COVID-19 impact on construction costs and escalation in the short, medium, and long terms
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or those of you who attended our Cost & Project Management presentations over the past several months, there was a constant theme around crystal balls and the moving market, especially in terms of hard construction costs. At the time, COVID-19 was a distant problem, developing mostly with concerns around the supply chain. I guess we discovered our black sheep! There is no doubt now that COVID-19 will have a great impact on construction costs. The primary focus of this opinion piece is residential and commercial; however, it needs to be noted that the entire construction industry is interconnected. There tend to be consequences and impacts in all asset types that influence each other. After all, concrete is always concrete; it does not overly differentiate by asset (no semantical arguments please). Also, with the stimulus funds that will flow into construction they will more often or not be directed towards institutional and civil (transit) projects; with the private sector left to fend for itself (thankfully). So, the question is: what will be the impact on construction costs? Some believe costs will go up, some believe costs will come down, and both are likely correct. The question is more around time and how long the pandemic impact lasts and, ultimately, will we end up in an official global recession? The question around the recession is how hard it hits Canada. Often in a recession all bets are off and construction prices will plummet, projects will be cancelled, distressed deals will appear, purchasers can’t buy, and financing will dry up, etc.
But, that’s a little doom and gloom, and we are not there yet. THE SHORT TERM Let’s take an optimistic view and say this scenario lasts just a few weeks longer. Costs will go up, claims will be submitted, and schedules will go long. Think about temporary hoists with only two workers at a time on a 40-storey tower trying to get to their floor. That’s an hour per person lost every day (minimum). Or, the line up in the morning as site’s screen workers come in – add in physical distancing and productivity will plummet. The supply chain is now somewhat broken with it being difficult to impossible to get materials from Quebec with the shutdown, local fabrication partially closed with backlog upon restart, China going to have long leadins, and the United States somewhat in flux, etc. We will have a future opinion piece on the supply chain around trade in the coming weeks, so stay tuned! Trades Sites were already struggling with obtaining skilled labour for certain trades, and it’s only going to get worse before it gets better. That assumes the sites don’t close, as the main priority has to be safety of workers and their families. Someone has to pay for this, as trades, owners, general contractors, and suppliers will all be hurting. Costs are going to increase on projects, likely more than the sudden drop in interest rates will help. Where construction financing is in place, put that savings straight into contingency, because it’s likely largely gone.
Financing As we run through the next billing cycle, who isn’t going to try and get as much cash as possible? The risk is if the sites stop and the project is over certified, is there enough cost available to complete? If the cash is gone by the time the remobilization happens in the future, is there an increased risk of defaults? Ultimately costs go up in the short term. Revenue Can I register the condo? Can I occupy the units? If the answer to either of those is ‘No’, then costs likely go up. If the industry stops for a short period, then costs carry on and go up. Margins, however, tend to do the opposite. Who had the foresight to provide a contingency for global pandemics? Bidders The next question is: are you bidding right now? We know the trade / supplier offices are likely largely up and running remotely, and I assume there are people to bid. If you are responding to a bid call, how do you approach the bid in the new world of risk we are in? If classification as an essential service continues, but productivity is 40-50% (say) does that get factored into the bid? If the materials come from countries impacted significantly, what premium do you add, and how do you take risk on schedule or cost? Is COVID-19 here for the season, or back next year? Bid high, or bid low as you need the work (perhaps) then face cash flow issues in the future. Or, do you simply not bid, because it’s not worth it? Unless you were to go safe (a.k.a. high, with lots of caveats) and someone else goes in low, that’s less competition in a year’s time (Darwinism approach)!
Summer 2020 | www.ciqs.org | CONSTRUCTION ECONOMIST | 21
