel, altering import controls, and closing non-essential businesses, there were concerns about material and equipment delays, and resulting impacts to project schedules. Certain suppliers of construction materials and equipment, including John Deere, suspended manufacturing in response to the decrease in demand and concerns for operational safety. And the supply of PPE necessary to satisfy the demand created by COVID-19—across all industries—remains unstable. Though construction has certainly been impacted to some degree by supply chain disruptions over the past few months, the big picture suggests that material supply is not a critical issue. And in stark contrast to the trend in recent years, the Associated Builders and Contractors reports that construction input prices are down.
The muted impact of COVID-19 supply chain disruptions is largely credited to steps taken by contractors over the past few years to diversify and broaden the supply base for construction inputs. While sophisticated contractors set out to leverage a broader supply chain for better pricing, those efforts created alternative sources for construction materials that mitigated COVID-19 disruptions. Going forward, there are calls in this climate for a renewed focus on a reshoring and increase in domestic manufacturing, though the fundamental economic pressures that drove certain manufacturing operations overseas in the first instance are not likely to be reversed during the expected period of financial uncertainty that lies ahead. In the meantime, the market for construction materials appears headed for a correction that may ultimately mitigate construction expense.
COVID-19 Jeopardizes Cash-Flow, Although It Is Already Generating Historic Government Stimulus.
Even as contractors work tirelessly to find steady footing moving forward, the industry’s biggest customers stare down a grim financial road. Brick and mortar retail as we know it is on the ropes, office space is grappling with an overnight paradigm shift to working remotely, and the recently red-hot healthcare sector is caught between a narrowly avoided crisis in capacity during the COVID-19 surge and a precipitous drop in institutional revenue resulting from the wholesale deferral of profitable procedures. As goes the economy goes the construction industry, and it is difficult to see how the robust backlogs of recent years will continue to be replenished. Available data—at least at this early stage—indicates a firm trend towards the deferral or outright cancellation of certain non-essential projects, presumably driven by a lack of clarity about the potential for resurgence of COVID-19 and confidence in future revenues.
State and local governments are particularly exposed to the risk of making long term financial commitments to public works projects in the face of sudden decreases in revenue that funds such work. Forty-five states have balanced budget requirements yet face unbudgeted increases in emergency spending in response to COVID-19 and unexpected decreases in revenue from gas taxes, tolls, transportation user fees, and a general decline in economic activity. Billions of dollars in public works are being scaled-back, deferred or cancelled.
Though at the same time, many state DOTs are actually accelerating ongoing transportation work to increase safety and reduce costs as less people are utilizing roads and public transit networks. Certain states, California for example, are forging ahead with planning and design for significant infrastructure work despite the forecast of monster deficits on the assumption that the federal government will ultimately step-in and provide stimulus in the context of an overall recovery plan. That bet is informed in two ways. First, to blunt the recession of 2008, the federal government provided $800 billion of fiscal stimulus, $100 billion of which went to infrastructure spending. Both parties of Congress and the President have acknowledged for years the dramatic and immediate need for further improvements to the nation’s infrastructure, though with proposals reaching $1 trillion a consensus for funding has never been close. Now, it is likely that ideologies will be easier to reconcile with the health of the economy fully on the line, though the significance of the approaching national election could influence the timing.
The other indicator that the federal government will stimulate the construction industry in response to COVID-19 is the fact that historic stimulus is already underway. In March, Congress passed the $2 trillion CARES Act, the largest ever single injection of federal funds into the economy. In May, the House of Representatives passed the $3 trillion HEROES Act, with billions earmarked for state and local governments, highways and transit agencies. As initially proposed, the HEROES Act does not enjoy the support of either the Senate or the White House but the fact remains that Congress has already contemplated $5 trillion in federal stimulus to combat the economic fallout from COVID-19. Given that early momentum, and the consensus that the 2008 stimulus significantly mitigated the Great Recession, federal spending on, among other things, infrastructure construction will increase significantly in the immediate future.
As recently as my last haircut, construction unemployment was reaching historic lows and contractor backlogs were at an all-time high. The sudden reversal is dizzying, but there is still a great deal to be played out. The obstacles are acute, but the industry is responding with innovation and intensity. Contractors by their nature are resilient and resourceful. Without question the construction industry will navigate this challenge, first to survive COVID-19 and then to thrive in its wake.
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Jonathan C. Burwood is a Partner with Watt, Tieder, Hoffar & Fitzgerald LLP. He focuses his practice in the areas of construction and surety. He represents sureties, contractors, subcontractors, owners, developers and community associations, among others, providing services ranging from general counseling, pre-suit negotiations, and alternative dispute resolution, to managing client interests through high-stakes litigation and appeals. He can be reached at jburwood@watttieder.com or 857.504.1140.