COVID-19: Confronting The New Normal
With much of the world squarely in the grip of the COVID-19 pandemic, construction is feeling the impacts and moving to manage them.
Skyrocketing case numbers and deaths are forcing governments in the U.S. and globally to upend workforce and business practices—slowing or shutting down scores of construction projects, forcing clients into a financial squeeze and triggering industry employees to transform jobsite and office interactions and workflows.
Layoffs and furloughs that have been rare in the worker-starved construction sector, have now become an unfortunate reality, hopefully a temporary one. But with economies in the U.S. and elsewhere uncertain and set for gyrations, industry firms are planning for a long haul and a new normal.
Boston’s move earlier in March to close its construction sites has now been mirrored in cities and states across the country, employers and crews strubble to comply as public officials spin out new shelter at home and social distance mandates to curtail the spread of a virus that has yet to reach peak in the U.S.
While Washington has pushed through a $2-trillion financial aid package—and now finally looks to a potential similarly large infrastructure stimulus also to somewhat blunt the economic impact—activist governors like Andrew Cuomo (D-N.Y.) and Gavin Newsom (D-Calif.) demand more federal attention and investment as the disease spreads faster than current space, supplies, personnel and resources can handle.
Cuomo had previously allowed construction to proceed in the state, classifying the industry as “essential,” in a mid-March executive order that curtailed other business sectors. But with New York City, in particular, now an extreme U.S. COVID-19 hotspot, on March 27 he closed down all but key infrastructure, health care and affordable housing jobs through most of April, and new safeguards for projects that are ongoing.
In a mid-March survey by the Associated General Contractors of America, 28% of 909 respondents said they have had an owner, government agency or official tell them to halt or delay work on active projects or on jobs expected to start within a month. In addition, 22% said a supplier had notified them that deliveries would be late or cancelled.
“The coronavirus pandemic has the potential to undermine what had been a very robust construction market, threatening the livelihood of countless workers and the viability of many firms,” said Ken Simonson, the association’s chief economist, in a statement.
The U.S. Dept. of Homeland Security on March 28 issued guidance that adds 21 new areas of construction that support essential infrastructure on which work can continue during the pandemic, up from four previously included. On the agency list are construction of energy and renewable energy projects, water and wastewater infrastructure, hospitals, housing, transportation and communications, among others.
The federal agency said the list is intended just to help state and local officials make decisions about essential workers, but it is not a directive or standard.
Meanwhile, citing COVID-19 concerns, the U.S. Environmental Protection Agency on March 26 announced changes to its rules—exempting from financial penalty companies that can show they are unable to fulfill environmental compliance because of pandemic impacts and complications niw emerging in the process. The temporary policy is retroactive to March 13, and has no end date.
EPA assistant administrator Susan Bodine says “consequences of the pandemic may affect facility operations and the availability of key staff and contractors," but Gina McCarthy, CEO of the Natural Resources Defense Council and former agency administrator under President Barack Obama, termed the policy “an abdication of EPA’s responsibility to protect our health.”
Even with governmental steps to bolster the industry, COVID-19 has already plunged timelines of some projects into uncertainty, including a planned Houston-to-Dallas high-speed rail line with a $20-billion estimated pricetag. Its developer has cut staff by nearly 30 and admits other challenges could complicate plans further.
Carlos Aguilar, CEO of Texas Central High-Speed Rail, called the March 27 staff reduction “an effort to make the best use of our current funding.”Although the company has taken other steps to cope with the outbreak, “we … still do not know what other impacts this will have," he says.
The pandemic has thrown into disarray plans to begin construction on the 240-mile project later this year because of far-reaching effects on its multinational design, construction and financial partnerships. In addition to U.S.-based program manager Bechtel, rail system contractors Kiewit and Mass Electric Construction Co., and station contractor Suffolk, the project team includes Italian contractor Salini Impregilo, technology providers Central Japan Railway and Team Shinkansen United of Japan, and Renfe of Spain.
“This is one of those moments to acknowledge how small our world really is,” Aguilar said. “Understanding the impact of COVID-19 … is a new fact of life.”
A $420-million resort project in Charlotte Harbor, Fla., on the state’s gulf coast set to open in 2021, temporarily shut down on March 18 as developer Allegiant Travel Co. seeks to save cash during the pandemic. Work at new sports facilities in California, Nevada and Texas continues, but it’s unclear whether the investments will pay off for owner with fans able to attend events in postponed or curtailed seasons.
In some states, such as Pennsylvania, pipelines and other energy projects now are in temporary shutdown, with power utilities also facing anew operating challenges as staffing is curtailed.
