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News & opinion

5 AUG 2020

RICS answers questions on the impact of COVID-19 on the construction sector

During our recent Americas Update webinar about the construction and infrastructure sectors, we had more questions than we had time to answer. To avoid disappointment, Simon Rubinsohn and Christopher Smith have answered your questions below.

Do you think that, as COVID-19 drags on, there is a chance that it will do long term damage to the global economy?
SR: Most of the analysis does indeed point to long term scarring as a legacy. To be clear, this means that even as output gradually picks-up and returns to some sort of trend rate of growth, the level of activity will remain someway below where it would have been in the absence of the pandemic. This will leave us significantly poorer than might have been the case.

Moreover, the pandemic is accelerating some structural changes in the economy. Arguably some of these developments were in process anyway while others have been encouraged by behavioural changes in the wake of the ‘lockdown.’ These will by their nature be disruptive resulting in higher level of unemployment, both near term and further out as some skillsets become redundant. Government action can help mitigate some of the consequence as has already been seen but the ongoing uncertainty around a possible second or even third ‘wave’ will likely compound the pressures and risk further damage.

Survey is showing bids down, but costs (COVID) will go up so profit squeezed?
CS: Profits may be compressed as the general reduction in workload available in the market drives sub-contractors to try to trim margins in an effort to secure precious revenue.

SR: The feedback to the survey is certainly consistent with some compression in margins. That said, the results also indicate that aggressive bidding for work is relatively limited at this point.

Assuming that there is no second wave, how long before things return to as they were in 2019?
SR: Expectations for a return to ‘normal’ have undoubtedly been pushed back and it would seem implausible even with a vaccine next year that this would be achieved before 2022. Yet I also wonder whether we ever quite get back to where we were.

There are likely to be significant ramifications of the pandemic in terms of behaviours which will impact the demand for bricks and mortar retail, office and hospitality space. On top of this the ballooning level of public debt will at some point need to be repaid. Can that be achieved without higher taxes? I am not so sure and if taxes go up materially, that could have implications for economic growth over the medium term.

Less of a question more of a comment I think that the last question is more dependent in the US based on local governance. California is going to see a larger decrease, but South Dakota might not see a decrease at all.
CS: Certainly local, state and federal requirements can drive regional differences.

How much do you think the reductions from subs is driven by fear of losing work like it was in 2007/2008?
CS: There is certainly fear associated with losing projects as we’ve seen projects across the country be put on hold.

In some cases, clients are in a ‘wait-and-see’ position given the fluid nature of the pandemic. In other cases, projects have been outright cancelled. The uncertainty in the market is real, although some sectors have been impacted more than others (retail, hospitality) whereas other sectors have remained strong throughout (industrial, distribution, life sciences).

We have heard that the number of bidders has increased from 2 or 3 to 5 or more.
CS: That echoes what we heard during our construction leaders’ forums, with a significant increase in competition at the sub-contractor level (increased demand due to shortage of work).

What should we as consultants tell owners that are expecting the cost to be low due to the pandemic but lack of materials and impact of social distancing and PPE seem to increase the cost?
CS: Simply having that discussion with clients about the factors ‘for’ and ‘against’ is key. The real impact will be project-specific (depending on the location, complexity, size, procurement stage and local market requirements, etc). Cost savings may be achievable; but understanding the many variables at play will help level-set any blanket expectation of significant cost reductions. Working closely with contractors and sub-contractors will help assess any additional cost or productivity impacts.

What is happening to specific material costs?
CS: There is a wide-ranging impact to material costs. We have seen significant ongoing reductions in cost for some materials in the last 12 months (steel, aluminium) whereas for other materials (such as lumber) are seeing shortages and price increases related to shutdowns and ongoing Canadian tariffs. For up to date information, review the latest data released by the Bureau of Labor Statistics (bls.gov).

What major change do you foresee when companies move their employees to working from home in following years overall?
SR: A more flexible workforce is a likely outcome from this event. My sense is that managers have seen that not being office-bound doesn’t mean a loss of productivity. But this isn’t the end of the office. Whether from a diversity and inclusion perspective or the need to build a culture, central hubs to engage with other employees still have an important role to play.

The increase in Public Works and Infrastructure is an aspiration driven by political necessity for any government. What happens when the tax revenue/base gets eroded by massive unemployment and impacts to aviation, higher ed, hospitality, retail, commercial office, tourism and other private sector result in huge cuts to public coffers?
SR: Clearly, there is a big risk associated with the huge level of government borrowing. I would question however whether there is much of a choice around this decision. The alternative is arguably worse and at least with the cost of money where it is, borrowing cost and the ongoing charge related to debt service is much lower than in the past.

Are contractor-produced indices reliable or self-serving?
CS: Best practice is to consider as many data sources as possible, and supplement with ‘news-on-the-ground’ through clients, architects, engineers, cost consultants, etc. Considering the bigger picture and validating through several sources is the most reliable course of action when assessing market data.

There are surges being driven by the pandemic too - data centers, video games, private school enquiries are some that we have experienced...
SR: The survey results certainly reinforce the message that some areas of the real estate market are at the least showing a considerable degree of resilience.

Do you think this time of increased competition will provide an opportunity to implement different types of contract where more risk is taken by the GC and more cost certainty for clients? For example, steering away from typical GMP contract to for example a design finalisation lump sum contract (where A&E consultants are novated to the GC)
CS: Certainly, on a case-by-case basis there may be value to clients in considering alternative contracting methodologies. With the uncertainties in the current market and material price fluctuations, it’s unlikely to solve all challenges faced, but assessing the merits of different contract mechanisms may provide value and having a discussion with your client would demonstrate a proactive step.

Which trades are more impacted and which are not?
CS: All trades could potentially be impacted due to the general site safety measures that impact all trades (accessing the site, additional screening and temperature checks, additional cleaning, etc). At the workface, trades that cannot easily perform their work distanced from others may face higher impacts. Projects have reported drywall and electrical trades being impacted, for example.

There are plenty of claims, some using yellow book clause 19 force majeure and 13.7 change regulation for claim for COVID-19, which is correct?
CS: Claims are multi-faceted so without knowing the specifics, I would recommend consulting your procurement manager or contract administrator to determine the specific application of your contract against any pandemic-related claims.