At the start of 2020, the outlook for the E&C industry in the US was bright. After years of lying in the doldrums following the 2008 GFC, E&C businesses couldn’t have asked for a better start.
In February 2020, the industry employed 7.64 million people and it added $900 billion to the US economy. Only a major catastrophe would hinder the growth trend. This came in the form of the COVID-19 pandemic.
Grey skies started appearing. The loss is worth two years of GDP gains and four years of job creation. They were not just dents, but huge craters. And unlike 2008, the pandemic’s reach was far and wide. Every sphere of life was impacted.
Fortunately, very valuable lessons were learned from the 2008 GFC. From a financial perspective, more E&C companies are on firmer ground to cushion the shock. Although some in the industry found themselves in more choppy waters (specifically those servicing the retail and hospitality sectors), with better credit controls and cost savings, there is in the least a flicker of light at the end of the tunnel.
From project cancellations or postponements, depressed margins to the rising cost of materials and equipment, it is a long road to recovery. Having said that, companies that have embraced new technologies, opened to alternative business models or M&A activities will prevail. This will place them in good stead to gain from post-pandemic recovery in E&C activities, for example, re-design of workplaces construction. In this article, we’ll take a closer look at trends and opportunities in the E&C industry that 2021 presents.
1. RISE IN PUBLIC AND COMMERCIAL SPENDING CAN IMPROVE THE OUTLOOK FOR 2021
Despite the gloomy start to the year, by June 2020 the Associated Builders and Contractors Construction Confidence Index had risen to 51.1 from 38.1 just a couple of months earlier. In addition, 7 in 10 industry executives felt somewhat positive or very positive of the industry’s outlook. Ostensibly, the growth in the residential housing segment contributed to this jump in industry sentiment. Low mortgage rates are a major influencer to this rise.
In contrast, non-residential construction is likely to continue to struggle. The pandemic has brought to a screeching halt people’s social and recreational lives. As a result, current commercial spaces are empty and many new ones have been put on the backburner. With working from home the new normal, businesses are reviewing their need for office spaces. This will impact new builds.
Growth in the residential segment is expected to continue. But 7 in 10 industry leaders believe spending on public and infrastructure as well as commercial segments will be the boost the E&C industry outlook. The good news is that governments are probably looking into them as well.
2. CONNECTED CONSTRUCTION AND MODULARISATION CAN ADDRESS LONG-TERM COSTS AND MARGIN ISSUES
By end of the first quarter of 2020, the E&C industry had recorded a reading of 1189 on the Turner Building Cost Index. It’s the highest since this measure was introduced 13 years earlier. While high costs and low margins are characteristics of the industry, the pandemic accentuated the problem. Global supply chain disruptions, cost overruns caused by project delays and higher costs of labor are highlights of the industry woes in 2020.
Nearly 8 in 10 industry executives surveyed in September 2020 (a rise of 10 percentage points over the previous month) predicted no change or a decline in profit. The pandemic might be the perfect catalyst for the industry to implement major changes that include:
i. Use of prefabrication and modularization methods of construction: With cost savings hovering between 6-30%, it’s an initiative that cannot be overlooked.
ii. Use of new materials: 1 in 5 industry executives has started using new building materials and continue to search for others. They include high-strength concrete, fire-resistant timbers, self-healing materials and geosynthetics.
iii. Across the board application of new technologies: The argument is investing in enterprise-level technologies offer longer returns than project-centric initiatives. By solving business-level issues, both effectiveness and efficiency can be scaled up.
3. DIGITIZATION OF THE E&C INDUSTRY
Nearly three-quarters of industry executives polled in 2020 indicated their intention to invest in one or more forms of digital technology. It helps the industry to evolve from being reactive to predictive. Below are some examples of how this can be achieved:
i. The use of building information technology, or BIM, can provide real-time project information. It helps to minimize project overruns and facilitates better allocation of resources.
iii. Digital supply networks, with the use of AI and machine learning, will help avoid the shortage of materials crisis that tend to plague projects.
iv. The use of digital twin technologies can produce 3D data to create building profiles and blueprints of building parts.
v. By deploying drones and autonomous rovers, remote site inspections can be done safely and at any time of the day.
vi. Post projects, companies can use predictive maintenance technology to plan the future deployment of equipment.
4. BUILDING TRADITIONAL AND NON-TRADITIONAL PARTNERSHIPS
With public infrastructure projects likely to take center stage in the post-pandemic recovery plan, it makes sense for companies in the E&C sector to consider public-private partnership initiatives. Such collaboration will enable companies to target projects in the range of $1 trillion in total.
Also, non-traditional M&A activities involving technology vendors or new materials are on the horizon. They’ll help lower operating costs while keeping the companies ahead of the innovation curve.
Reducing reliance on specific industries is on the table too. This will reduce exposure like that experienced in the current pandemic.
5. NEW WORK, WORKPLACE AND WORKPLACE NORMS
From safety to the impact of digitization, a new normal is being put in place. This will require upskilling or reskilling of workers as well as enhancing safety and well-being measures. An injection of new talent will be needed too as drones and AI become common features.
Preparing today for tomorrow’s unknowns!
It’s the most valuable lesson of 2020 for the industry. Hence, the call to move from reactive to predictive. Unless the trends above are embraced quickly, the road to recovery will be long and hard.