Potential impacts on construction costs

COVID-19: Potential impacts on construction costs

Building resilience beyond a global pandemic

It is four months since the first case of COVID-19 surfaced in Canada and a little over two months of mandatory closure in certain provinces, which has included closure of non-essential business operations . While these measures were necessary, they have resulted in unpredictable impacts to the construction industry . We have seen a surge in operational cost, a variance in productivity, and uncertainty in the supply chain . In many ways, this event is “unprecedented” as there is no field manual, case study, or any Artificial intelligence-backed technology that predicts the timeline of this pandemic .

At the time of writing, effective implementation of social distancing has slowed down the pace of the spread and provincial governments have started to assess the possibility of lifting certain restrictions . Businesses have also started evaluating their preparedness to resume operations under the constraints .

With health and safety of the on-site construction staff the top priority for contractors and owners alike, the cost impacts of achieving this in the short term may be significant .

As of now, strict compliance of selfimposed physical distancing norms and the use of appropriate personal protective equipment are leading to a loss of productivity on many construction sites . All of the points above are leading to negative financial impacts on most construction projects .

CHALLENGES FOR THE INDUSTRY: Short term (next 6 months)

We expect to see projects that were underway prior to COVID-19 slowly return to a ‘new normal’ of operations dealing with a disrupted supply chain, and increased health and safety practices . Projects in the planning stage that have secured funding, will be received in the market with competitive prices from contractors aiming to fill their backlog of secured work .

Figure 1 (Source: www.investing.com)

Disrupted supply chain: Maintaining the schedule of construction projects depends on many factors . One of the crucial factors is the health of the supply chain . Due to disruption to many global supply chains, projects that have greater dependencies on imported materials are starting to face some difficulty . (Steel, aluminium, drywall, controls etc .)

The increased number of people working from home has affected production of materials and goods, while border restrictions have challenged the logistics of getting them from manufacturer to end-user . There is also disruption at the site level when goods are available to be delivered but the site is closed, or alternative hours of operation are in existence and the contractor is not able to assume ownership .

The cost impact of the disrupted supply chain can be the opportunity loss of not having product available for installation, or alternatively, the additional cost of an available product substitute . This will negatively affect the construction schedule and may lead to an increase in the cost of projects in the short term .

Exchange rates: Any commodities coming from the US will be affected by the high USD which, at the time of writing, is 10% higher against the CAD than it was in January 2020 . Until the beginning of 2020, the Canadian dollar had consistent performance when compared to the USD . After a low of less than US$0 .70 in late 2015, the Canadian dollar had maintained an exchange rate of around US$0 .75 . In midMarch 2020, the Canadian dollar reached an 18-year low of just under US$0 .69 . From that moment to the time of writing, the loonie has been slowly recovering, and is now back over seventy cents . The impact of this will be felt by the construction industry all the way through the supply chain; Canadian purchasers will be paying more for the same goods and material than they were in January 2020 .

Competitive pricing: Notwithstanding the factors listed above, we can expect to see a period of more competitive bid prices . When projects that have secured funding reach the market for tender it is likely that contractors, in the shadow of the impact of a likely global recession, may become more competitive in their pricing to ensure they have a strong order book of work for the upcoming year .

Long term (6 months and beyond)

Despite the best efforts of the public sector to provide ‘shovel ready’ projects, we expect to see a levelling off and potential decline in construction volume through 2021, as the impact of the recession takes hold on the global economy .

Project delays: Owners of construction projects that were temporarily suspended due to mandatory site closure, or the start dates of which were delayed at their own discretion, should be conducting a quantitative risk analysis to determine if acceleration is the best option for the project . Sometimes the cost of accelerating (more manpower, more site supervision, less productivity due to trade stacking) will be greater than the Liquidated Damages for a contractor, or the loss of revenue for an Owner .

There will be further cost impacts for any “outdoor” construction activities that were originally scheduled to be completed in summer, or mild weather months, but are pushed to be completed during winter months (heating, hoarding, ground thaw, paving, labour productivity, etc .) .

Regulatory reforms: The government or regulators may introduce new regulatory health and safety frameworks for both construction staff and the occupier . We can expect to see new project design requirements that accommodate physical distancing compliance and enhanced quarantine features . These possible regulatory reforms will have a direct impact on labour costs (physical distancing) and revenue (more square footage for use of occupancy) .

Recalibration: Projects that are in the pre-construction planning phase will require in-depth analyses, considering these new regulations and economic pressures . Recalibration would include reallocation of resources, scenario planning, and cost analysis .

“Never let a good crisis go to waste” - Sir Winston Churchill

While the specific outcomes of the pandemic remain uncertain, the construction industry will more than likely continue to experience disruptions in overall operations, at least in the short term . In response, organizations will need resiliency planning to mitigate any future project risks . The construction industry will inevitably be reshaped due to change in behaviours, policy changes and – put simply – the way we do business . In response to these changes, our profession has an opportunity to demonstrate the true value of engaging cost management professionals to assist organizations with managing costs, mitigating claims, ensuring business continuity, and navigating risks in times of uncertainty .

About the author

Leslie Fowler, PQS, MRICS, is a Director with Turner & Townsend based in Calgary . She has over 15 years of diverse industry experience along the full lifecycle of project development . She has worked in both the general contractor and consultancy environments on projects in the public and private sectors, focusing on strategic contract planning, risk analysis, schedule and cost analysis, delay claims, and dispute resolution .