This document focuses on a number of topics that affect the construction industry as a whole, including the impact of the Corona virus (COVID-19), the onset of autonomous equipment, the use of technology and scale to address the labor shortage, and the thoughts around shutting down construction projects as a response to COVID-19. It also includes a brief summary of trends in used equipment values.
Six Ways the Corona Virus will Affect the Construction Industry: Experts predict COVID-19 will have long-term ramifications for many aspects of the U.S. construction industry. As the fallout from the effects of this virus is far from complete, no one can predict its full impact. From labor shortages and escalating tariffs to the upcoming presidential election, the industry entered 2020 facing many unknowns, and experts say the fallout from COVID-19 is one more factor poised to affect construction firms. Despite the uncertainty, experts predict the pandemic will have ramifications for several aspects of U.S. construction. These include:
- Employee Health and Safety First and foremost, companies in affected regions say they are concerned with employee well-being. The good news is that the risk of transmission for those employed outside the healthcare sector is low. In addition to physical wellness, contractors are considering the state of employees’ mental health as anxiety among workers is one of the top issues brought on by the virus. In a recent survey, 68% of respondents noted “employee anxiety” as their top concern, above material shortages and the prospect of government shutdowns. As schools close and public transportation becomes more limited, many employees may find it difficult or impossible to show up for work.
- Material Delays According to the New York Times, Chinese government containment efforts and quarantines have slowed or shut down factories in dozens of the country’s cities and provinces, leading to forecasts of a sharp falloff in production of everything from cars to smartphones. For commercial builders that rely on Chinese-made goods or materials, this could mean higher material costs and potentially slower project completions.
- Jittery Clients and Lenders One of the most devastating consequences of the virus could be that it spooks clients and lenders, especially firms that work in highly impacted segments like hospitality. Financing may dry up for new jobs and owners may table current projects until the uncertainty passes.
- Quarantines and Travel Bans Construction companies across the world are considering how they will react to an outbreak near one of their jobsites or offices. Some companies are ready to close sites and are examining contractual terms should they have to do that. Other construction companies have put in place rigorous travel guidance for employees. These shutdowns and bans mean that companies will need to turn to teleworking and other technologies to keep business running smoothly while employees are at home.
- Legal Issues While the corona virus pandemic was unforeseeable, experts say contractors may still be contractually responsible for delays or cost overruns on current projects. Both contractors and owners will be reviewing contracts to see what contractual rights and duties exist in light of the conditions caused by the virus’ spread.
- Global Uncertainty Recent historic levels of volatility in the stock market and oil disputes in the Middle East have amplified the level of anxiety among Americans, who see their retirement and pension benefits shrinking by the day. The virus and its impact have scared the markets so much, some analysts believe they cannot make a forecast for the remainder of 2020. While the expectation is that the U.S. economy will soon enter recession, non-residential construction typically lags the overall economy by 12 to 18 months, meaning that many contractors can expect far more difficult circumstances next year.
The Dawn of Autonomous Equipment May be Upon Us: Those who believe autonomous equipment operation is a pipe dream may be very, very wrong. Many have doubts about the feasibility of autonomous machines, mostly because autonomous cars have such a poor safety record. But excavators aren’t Teslas. Heavy equipment, as it turns out, is an ideal application for autonomy. In fact, in 10 years it is conceivable that at least a double-digit percentage of contractors will be using it. The advantages in safety, speed and productivity will be too great to ignore. Imagine just one guy sitting in the job trailer monitoring the autonomous work of three or four earthmovers and the attending trucks. Imagine running that equipment two or three shifts a day without all the lunch breaks, shift changes, safety briefings and other work stoppages that occur when a man has to be in every machine.
As far as cost, at this time none of the original equipment manufacturers (OEMs) is willing to discuss that since, except for mining trucks, none of these technologies is in production. However, consider the fact that wages paid to operators are often half of an owner’s operating costs. So even if the cost of autonomy made those machines 30% or 40% more expensive, that would equate to a 10% or 20% savings even before factoring in the higher productivity rates. There aren’t enough operators as it is, and the situation is unlikely to improve. However, when autonomy becomes generally accepted, it will be a lot easier to hire and keep an employee who works from the comfort and convenience of a climate-controlled trailer. Some predict that autonomy will attract a whole new generation of operators, particularly young people with gaming skills and a high level of computer competence. There are a lot more people who’d be attracted to this kind of job than people who can put up with the drudgery of digging/dumping/driving back and forth all day long. Although it may not be a fit for every site or contractor, autonomous construction equipment is definitely coming. In fact, Doosan hopes to have elements of its Concept-X autonomous technology ready for market by 2025. We’re at the dawn of a new big leap forward in technology.
