June 29, 2020
the outlook for and resulting confidence in the commercial construction industry. According to the
press release
issued on the subject, the CCI plunged from 74 in Q1 to 56 in Q2.
Revenue and Profit Expectations
Confidence in the construction market and revenue expectations both plunged deeply, with each
decreasing by 26 points. Contractors’ confidence in the ability of the market to provide new business in the next 12 months has dropped dramatically to 50. This demonstrates a concern about the pipeline of work. Contractor’s confidence in their ability to generated revenue dropped to 44 as many contractors see projects deferred, canceled, or temporarily shut down.
Compared with the last two quarters, revenue expectations for the next year are far more pessimistic, with a spike from 2% to 21% in those expecting their revenues to decrease and an even steeper 30-point adjustment downward in those expecting revenues to increase. However, it is notable that the highest percentage of contractors (60%) expect their revenues to remain about the same.
Profit margin expectations mirror revenue expectations, with far more expecting a decrease than in previous quarters, far fewer contractors are expecting an increase and the majority expecting their profit margins to stay about the same.
Large companies (annual revenues of $100M or more) express the most stable profit outlook, with only 2% expecting to see either an increase or a decrease in their profit margins.
Backlog
Backlog was much steadier, only falling from 76 to 73 between Q1 and Q2, according to the report. Far fewer contractors (20%) report that backlog has increased in the past three months, compared with 39% in the previous quarter. Far more report their backlog has decreased in that time frame (44%). Even though more contractors report their backlog decreased and fewer report that it increased, the ratio of current to ideal backlog only dropped by three points.
Though backlog is below levels seen in the past year, current levels are consistent with those reported in the first half of 2018. There is a slight shift toward backlogs that are less than six months in the current findings, but overall, the findings are not dramatically different than in previous quarters. However, backlog is a lagging indicator of market conditions, and it may be many months before a reduced pipeline causes an actual decline, so this will be an interesting indicator to watch over the next six months.
Project Delays
Nearly all contractors (87%) are experiencing project delays currently and expect delays to continue into the summer. Most (73%) also expect delays to continue into the fall. However, fewer projects are expected to be delayed as the year progresses. In April, contractors reported an average share of 40% of their projects were delayed, and over one-third (35%) of them reported that the majority of their projects (75% or more) were delayed.
Within three months, the percentage expecting the majority of projects to be delayed shrinks to 16%, and the average share of delayed projects drops to 35%. In six months, only 8% expect the majority of their projects to be delayed, and the average share of projects on which delays are expected drops notably to 23%.
Currently, a higher percentage of contractors in the Northeast are expecting delays on the majority of their projects than in other regions. The Northeast region includes many large jurisdictions (i.e.,
New York, Pennsylvania, Boston) with government mandates that shut down most construction projects.
Working Capital
Contractors are expecting change in the availability of working capital financing over the next six months. Less than half (43%) expect their access to working capital financing will remain the same, a significant drop of 35 points from Q1 (78%). However, those expecting it to get easier (18%) and
those expecting it to become more difficult (30%) both increase by a wide margin, revealing that there is little certainty in the industry about the impact of the current crisis on financing availability.
Financing
Nearly half (49%) of contractors expect building owner access to financing to remain the same over the next six months. However, there is a much broader consensus among those expecting change
that it will become more difficult (38%) for owners to obtain the financing they need, an increase of 25 points since last quarter.
Spending
The majority of contractors (59%) report they will not increase spending on tools and equipment in the next six months, more than twice as many as those who say they will (28%). This finding clearly reflects their uncertainty about the market in that time frame and an attempt to be more conservative about expenditures.
More general contractors (GCs) (68%) than trade contractors (48%) report they will not be spending more money on tools and equipment in the next six months.
Material Costs
The percentage of contractors expecting low or no impact on their businesses from material cost fluctuations continues to grow, from 19% in Q2 2019 to 39% in the current quarter. It is important to note that this finding is part of a preexisting pattern and does not appear to be the direct result of the COVID-19 crisis.
Product Shortages
Over half (55%) of contractors report they are not experiencing any product shortages, slightly up from Q1, and generally consistent with the findings of previous quarters. While it is possible that the COVID-19 crisis may impact the availability of some building products, currently no impact is evident in the findings. Even so, 41% GCs say the availability of building products/materials will be a top challenge, compared with only 12% of trade contractors.