Mike Beehler, a West Palm Beach, Fla.-based consulting engineer, termed the pandemic “a black swan event … that is a true test of leadership in American business, especially for the nation’s electric and gas utilities.” He says that Edison Electric Institute, the trade group for investor-owned utilities, forecasts that up to 40% of the utility workforce—including some mission-critical staff—may be absent at any given time due to COVID-19 exposure or related symptoms."
Design professionals already see major workload impacts from the economic slowdown, according to new association surveys of members and one of CEOs by a financial consulting firm.
Half of architecture firms surveyed reported fewer new design projects than expected for March, says a March 27 report by the American Institute of Architects. About 83% of the 387 respondents anticipate a decline in revenue for March compared with an earlier projection. More than one-third estimate that their firms’ revenue will be at least 10% below expectations.
In a March 24 survey that included about 1,150 American Society of Civil Engineers members among 2,762 respondents, 39% noted just “mild concerns” about long-term post-virus company viability, although about 20% of firms with one to four employees “question whether they can remain in operation after the crisis.”
One respondent points to virus impact on “morale issues as people are concerned about their health and the possibility that it will result in slowdowns and huge budget impacts that will cause staff reductions and/or furloughs without pay.”
In an updated analysis released April 3 of COVID-19 impact responses from 254 mostly design and design-build firm CEOs by financial consultant AEC Advisors Inc., 26% of CEOs have implemented layoffs and furloughs, up from 19% last month, with about 25% stating that one or both of the strategies are planned.
Employees appear most at risk in publicly-held firms and those with private-equity owners, according to AEC Advisors. "Private equity firms with substantial debt have few other options," says the consultant.
About one-third of respondents see delays in more than 10% of their backlog, up from just 7% in the firm's initial analysis.
CEOs are mixed on reaction to whether the Trump Administration financial stimulus, the CARES Act, will help them, with the 55% of those saying "yes" noting the law's anticipated loan program and payroll assistance provisions, as well as hoped-for financial cushion for clients in the travel and medical sectors.
Chiefs of employee-owned firms see a clear impact on their company stock valuation, with 33% saying the effect already has been seen and 50% reporting it is "unclear but likely." The median decline is 5% to 10%, says the survey.
AEC Advisors says that compares to publicly-traded industry firms in its survey, which it contends are off by about 35%.
“This is probably one of the most complicated problems we’ve had to face in leadership,” says one CEO of an employee-owned global design firm who declined to identify. “Everything is connected. It’s hard to isolate one thing. You have to scrub every aspect of backlog and prepare staffing plans for what will happen next,” which he said could be “a four-month or two-year exercise.”
Cash flow and payments should be a focus, says Michael Cusack, a managing director of broker Alliant’s construction services group.
Most contractors will stockpile cash because no one knows how long and how far the crisis will go on, he says. Payments from owners will slow and construction managers are likely to hold money a little longer.
Anticipating few new contracts, both union and open-shop subcontractors are reducing their staffs. “The concern is what will happen to the subcontractor community if construction managers are slower in distributing payments,” says Cusack, adding that “more sophisticated subs are trying to bill for what they can now, hoping to get payment in on those requisitions.”
A New York City building contractor CEO noted “more clients are announcing layoffs, with the potential of awarded contracts being terminated or re-evaluated at a later date.”
He said his firm was not laying off employees “as of now, but no company will [avoid impacts] as work has dropped and invoices and payments are immediately affected.”
The executive added that “much more of this is expected over the next two to three weeks,” noting the potential of bankruptcies of smaller firms “to be watched closely.”
Added the CEO: “Prudence in running a business in a sustainable way is required.”
The emphasis on force majeure clauses in contracts is premature, says Frank Giunta, partner for contract and risk consultant HKA. “We are not advising clients to notify owners about force majeure clauses in contracts,” he says. The clauses permit delays and time extensions, but won’t entitle a contractor to more money, and contractors will need money to cover extra costs involved in demobilizing and then getting back to work.
Many insurance policies won’t cover acts of government, such as work shutdowns. Instead, says Giunta, HKA is advising contractor clients to notify owners of work suspensions. “Calling it a force majeure may be digging a financial hole,” he says.
With fears related to COVID-19 and resulting economic uncertainty, the future is “cloudy at best,” says Richard Branch, chief economist at Dodge Data & Analytics. He says that there is likely to be a recession in the second quarter of the year, possibly into the third, with effects on future construction starts still unclear.
The Dodge Data & Analytics first quarter 2020 forecast predicts a 3% decline from 2019’s level, which Branch now calls “too optimistic.”
But more recently, Alex Carrick, chief economist at ConstructConnect, draws a parallel between the public’s excessive hoarding and construction.
“This trend must soon run its course,” he says. “Will there be a similar phenomenon with respect to construction activity? Probably. With factory closings around the world, assured sources of some building components will be drying up.” On the demand side, he says, the largest effect will come from projects being placed on hold.