COVID-19 the impact on Global Construction Industry - Part 2

What a difference 3 month makes!!! Compass International has been researching the impact of COVID-19 on Construction, our initial Part 1 findings were posted in May. This is Part 2 of that article. We will be continuing with Part 3 in the next month.

?Recent Events (the last 3 months):

The COVID-19 pandemic has delivered a major setback to the Global Construction sector. Forcing many construction organizations to shut down or severely slow down ongoing construction activity. The world economy & construction sector is in its most unstable place since the Great Depression of the 1930’s. International growth has been slowing down for the past 18 months, COVID-19 has slammed on the breaks of future growth for at least the next year or two.

The COVID-19 virus has been responsible for anywhere from 35% to 70% of ongoing construction projects around the world to be closed down since mid-March, COVID-19 has impacted the economies and construction sectors of more than 185 of the world’s 200 countries.

Vietnam and a smaller group of nations continued construction activities throughout March, April and May, while construction work in the Philippines similar to the majority of countries around the world banned construction activities for the best part of a 3 month period.

Millions of people have been laid off from their current employment with no guarantee that they will be reemployed.

Construction organizations, Architects and Engineering firms, construction professional and workers, vendors, suppliers have wrestled with the impact of COVID-19 for the last 3 months. The 2nd Q, saw less demand for EPC services related to process, power, energy, infrastructure & industrial construction, look for this activity to increase as we transition into the 2nd half of 2020. Engineering & Architectural “all in” selling rates in the US have experienced 2% to 5% declines in 2nd Q. As construction activities start to pick up in the 2nd half of 2020, these declines are forecast to recede.

New orders Process & Production Equipment / Machinery have decreased off in the last 3 months. Prices have declined by 2% to as much as 6%, fabrication and delivery to site duration's have slipped by as much as 6 to 12 weeks. 

COVID-19 substantially impacted the Global Construction supply chains, the vast majority of Chinese construction suppliers did not fabricate and produce products / components in February & March. China supplies between 20% and 30% of construction materials & components for the North American and European construction markets. The majority of countries will experience a daunting year economically as they all struggle to get beyond COVID-19.

A number of US States are limiting the size of work crews and requiring workers have to maintain at least 1,000 to 2,000 SF of free workspace (the so called 6 foot rule) from their co-workers. Work crew size reduction can also supplement work distancing objectives. Construction site staff and field construction workers are required to wear personal protection and regularly use hand sanitizers, this of course is affecting budgets and field productivity. COVID-19 has forced many contractors to reduce their current workforce by as much as 25% to 50% in an effort to minimize the spread of COVID-19.

The 2020 Global GDP growth pre-COVID-19 was forecast to be 2.7% - 3.1%, which would have been a reasonable year for Global Construction. Post-COVID-19 look for this projection to drop to 0.4% - 0.9% a major decline.

Many industry leaders are forecasting that COVID-19 will have lasting consequences on the ways future Global Construction projects are planned, managed and executed. However I have been watching construction activity on a large supermarket being built close to my office in Florida over the last 4 weeks, the workforce of 40 + mainly Mexican concrete workers and masons are not socially distancing, wearing masks or gloves, is this COVID-19 overblown?, it’s difficult to determine the full impact of COVID-19 on future construction at this time. Perhaps the majority of industrial oil / gas, manufacturing, power plants / Government funded infrastructure construction projects will follow the vast majority of requirements detailed in this article.  

Numerous construction organizations have in the last 3 months been fine-tuning and developing new approaches on how to successfully work in the Post-COVID-19 environment.

What will be the impact of COVID-19 on Construction in the next 3 months or possibly longer?

Everyone is forecasting that a new vaccine will be discovered, we are told it will be available in 6 to 18 months, but we don’t know when it will be approved and the logistics of producing 7 billion doses is not feasible for at least a couple of years, so it looks like we are stuck with COVID-19 for the foreseeable future.

In the US the vast majority of States are starting to allow construction work to move forward with new procedures to counteract the spread of COVID-19, construction activity is starting to slowly ramp up in the next month or two.

