The construction industry stands in a unique position when gauging the impacts of the response to the COVID-19 pandemic. Largely declared an essential industry, many construction projects were not shut down, even in the early months of the pandemic. However, the public funding on which infrastructure projects rely and the general economic health of the nation both threaten to significantly slow down the market. This is why getting the perspective of contractors on their business expectations and on how they are responding to the new requirements and conditions is so essential.
Dodge Data & Analytics has two publications that shed a light on how the pandemic is impacting the business of construction. Since 2017, the Commercial Construction Index, drawn from research and analysis by Dodge and published by the United States Chamber of Commerce, has revealed how contractors’ businesses are faring and their optimism for their prospects in the future.
In July 2020, Dodge Data & Analytics also launched another publication, The Civil Quarterly, based on the responses of contractors who engage in heavy civil construction, and it looks at similar business factors.
The most recent editions of both of these publications have supplemented the overall business conditions examinations that each explores—including backlog, revenue and profit margin expectations, workforce issues and supply chain issues—with questions directly about the impact of the response to the COVID-19 pandemic on their businesses and how they are responding to it. Both the business conditions and the data on the response to COVID-19 reveal the impact of COVID-19 currently and expected in the near future.
The overall index figure in the Commercial Construction Index that gauges the health of the industry plummeted from 74 to 55 between Q1 and Q2 2020, and then remained relatively steady at 57 in Q3. However, despite the similarity in the overall number between Q2 and Q3, the three components on which that score is based—backlog ratio, new business confidence and revenue—did have some important differences between the two quarters. Initially, the Q2 ratio of contractors’ average current to ideal backlog only fell slightly from Q1, from 76 to 73. This is in sharp contrast to their confidence in the ability of the market to supply new work in the next 12 months and their revenue expectations, both of which dropped by 26 points between Q1 and Q2.
In Q3, by contrast, the ratio of current to ideal backlog continued to fall, down to 68. However, while still low compared to pre-pandemic ratings, new business confidence and revenue expectations actually picked up in Q3 compared to Q2 (by 6 and 4 points, respectively). With the pandemic still ongoing and uncertainty about a resurgence in the fall, contractors in the July survey nonetheless were slightly more optimistic about their business prospects than those in April.
Part of this likely has to do with a decline in that period in the overall share of delayed projects that commercial contractors were experiencing. In April, on average, contractors reported that 40% of their commercial and institutional projects were delayed due to the pandemic. By July, the share of delayed projects had declined to just 26%, and the contractors in July were expecting it to drop further to 22% by Q1 2021. All of this demonstrates that commercial contractors have been experiencing serious business impacts from the response to the pandemic, but that their optimism is already rising for stronger market conditions in the future.
While The Civil Quarterly does not employ an overall index number, it does track the same information on the ratio of current to ideal backlog and confidence in new business that is tracked in the Commercial Construction Index. In addition, the first survey for the Civil Quarterly was conducted in April 2020, so pre-pandemic data from this study is not available. Still, even with those caveats, the picture painted by the Q2 survey from April and the Q3 survey in July paint a clear picture of how this sector is responding to the COVID-19 pandemic.
Similar to the commercial contractors, the civil contractors have a lower current to ideal backlog ratio in Q3 than in Q2. However, the ratio for civil contractors in Q2, even after the pandemic started, is 92, nearly 10 points higher than the highest ratio of the responses from commercial contractors since 2017. So even though the ratio has now lowered to 85, that still means that most civil contractors still have backlog levels very close to their ideal amount, even after the impact of the pandemic has been felt for several months.
The high backlog ratio is probably due to the prevalence of publicly funded projects in civil construction. Most public projects already funded for 2020 are not affected by the crisis, and nearly half of the contractors have backlog levels of 6 months or less, suggesting that for now, the crisis would not have had a major impact on their volume of work. This does suggest, though, that as public coffers are diminished due to increased spending in response to COVID-19 and declining tax revenues, future projects outside of a 6- to 12-month outlook may be at risk.
Some of the civil contractors share this concern, with those with high confidence in the market’s ability to provide them with new work over the next 24 months declining from 64% to 55% between Q2 and Q3. However, it is worth noting that over half still remain highly optimistic about their prospects for finding new work. This contrasts notably with the responses of the commercial contractors, with only 41% report this level of confidence in the 24-month outlook.
In fact, The Civil Quarterly reveals that the business conditions reported by civil contractors have remained relatively strong in 2020, with revenue and profit margin expectations remaining relatively steady for the next 6 months. This is despite the fact that the average share of projects delayed by COVID-19 by July according to the civil contractors is 21%, lower than the share reported by commercial contractors, but still a significant percentage of their work. It demonstrates that, while the initial pandemic response has had an impact on the heavy civil construction sector, the economic fallout may ultimately be the biggest challenge faced by these contractors caused by the COVID-19 pandemic.
Each of the recent studies also looked at the way contractors have changed the way they do business due to the COVID-19 outbreak. About three quarters of both civil and commercial contractors report that they have changed work procedures to increase social distancing. However, allowing remote work options for office employees is more common among commercial (67%) than civil (50%) contractors. While few contractors in general report that they have had to adjust employee salaries, furlough or lay off employees, there has been a greater need to do so among commercial contractors (20%) than civil contractors (10%).
Almost one quarter (23%) of civil contractors have also adopted technology to support social distancing, far more than the commercial contractors, where only a nominal percentage (4%) report making these kinds of investments.
The civil contractors were also asked about the more long-term changes they expect to remain after the pandemic is over. Three quarters (75%) expect some of the changes they’ve implemented to be permanent, with a particular focus on their increased attention to cleanliness/sanitation (53%), and adjusted safety and work procedures (42%). Interestingly, 35% also report that they expect to encourage/allow remote working where possible, a much lower percentage than the 50% who are permitting it currently. This does suggest that a portion of the industry sees advantages to remote working, but that it is still not going to be a widely used practice after the crisis subsides.