Resilience and Perseverance

It’s that time of year where we summarize the performance of the Canadian construction industry over the past year and look into our crystal ball to offer perspective on the year ahead. In our company’s 43 years, we have not been witness to as tumultuous and erratic a year as 2022, nor as challenged a task as offering a forecast of what may lie ahead.

Inflation - higher labour costs, material, equipment, and other price increases - has cut into contractors’ gross margins, and supply chain and labour shortages continue to hinder productivity and extend schedules, further exacerbating pressure on profit margins. Meanwhile, surging interest rates and the resultant ballooning carrying costs of borrowing has added a new element of risk and profit erosion to the great proportion of construction businesses reliant on debt. All told, these challenges – and in particular their confluence all at the same time - would have spelled doom were it not for the continued healthy demand for construction services, and the generally robust backlogs prevalent in the industry.

So, what’s in store for 2023? Here follows some commentary from a diverse group of PWA clients, who offered their perspective beyond the crisis in Ukraine, possible further Covid waves, continued impacts of inflation on cooling the economy, and all the micro and macroeconomic issues surrounding their businesses:

“2023 will bring some stabilization in terms of the wild inflationary pricing. Volumes will remain high as most companies are still working down their backlogs. I foresee bidding opportunities slowing down and certainly project budgets are going to get tighter and I think many projects will be cancelled. The fact that inflation is still an issue poses a greater risk to the overall economy than the [construction] industry. The industry as a whole won’t be affected as much as the greater economy, most [general contractors] have already built in additional risk factors into their pricing. Access to human resources is going to continue to be an issue for most of the construction industry in terms of limiting what we can actually get done and certainly will limit overall growth. I believe as interest rates increase, we are going to see a significant number of failures in the subcontracting industry, most trades cannot handle the increased lending costs and I suspect a lot of the lending institutions are going to start paring back their facilities so the trades are going to get pinched.” –

Institutional General Contractor

“2023 will certainly be a better year than 2022. The pricing escalations and supply chain issues of 2022 have been settling down and we feel the worst Is behind us. 2023 barring any worsening of the issues in Ukraine and Covid should see stability in pricing and as we’re still in the first year of the labour contract, labour pricing is a known quantity…. The talk of a recession seems to be mostly just talk, there seems to be a lot of people working, low unemployment and people are still spending…” – ICI

Mechanical Contractor

“We are expecting 2023 to be a better year than 2022…. Although there are lingering issues from the pandemic years - especially supply chainsthe pricing volatility has stabilized. This volatility was unprecedented. Supply chain issues are being mitigated but most contractors were fully exposed to the pricing increases in 2022. I think most will indicate a more optimistic forecast for 2023 due to a large backlog of projects in some markets, whereas other markets may not be the case, as interest rates rise and the potential for a recession looms. Suppliers are our greatest concern; supply chains are still plagued with issues and manufacturers and suppliers simply can not meet current demands” – Industrial and Commercial Electrical

Contractor

“My sense is that most contractors are still working through a fairly healthy backlog of work, so I would guess that most would expect to see similar results to last year. For our business, we are most concerned with over leveraged sub trades. I think there are a large number of trades who have used the recent high volumes of work to take on debt and over leverage themselves believing that this level of activity is normal. If for some reason we see a down turn I think we may see many subs experience issues” –Institutional General Contractor

“Ours is a healthy backlog and we’re comfortable with the way 2023 appears to be playing out. We’ve carried a good deal of contingencies in our bids - for fuel, equipment, labour, and other materials, but for the first time in a while, believe we may not need all of these contingencies, and they may turn to a modest increase of gross profit, which is the opposite of what happened in 2021-2022. That said, we’re concerned about the rising cost of construction, the mismanagement of our provincial and federal financial affairs, and the ability of public entities to pay for the necessary infrastructure investments” –

Heavy Civil contractor

In our humble view, a fair number of contractors with less resilient balance sheets (modest working capital and/or significant dependence on debt) who have suffered financial setbacks through 2022 will face a very real risk of succumbing to those injuries in 2023, and that will have a consequential ‘domino’ impact on their customers and suppliers. So our recommendation would be to pick your partners and projects carefully in 2023. That said, the year ahead will likely see some settling of interest rates, labour shortages, and supply chain challenges, and present unique opportunities for nimble and financially resilient contractors. And one thing is for sure; contractors have developed a keen ability to adapt to change and challenge.