Learning from the Past to Prepare For The Future

Ronald J. Eagar

As contractors head into 2022, it may seem like not much has changed from last year. COVID-19 outbreaks and workforce restrictions remain, the skilled labor shortage is increasing, materials remain scarce and more expensive, and cash flow is still constrained. 

Unlike last year, however, contractors have the advantage of the many lessons learned over 2020 and 2021. 

To better understand this new dynamic, Grassi surveyed contractors and subcontractors to gauge the industry’s current condition and outlook. Here are the five key takeaways.

Impact on revenues and profits
For many contractors, the financial impact of the pandemic may only be fully realized in 2022. While 53% of respondents said revenues declined in 2020, Paycheck Protection Program (PPP) loans, Employee Retention Credits, other government relief and existing backlogs kept many of them afloat. 

As contractors burn through their backlogs, not enough new work is surfacing, due in large part to a highly competitive bidding field. Almost half of respondents reported competing against 5-9 bidders, and almost one-fourth reported 10-15 bidders, only to be topped off by significantly decreasing margins.

Cash flow projections providing a 6- to 8-month outlook are always recommended, but even more so during uncertain times. This process can help contractors predict cash shortfalls and remediate issues before it is too late.

Contractors should revisit their pre-qualification process to ensure their bids are differentiating the company from the competition. Highlight relevant experience, past performance, safety records, payment history, compliance with contracts and more. 

Labor challenges
Entering the pandemic with an already-strained labor pool, contractors face workforce challenges in 2022. According to the survey, the three most significant workforce issues became: COVID-19 outbreaks among workforce, difficulty factoring COVID-19 costs into projects, and reduced labor productivity.

Finding talent remained difficult, with respondents saying project managers, skilled laborers and foremen roles were the most challenging to fill.

Contractors that take a proactive approach to employee retention will have a distinct advantage. Ask questions such as: What tone is my management setting at the top? Should I consider an employee stock ownership plan (ESOP) to keep employees invested in our long-term success? Do I have a succession plan that lays out the future roles of my key employees?

Jobsite technology
In an industry that is known for lagging in technology adoption, many contractors regretted this lack of investment when workforces went remote and safety requirements were increased. 

According to the survey, contractors rose to the occasion and implemented technologies that might have otherwise been years in their future. The most common technologies adopted by respondents were virtual toolbox talks and video conferencing for project walk-throughs.

Investing in the right technology can keep a construction company competitive, lean and prepared. Automation, robotics and data analytics can reduce redundancies and human error, create safer jobsites, improve efficiencies and help contractors make informed data-driven decisions.

Ongoing COVID-19 impact
The majority of survey respondents reported that the pandemic had an impact on their ability to confidently price projects. Contractors also have the additional costs of the pandemic to consider, such as daily health screenings, remote work and on-site COVID-19 testing.

It is important for contractors to understand the true cost of the pandemic and factor these findings into their business plans, cash flow projections and bidding. These expenses include not-so-obvious ones, such as mandatory paid sick leave, productivity declines and rising insurance costs. Insurance costs continue to remain one of the largest challenges industry wide.

2022 and beyond
When asked to anticipate when the construction industry will make a full recovery, 46% of respondents predicted 2022, and 23% anticipated 2023 or later. 

Uncertainty is still high, but there is optimism that conditions will improve soon. This could be fueled by the potential of the infrastructure bill and the many new ways contractors are finding to recover. Positive trends reported in the survey include: increased emphasis on escalation clauses in contracts, an increase in public/private partnerships (P3) and joint ventures, and supply chain diversification.

While COVID-19 will continue to be a “known unknown” in 2022, learning from what we do know can help secure a more confident future for your construction business. 

Ronald J. Eagar, CPA, CCIFP is a construction partner and COO at Grassi Advisors & Accountants. He can be reached at reagar@grassicpas.com.

ABOUT THE AUTHOR
Ronald J. Eagar
Ronald J. Eagar

Ronald J. Eagar, CPA, CCIFP is a construction partner and COO at Grassi. Ron can be reached at reagar@grassicpas.com.