Initial Forecast

Field construction productivity will take a big hit, we have been talking to a number of Senior Construction Managers, they inform us that a typical construction work item that took 1,000 man-hours to perform pre COVID-19, will take anywhere from 1,100 to 1,200 (a 10% to 20% increase) to perform with the required social distancing, personal protection requirements, latest safety regulations & cleaning routines. For example a new process (oil / gas), power, pharmaceutical, manufacturing, industrial related construction project with an estimated 250,000 of direct construction man-hours on a typical pre-COVID-19 project, will now take 275,000 to 300,000 man-hours to execute, due to these measures.

Initial forecasts from our research is that COVID-19 will increase current and future construction project costs by as much as 20% and possibly more in some situations, this increase is due predominantly on the increase of additional man-hours to complete a project, we expect to see labor hourly rates and bulk materials to remain static or to reduce marginally. COVID-19 will cause building occupancy, mechanical completion, commissioning activities and facility handover to be delayed.

This increase will be driven by: (A). Loss of worker productivity at site, smaller work crews, social distancing, extended periods of wearing of personal protection, additional direct and in-direct man-hours will be required to complete construction tasks. (B). Construction projects will take longer to complete a Pre-COVID 19 project that took 12 months to complete, will now take 14 to 16 months to complete. (C). General Conditions / Preliminaries / Site Establishment costs will increase, larger / additional temporary site offices, changing rooms, lunch areas will be required, General Conditions / Preliminaries / Site Establishment will be needed at the site longer. (D). Construction equipment / plant hire costs will increase because of the issues in the above. (E). Additional COVID-19 compliance staff could be an additional cost. (F). Bulk material costs such as hardcore, engineered fill, bricks, concrete blocks and structural steel costs are forecast to fall by 4% to 8% in the next 3 to 6 months. We are seeing a slight rise with ready mixed concrete prices, increasing by 2.5%, imported specialty items such as terrazzo / granite products, lighting / plumbing fixtures, valves, certain process pipe fittings will increase by 4% to 7% in the next 6 months. (G). In the US labor hourly rates are expected to remain somewhat static. Open Shop hourly rates could see a decline of 2% to 5%, these rates are decided many time on what the local market will bear. Union hourly will remain fixed. However the overall cost of labor on a project will increase because it will take additional man-hours to complete the work effort. Labor rates around the world could see a decrease of 2% to 5% in the next 6 months due to the abundance of available labor.

The construction supply chain has been severely impacted in the last 3 months, it could take months to fully recover, creating delivery delays / shortages of major equipment (columns, compressors, reactors etc.), driving up prices & causing delivery lags. Some major production equipment and instrumentation devices, transformers, HVAC items, overhead cranes, lighting / plumbing fixtures materials costs will marginally increase.

There will be less demand for new office construction and the need for office leasing space due to recent work from home mandates and social distancing protocols. There could also be a renewed movement to relocate high priced US and European call centers and administration / help desks to developing countries in South East Asia to save administration costs.

Historically low borrowing rates could help stimulate the construction with many potential companies looking to build or expand facilities with extremely low financing costs. This coupled with the current US administration’s desire to relocate manufacturing back to the US from overseas countries could possibly see a construction advance in the 4th Q of 2020.

Owners and contractors are developing new construction practices / procedures to deal with transmission and mitigation of COVID-19 at construction sites, of course there are increased costs associated with these new measures. 

Site staff and construction workers on the vast majority of Global construction projects will be directed to wear hard hats, gloves, face masks and possibly safety goggles / glasses at all times. This coupled with temperature checks when entering the site, the possible need for additional field staff to ensure COVID-19 mitigation is being followed, hand sanitizers, new gloves and masks each day will be a significant add-on the construction labor costs, we have revisited our earlier estimate and believe this cost could range from $2.45 to $3.85 per direct man-hour. The workers waiting in line for temperature checks and the social distancing and the fatigue that will be experienced by continually wearing personal protection will of course seriously impact worker performance and will reduce historical productivity norms that contractors have been using in there bidding efforts.

