By Karen Barbour, founder and president of the Barbour Group, LLC.
See article in American DBE Magazine, clicking here
The first five months of 2020 showed an uptick in U.S. construction spending overall, according to recently published construction forecast reports by Deloitte, FMI, and the U.S. Census Bureau to name a few. But this was at a time when COVID-19 was not spiking as it is now and before the onset of the June 2020 social unrest and protests. In cities such as New York, construction stop orders were put into effect for several months with some just reopening as recently as May. Across the United States, many construction sites closed (for two weeks or more of quarantine) once any worker tested positive for COVID-19. The delays are costing construction companies and owners more than just lost profits. June’s impact to the construction industry may have an unanticipated dampening effect to construction that may take several months to manifest. Only time will tell.
Tracy Steedman(1) , an attorney in Maryland with Adelburg Rudrow, in a recent webinar hosted by the Alliance for Hispanic Commercial Contractors(2) strongly emphasized to the participants how COVID-19 has created multiple layers of new safety measures for job sites. While it may be possible for workers to socially distance from each other on a job site, it is not uncommon to see four or more workers arrive in one work truck. Questions to consider: Are those trucks disinfected properly? Are all passengers wearing masks in the vehicle? Is it necessary for each worker to drive separately? -- keeping in mind that lack of reliable transportation to job sites is a key reason why construction companies cannot secure enough workers. Additionally, for added safety, temperatures need to be taken at least every day and tracking of any infected worker must be diligent to stop any spread of the virus to the entire construction team. If a worker has a temperature and needs to leave the site, how will that worker find transportation home? These are just some new job safety issues born by COVID-19. Further, the stimulus checks are creating higher pay for construction workers than what they would receive if they went to work, creating havoc on an already diminishing labor pool.
To offset the cost of retained labor and overhead expenses during COVID-19, Paycheck Protection Program (PPP) funds were quickly sought after and secured by many contractors throughout the US. Construction was the biggest business sector that received PPP funds – 13% of the $342.3 billion in total(3) . According to 20 contractors polled for this article, several received PPP funds in the $1.3 million to $1.5 million range (having revenues up to $80 million), while others received funds in the $150,000 to $800,000 range (having revenues up to $20 million). The fund amounts varied depending on how much work the contractors self-performed and the levels of skill and pay of their employees. Some surety companies are treating the entire amount of the PPP funds as a current debt, despite the long-term payout and loan forgiveness option. Others, like the SBA Office of Bond Guarantees, are treating 25% as a current liability and deferring the remainder as long-term debt. Only a vfew sureties are treating the debt as pure capital.
With irresistible interest rates, project owners are spending more. The “Value of Construction Put in Place – Seasonally Adjusted Annual Rate” by the U.S. Census(4) shows that residential construction is up - $543 billion in May of 2020 versus $538 billion in May of 2019; and that non-residential construction is down - $812.5 billion in May of 2020 versus $814 billion in May of 2019. Of the $812 billion reported in May of 2020, $106.9 billion is being spent on Highway and Street, $117.8 billion being spent on Power, and $104 billion being spent on Educational construction. Recently a heating and air construction client expressed concern that there is very little new construction starting now. If those concerns materialize, then there will not be any significant work for the major subtrades the first quarter of 2021, causing a shift for more contractors to bid aggressively on renovation work to capture much needed revenue.
Federal construction, according to Deloitte’s “2020 Engineering and Construction Industry – A Mid-Year Update,” is poised to spend $2 trillion over the next 10 years on infrastructure upgrades.(5) However, for small business contractors, the contract awards are taking too long. The school of thought is that the funds will take a long time to be allocated. For example, a United States Postal Service office took bids at the end of April 2020 on a parking restoration project with an estimated value of $2.5 billion. When the contracting officer was contacted directly via email for an update, the response received on June 15 was, “I apologize the length of time it has taken to finalize the award of this project. Unfortunately, I cannot provide you with any information until an award has been made.” What the federal government fails to realize is that once a project is bid, especially one that requires a surety bond, the surety company will include the full estimated value of that bid into the contractor’s backlog until the results are known. Luckily, the surety company involved here elected to include only 50% of the estimated value into backlog to allow the contractor to pursue more work. This is just one example. Whether the delays are due to COVID-19 because of contracting officers and their administrative staff taking unemployment, due to challenges working virtually, or truly a lack of funding are anyone’s guess.
FMI’s report, “North American Engineering and Construction Outlook – First Quarter 2020 Report,” suggests that the second and third quarter of 2020 will bode negative GDP growth with a hint of an economic recession.(6) With the onset of COVID-19 spikes, stalled stimulus funding, protests, and possible extended disruptions for construction, FMI research predicts that the country could see as many as six quarters of negative GDP growth, leading to “irreparable financial damage and implications across multiple industries and seemingly healthy organizations and corporations.”(7) For now, one of the three surety companies contacted, “Surety A,” stated that their Northeast region had their largest single month record in May compared to sales over the past 18 months. They reported that no bonded contractor clients went out of business due to any COVID-19 shutdowns. “Surety B” stated that COVID-19 has severely delayed the receipt of CPA year-end financial statements. They stated that the PPP regulations are a challenge to monitor for their underwriting compliance and analysis. Unlike “Surety A,” “Surety B” reports that construction projects have stopped in the City of Boston with bids and project awards delayed. “Surety B” is concerned about their client’s results for 2020 and 2021 due to lack of a profitable backlog capture. Last, “Surety C” stated that they have seen large PPE contracts with no force majeure provisions and the requirement by general contractors to have their subcontractors provide a surety bond to guaranty their subcontract agreement, regardless of its value.
A few regional banks on the east coast are showing concern like the sureties noted above. Bank lines of credit provided to construction firms are being reviewed carefully and are generally not being renewed for the standard 12 months. Some banks are extending renewals only for six months, while one small regional bank is extending the bank line of credit for only three months due to COVID-19’s economic impacts.
The fourth round of PPP funds approved in Summer 2020 gives small business owners with less than 100 employees the ability to apply again if they were not initially successful -- but they must reapply no later than Aug. 8. There is a pool of $130 billion remaining of the total amount Congress appropriated to the program and it is being considered for a fifth round of PPP. Treasury Secretary Steven Mnuchin is hoping that the fifth round will be approved with legislation passed by the end of July.
(5) https://www2.deloitte.com/us/en/pages/energy-and-resources/ articles/engineering-and-construction-industry-trends.html
(6) https://www.fminet.com/wp-content/uploads/2020/03/ Q1_Outlook_2020.pdf
(7) https://www.fminet.com/wp-content/uploads/2020/03/ Q1_Outlook_2020.pdf.