As the effects of COVID-19 are felt around the world, construction is one of the few industries that have managed to continue operations. Many projects — where infection rates have been more controlled and lockdown measures less drastic — have carried on, albeit in the face of several financial and operational challenges.
As construction companies start to reimagine their recovery, the focus will be on ensuring execution on the backlog of projects. At the same time, concerns will arise over future project pipelines that are expected to weaken as the global economy is hindered by low growth and high unemployment. In particular, the industry could be affected in several ways:
- Commercial and industrial sector: This sector faces the greatest risk from the economic downturn in counties that have been most affected by the pandemic. Its immediate priority will be maintaining business continuity rather than seeking investment in new projects.
- Residential sector: Residential will likely weaken as rental revenues suffer from the fallout of the global shutdown (where some countries are further down the path to reopening than others), as well as a glut of properties coming on stream.
- Public capital investment: On the flipside, the public sector is expected to invest heavily in infrastructure projects to reinvigorate economies, although the extent of public spending will depend on debt and deficit levels.
This suggests that some subcontractors — as smaller businesses — may default. Other firms, in order to conserve cash, might retrench by reconsidering international projects and focusing instead on regions with a critical mass of operations. Large contractors, which rely heavily on smaller operators for large engagements, might face operational challenges and suffer financially due to delays in project closeouts. Across the procurement chain, costs will be a key consideration when defining bid packages and technical specifications, while other aspects — including business partner defaults and project execution capacity — will continue to play a major role in project selection.
It is essential that construction firms take a holistic view of the current environment, especially the ability of subcontractors to meet project needs. There are a number of issues that need to be considered in the context of the latter, including governance and ownership practices, risk management capabilities, delivery management, resource planning and allocation, contract approach, and supply chain and stakeholder management. A subcontractor’s failure to properly address and manage each of these can have a detrimental effect on the delivery of work packages, causing a domino effect on other subcontractors and eventually the project as a whole.
Exhibit 1: A holistic approach to managing construction risks
Source: Marsh analysis
Managing the business: Governance and ownership
How contractors and subcontractors manage their businesses will have a significant impact on the success of their projects. It is paramount to ensure consistency in the design and execution of project procedures, the enforcement of robust accountability controls such as clear lines of responsibility and performance evaluation metrics, and the availability of transparent channels to facilitate communication. Proper governance entails having all parties involved in a project operating within a commonly agreed framework and under the same rules of the game such that any delay and/or quality shortfall issues are promptly detected and addressed as early as possible in the project cycle.
Managing risks: Risk management capabilities
In construction projects, costs connected to changes and errors generally increase as the work progresses. A holistic risk management framework requires a consistent approach to understanding and evaluating risks, resiliency linkages (in case of incidents or shortfalls from third-party providers), and performance measures pertaining to risk exposure. An integrated approach across the contractor network as well as all project phases will help identify early on where problems might materialize and facilitate contingency planning.
Managing activities: Delivery management
In construction projects, the extent to which service providers are integrated and financing sources diversified affects the delivery management process. When activities are segmented across service providers, it becomes difficult and costly to control workflows. Moreover, such fragmentation could lead to situations wherein individual providers contribute in a suboptimal manner. To integrate providers into the project, it is critical to utilize a consistent approach to planning, scheduling, and delivery. This should be supported by a framework providing guidance on meeting expenditure and timeline objectives.
Managing capacity: Resource planning and allocation
Resource planning in the construction landscape is critical as there must be a balance between project requirements and the availability of real inputs and personnel. Given the present situation, there may be issues around the ability of contractors and subcontractors to deliver against requirements. These include not only technical aspects such as environmental impact, safety, and security, but also commitment levels, delivery time, performance management, and resource allocation. Contracts with third parties can enforce stringent and specific requirements as a start, but large contractors can enjoy substantial benefits — such as improved efficiency and reliability — by taking greater control and actively auditing resource planning models within project management frameworks.
Managing relationships: Contract approach and supply chain and stakeholder management
Project delivery does not occur in isolation; it is dependent upon a number of internal and external actors and the relationship between them needs to be well understood and managed. An approach built around a risk allocation model, wherein potential risks are aligned to the project activity chain, can help ensure that issues are quickly identified and addressed by each party. This is particularly relevant to the supply chain, which has been heavily disrupted by the COVID-19 pandemic: Government policies aimed at stockpiling resources to improve national resilience and reduce dependence on other countries have reduced the agility and flexibility of some suppliers in meeting demand. Consequently, certain materials and commodities have become harder to come by, resulting in increased costs. It is important to ascertain that all parties involved in a given project have taken this risk into account and are prepared to respond should the need arise.
In today’s turbulent business environment, construction companies need to take proactive steps to detect and address systemic issues that could increase the likelihood of scheduling delays and cost overruns. By considering each of the drivers outlined above, firms will be better able to predict and measure the performance of subcontractors as well as identify potential issues and risks. They will also be more equipped to forecast how potential shortfalls could impact project financing and scheduling, in turn enabling them to develop more effective mitigation strategies.