 Some Owners and Contractors have begun hiring additional field staff to ensure COVID-19 mitigation / safety diktats are being followed, the feedback we are getting that 1 additional COVID-19 compliance person is appropriate for 100 / 150 construction workers. These individuals are responsible for temperature checks at the sites entry points, handing out face masks and gloves, making sure hand sanitizers are available, material deliveries are sanitized, ensuring lunch areas, changing rooms, temporary toilets are disinfected on a regular basis and of course social distancing is being followed on the site.

Temporary Fencing / Barriers, Warning Signs, Access Controls and Site Entry for deliveries and the need for gate keepers and security guards may be required to limit non-essential visitors to the site. This of course has a cost impact that should be added to the General Conditions / Preliminaries account.

Deliveries of construction materials, major equipment, hired plant / construction equipment, scaffolding will need to go to a dedicated holding / laydown area to cleaned / sanitized and store for at least a day or two before being transported and stored into clean temporary site warehouses, documentation needs to be completed and maintained of these deliveries, cleaning and site distribution activities.

Out of a 8 or 10 hour construction workers work day, the consequence of waiting in line to get a temperature check (10 minutes), listening to tool box safety talks (10 minutes), travelling to the work area (10 minutes), getting instructions from a Foreman (10 minutes), selecting correct materials (10 minutes), a lunch break (30 minutes), visiting a bathroom a couple of times (3 x 10 minutes), taking a (4 x 10 minutes) water break from wearing personal protection / cooling down, cleaning of tools (10 minutes), getting ready to go home (10 minutes), only 5 or 7 hours of actual work is performed.

There could be a need for a number of dedicated ongoing cleaning squads that are responsible for sanitizing work areas prior to the start of construction activities.

 Lots of miscellaneous items such as windows, cabinets, lighting, HVAC units, electrical and plumbing fixtures, office partitions are made in China, Mexico, Germany, Italy or South Korea, pre-COVID these items took 6 to 10 weeks to order and arrive at the construction site, these items are now taking 10 to 20 weeks to be ordered and delivered to site.

Major equipment items such as columns, compressors, chillers and reactors are typically long lead items that can take 16 to 32 weeks or longer to fabricate with the COVID-19 we are experiencing delivery delays of an additional 8 to 12 weeks for delivery at site.

A dedicated clean warehouse / fenced off lay down areas may be required.

 US Single Family / Multifamily, New Offices and Retail construction will have a difficult remainder of 2020. Construction activity is forecast to see a 40% to 60% drop over pre-COVID-19 levels, this projection is expected in the majority of countries around the world. 

The US and the Global construction sector could see additional Pharmaceutical / Industrial projects and the need for warehouses and logistic centers as a result of COVID-19.

Working from, home, video conferencing of site coordination meetings is now the new normal.

The COVID-19 crisis could see modular construction take on major role in the Global Construction sector, the world has seen major hospitals and clinics built in weeks were conventional “stick” built facilities could take many months to build.

There is a concern that there will be a 2nd outbreak of COVID-19 in the 3rd and 4th Q of 2020, all construction organizations must accept this reality and continue with current mitigation procedures and be prepared to deal with this new outbreak if it does occur.

Many construction related organizations are currently experiencing serious cash-flow problems, delayed payments from Owners and cost overruns on lump sum projects. Lots of contractors are now paying the price for previous aggressive bidding practices. A lot of large and mid-sized EPC companies have been experiencing financial issues for the last 18 month, unfortunately some of these companies could be facing bankruptcy in the coming months.

The new “normal” in construction is the relationship between the home office and the field office and how this coordination operates is vital to future success.

The real impact of COVID-19 on the Global Construction sector will not be fully known for another 2 to 3 months. If you have any questions on this article contact John G. McConville CCP - Operations Director www.compassinternational.net/  

Telephone (609) 577 4505 Private E Mail [email protected] we will be issuing Part 3 in the coming weeks, stay tuned.

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