Interesting Times for Construction Contractors

As seen in Crain's New York Business

Many construction contractors are currently facing tough decisions regarding future work, pricing of the work, and profitability. Despite the pandemic, most contractors are coming off very profitable 2019 and 2020 years by completing work that was already on the books. The Paycheck Protection Program (“PPP”) helped these contractors keep their employees and deal with the inefficiencies that were caused by the pandemic, but contractors are now left with a market that does not have enough new work. In addition, any work that is being released has many bidders and extreme competitiveness that drives the prices down at the same time when many of the associated costs, such as building materials and labor, are all increasing. Due to the situation, contractors are forced to decide on whether or not they should take on work at lower prices than usual, with the hope that nothing will further decrease the profit during the job. By taking on work at these prices, this puts significant pressure on the contractor’s finances. If the work is not properly monitored or managed, it could even put contractors out of business. If a contractor decides to take on less profitable work, they must monitor the project on a daily basis and make sure they have adequate funds to get through the project.

Monitoring these projects with today’s technology, if properly implemented, should be a relatively easy task, but management must be very involved with this process, and they must push the work to get done on schedule. Cost overruns and delays can really create major issues at a time that a contractor can least afford it. Most contractors who are taking on this type of work to keep busy are expecting that by the time they are mostly done, the market will open up with new opportunities so they can offset some of the potential losses with more profitable work in the future—a more positive approach to the current situation. However, this comes with significant risk and uncertainty, which is a major gamble for many business owners in this new post-Covid world. The result of taking on less profitable work could weed out undercapitalized and poorly managed contractors who drive prices down on bids because they want to “keep their men/women busy” and take a shot at getting work. During the recessionary times of 2007 and 2008, we saw many contractors exit the industry because they were undercapitalized and unable to sustain their businesses due to the lack of future work, significant debt levels, and significant bad debts from customers who were unable to pay for completed work. The “strong” and well-managed contractors survived during those times, and we can expect that will also be the case.

The other option for contractors today is to sit on the sidelines and wait until the market opens up with more profitable work and less bidders. Some contractors may have the benefit of doing this without having to make an “investment” in one of their customer’s jobs if they profitably ran their business throughout the pandemic, received adequate PPP funds, and do not have a significant amount of debt. Waiting patiently could lead to positive results in the future as major cities and metropolitan areas return to a new “normal” in a post-Covid world. Factors that could affect the industry include flexible work schedules for many businesses, the uncertain need for office space, and the shift in desire for people to live in metropolitan areas. It is believed that these metropolitan areas will eventually come back to the pre-pandemic times, but the question remains as to when and how long will this take to happen? This question is one of the toughest questions to answer for contractors who are sitting on the sidelines and waiting for the markets to open back up. The next question would be, how long until their money runs out before new profitable work begins? How long do they keep their employees until work comes in? Everyone in the industry hopes that the waiting period for the construction market to change will be relatively short. The infrastructure bill that is currently being negotiated by the U.S. Congress can provide the country with the kick start needed to get things going back to pre-pandemic times. In addition to the infrastructure bill, additional factors such as the vaccination rollout, employees returning to their offices, and the country opening up in popular metropolitan areas will also help developers and other property owners commence construction. If this occurs, this will also provide a much-needed boost in the commercial interior sector of the construction industry, which suffered significantly during this pandemic as employees stopped going into the office and office renovations were put on hold. Despite the fact that most employers are currently giving their employees the option to adopt a flexible work schedule, there is a strong belief that the commercial interior sector will return at some point as employees will eventually be required to come back to their offices.

As the pandemic comes to an end and we move into the new normal, the construction industry will do the same. Both options above provide risks to most construction companies, and owners of these companies will have to do their best to measure their risk tolerance levels during these difficult times. Either way, the industry will remain in some form, and the people in this industry will be even more resilient than in the past.