IMPACT OF COVID-19 ON CONSTRUCTION - REOPENING THE ECONOMY - the next 3 months Part 1

What a difference 8 weeks makes!!! Compass International has been researching the impact of COVID-19 on Construction, our initial Part 1 findings are as follows. We will complete Part 2 of this article towards the end of May or in early June.

FACTS

The global economy is currently distressed, with serious declines in most major economies. However we do expect a gradual economic upturn in the 2nd half of 2020. 

COVID-19 has shut down the economies of more than 187 of the world’s 195 countries.

Construction, airlines, restaurants, hotels & international tourism sectors are really struggling.

Millions of people have been laid off or are looking to be unemployed.

All countries will experience a daunting year economically as they all struggle to get past COVID-19.

2020 Global GDP growth pre-COVID-19 was forecast to be 2.7% - 3.1%, post COVID-19 look for this forecast to drop to 0.7% - 1.1% a major drop.

US overall industry unemployment at the end of May is 13.3% up from 3.5% only 8 weeks back. Unemployment is showing signs of improvement going into June.

We are assuming that business / construction activity will slowly return to some degree of normality in mid May to early June (the next 3 to 6 weeks).

The likely negative impacts to the Construction Industry from COVID-19 in the next 3 months:

• The bottom line is that construction costs will increase, material costs will rise, additional direct construction man-hours & field in-directs man-hours will be needed to complete construction projects.
• 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 to perform with the required social distancing, personal protection (PP) requirements, new safety rules & cleaning routines.
• For example an Oil / Gas, Process, Offshore, Industrial, Manufacturing or Pharmaceutical related construction project with 250,000 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 new work practices, social distancing, new safety rules, temperature checks, cleaning protocols & the wearing of PP.
• The cost of N95 masks, disinfectant, disposable gloves, performing no touch thermometer checks to the workforce, hand sanitizers & the possible need for additional onsite compliance testing staff, could be a cost similar to small tools & consumables $2.25 to $3.50 per direct construction man-hour.
• Larger temporary lunch tents, changing rooms & temporary field offices to comply with social distancing requirements will be required.
• Construction unemployment across the US increased rather dramatically in April & May. US unemployment prior to the outbreak of the COVID-19 was between 3.6% & 4.3%. As of the end of May, this was reported to be 13.3%.
• Construction Projects will take longer to complete, a 12 month typical construction schedule will take anywhere from 14 to 16 months to complete post COVID-19.
• Additional construction in-directs / preliminaries / site establishment will be required to support the additional direct field man-hours &longer duration's, possibly an increase of 5% to 10%.
• Owners are demanding new work procedures that include social distancing, PP & cleaning on current ongoing & future projects.
• Owners & construction organizations are struggling with restarting projects & the need of worker testing, obtaining PP (masks / gloves) & developing necessary cleaning procedures & safety requirements.
• Commercial, Infrastructure, Pharmaceutical, Oil & Gas, Chemical, Power & Industrial construction has slowed down significantly in the last 8 weeks, some projects have been postponed or suspended. Final Investment Decision’s (FID) rulings have been delayed.
• Lenders & Banks have tightened borrowing & project funding procedures. Skepticism on the state of the economy will cause some planned construction projects to be deferred.
• The construction supply chain has been baldly impacted in the last 3 months, it could take months to fully recover, creating shortages, driving up prices & causing delivery delays.
• Major production equipment & bulk materials costs will increase, there will be specific shortages that Owners & Contractors will pay premiums to obtain ASAP to meet critical path milestones.
• Additional costs related to construction equipment / plant hire being on site longer & as an example on large projects were the workforce is bused from a parking lot to the work site, additional buses will be required to meet social distancing mandates resulting in additional costs.

The likely Positive impacts to the Construction Industry from COVID-19 in the next 3 months:

• In the US with the current high unemployment level, there will be an abundance of available unemployed skilled & non-skilled Open Shop & Union workers. Previously to the COVID-19 pandemic, the US experienced a lack of skilled construction workers, especially Pipefitters, Welders, Instrumentation Fitters / Electricians on the US Gulf Coast.
• 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.
• Inflation in the US is forecast to fall to 0.8 % – 1.5%, versus pre COVID-19 forecast of 2.3%, we believe some countries will experience lower inflation, while some developing countries will see an increase in inflation. We will cover this in Part 2.
• In the US a $2 + Trillion US “Infrastructure” stimulus package is expected to be introduced in July or August, this will be focused on shovel ready Highways, Bridges, Airports & the like, plus a payroll tax reduction program.
• Many Federal & State Governments around the world are expected to initiate infrastructure projects to stimulate their economies & to reduce unemployment levels.
•  Historically low borrowing rates could help stimulate the construction with many potential companies looking to build or expand facilities with extremely low financing costs.
• The partial reopening of the US & World economy towards mid May & June (just a couple of weeks away), will see a major push to get late / delayed construction projects completed.
• A steady increase in Oil prices as Northern hemisphere countries stock up for the upcoming winter months & the expected increases in Chinese demand, many Oil / Gas CAPEX projects that were put on hold will be resurrected. The oil price war between Russia & Saudi Arabia over market share has driven oil prices down by 40% in the last 3 months, it appears that a negotiated agreement has been reached, this will be beneficial to the Oil, Gas & Energy construction sectors. The world consumes approx. 100 million barrels of oil a day (MBD). COVID-19 has reduced this need to approx. 60 MBD. Currently there are approx. 450 to 850 MBD in storage or loaded on oil tankers at sea awaiting delivery instructions. This is a reason why we are experiencing significant oil price fluctuations in the last few weeks.
• Many home office / construction support staff will continue to work from home, businesses are looking for containment strategies that reduce person to person contact, look for this trend to remain in effect for the next 3 months & possibly this could be the new norm.
• An improvement in construction activity in the 2nd half of 2020 & 1st Q of 2021 appears to be a reasonable assumption. Some major US cities have stated to reopen as of early June.
• Look for modular, pre-assemblies, skids, process pipe fabrication, pre-fabricated clean rooms & buildings becoming more & more the norm in the US / North American Construction Industry & around the world, look for this trend to continue in 2020 & beyond. Modularization many times is cost effective versus “stick built” construction methods.

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 2 in the coming weeks, stay tuned.

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