Of the contractors experiencing product shortages, the majority (69%) report only a moderate impact on their projects. This is statistically unchanged since last quarter
Contractor Concerns
The biggest concern by far is worker health and safety, with 75% of contractors indicating this as their top concern. The larger the company is, the more likely they are to select this issue, ranging from 66% of small firms (revenue less than $10M) to 88% of large firms (revenue $100M or more).
However, unlike many U.S. industries, only about one-third (34%) of contractors report their companies have laid off, furloughed, or reduced the salaries of their workers, suggesting that construction is still providing a boost to the U.S. economy. While only 32% of contractors report the expectation to employ more people in the next six months, even less (15%) expect to employ fewer people. This quarter also saw the first major reduction in contractors experiencing difficulty finding skilled workers since 2017. However, those percentages are still high, with 46% saying it is exceedingly difficult to find workers and 43% reporting that it is moderately difficult. One-third of contractors expect an increase in worker shortages will be a top impact, further exacerbating an ongoing labor shortage challenge.
Fewer projects is the second top concern for nearly half (48%) of all contractors, with small companies (58%) most frequently selecting this, compared with midsize (46%) and large (32%) companies.
Near- and Long-Term Outlook
Very few contractors (16%) report high levels of confidence in the ability of the market to provide sufficient new business opportunities in the next 12 months, and those with low expectations increased dramatically from previous quarters. However, the majority (59%) of contractors still fall in the moderate range. This suggests that most are expecting activity to continue at a level that will at least support their businesses.
Surprisingly, more contractors are extremely optimistic about the market’s ability to provide sufficient new business opportunities in two years than in the last quarter. This may suggest an expectation of pent-up demand in some sectors as the economy recovers.
Large companies have a more optimistic outlook than smaller companies, with 29% of large companies reporting high confidence levels for the next 12 months and 56% for the next 24 months.
Response to COVID-19
Nearly all (98%) contractors have made changes to how they operate their businesses in response to COVID-19. The majority (92%) have already changed work procedures to increase social distancing. However, very few (8%) have adopted more automation to enhance social distancing, with large companies (15%) and GCs (13%) more likely to do so than small companies (4%) and trade contractors (3%).
GCs are also more frequently asking owners for adjustments to work/delivery schedules, with over half (53%) reporting this, compared with just 29% of trade contractors.
About one-third of contractors (34%) report they have adjusted employee salaries, furloughed, or laid off employees, with midsize (40%) and large (41%) companies more frequently doing so than small companies (23%).
A portion (10%) mentioned other types of changes, including remote working; supplying hand washing stations and extra PPE; and keeping workers on payroll regardless of the amount of work to preserve their workforce.
Over one-third (39%) of contractors are asking owners to accommodate these changes by extending their work schedules. This pandemic has reinforced the importance of relationships as a driver of business, with most contractors considering their relationships with their clients (owners or GCs) and workers to be an effective risk management strategy.
Risk Management
While no one in the construction industry was planning for a global pandemic, many contractors have taken steps to reduce their exposure to risks they cannot necessarily predict, due to the challenges they have faced in the past.
Contractors were asked two questions about their means of reducing risk: which steps they took in the last three years, and the degree to which they consider those steps effective. The findings clearly demonstrate that building relationships with clients and with their workforce is a strategy that is
frequently employed. These relationships are also widely considered to be the most effective means of reducing the impacts of unexpected risks.
There are a few other factors, though, that are underutilized based on the percentage who consider them effective. These include developing cross-functional teams, increasing backlog, improving
contract language and diversifying. Large firms are not only more likely to take many of these steps than small firms, but more but more large firms who do so also report that cross-functional teams and diversifying types of work are effective strategies.
Feel free to contact any member of our team at (610) 828-1900 (PA) or (732) 341-3893 (NJ) with questions. Rich Higgins, CPA, managing principal – New Jersey office can be contacted at
[email protected]
.
I can be reached at
[email protected]
.
As always, we are happy to help.
Stay safe,
Marty McCarthy, CPA, CCIFP
Managing Partner
McCarthy & Company
Disclaimer: This alert is for informational purposes only and does not constitute professional advice. Information contained in this communication is not intended or written to be used as tax advice, and cannot be used by the recipient to avoid penalties that may be imposed under the Internal Revenue Code. We strongly advise you to seek professional assistance with respect to your specific issue(s).