Using Technology and Scale to Address the Construction Labor Shortage: In the U.S., jobs in the skilled trades continue to be the most difficult to fill The problem is further exasperated by an historically low unemployment rate [Editor’s note: at the time of this writing]. Across the nation, construction companies are struggling to find skilled craft workers for their projects. In general, the labor shortage is limiting the number of projects that companies can take on and also increasing the amount of time it takes to complete them. According to the Associated General Contractors of America (AGC), 81% of construction firms are reporting difficulty in filling salaried and hourly craft positions, and 65% of firms estimate that it will be as difficult or more difficult to hire over the next 12 months. Cost and availability of labor topped the list of problems builders faced in 2019 and are expected to remain the top concern in 2020. At the same time, the demand for construction remains strong and residential construction employment is up. The increase in housing starts last December drove residential construction employment up by 20,200 in January, the largest increase in the past twelve months.
To cope with the labor shortage, many firms are increasing both base pay rates and overtime hours. The average hourly earnings of construction workers was $31.19 in January 2020, up nearly 3% from January 2019. Companies are also looking for ways to improve efficiency through technology. In their 2020 Construction Outlook Survey, the AGC reported that 32% of construction firms are increasing their use of labor saving equipment. In the long term, the construction industry will need to increase the number of young people learning trades and provide training to people currently employed in other fields.
Is Shutting Down Construction Projects the Right Response to COVID-19? Stephen E. Sandherr, chief executive officer of the Associated General Contractors of America, recently issued the following statement in reaction to steps being taken to arbitrarily halt construction activity in certain parts of the country as a result of Covid-19:
“Halting construction activity will do more harm than good for construction workers, community residents and the economy. Construction firms are already acting to ensure the safety and health of their employees in the face of the coronavirus outbreak. These new measures, which include increased hygiene and halting group gatherings of staff, are in addition to the fact that construction workers already wear protective equipment, including gloves that will help protect them and their co-workers. Given the precautions already in place, halting construction will do little to protect the health and safety of construction workers. But it will go a long way in undermining economic vitality by depriving millions of workers of the wages they will need over the coming days. At the same time, these measures have the potential to bankrupt many construction firms that have contractual obligations to stay on schedule or risk incurring significant financial penalties.
“In addition, halting construction projects will undermine ongoing, and future, recovery efforts in regions hit by natural disasters, and will also undermine any future efforts to expand hospital capacity. We understand the need for social distancing to help slow the spread of coronavirus. But needlessly shutting down projects where workers are already protected will not help. Instead, it will threaten the livelihood of millions of craft professionals, force many small and family-owned businesses to shut down, and undermine the nation’s ability to respond to natural disasters, including the coronavirus.”
In the unfortunate event that construction is halted, one alternative that construction owners may consider is continuing to make their scheduled payments to contractors as a down payment for future work to be completed on the project. These payments will help mitigate some of the potential economic impacts of construction shutdowns.
Trends in Used Equipment Values
As COVID-19 cases continue to soar in Europe, the USA and the rest of the world, following the outbreak in China, the heavy equipment and industrial vehicles industry is facing challenges and taking measures to reduce the impact. Large fairs or events are being cancelled or postponed, and disruptions in supply chains are raising serious challenges. As a result, OEMs are starting to reduce their production levels, decrease travel time and take other well-considered measures to protect their business. The heavy machinery industry is bracing for longer-term effects from this worldwide affliction but is hopeful for the first signs of recovery, such as the slow reopening of factories in China. However, the tough part has just begun in countries like Italy, France and Spain, where industry activity has come to a halt during mandated national quarantines.
Although the heavy equipment industry as a whole is sure to be adversely affected by the COVID-19 outbreak, used equipment sales and the rental equipment market will certainly benefit from the slowdown in the production of new equipment. The current circumstances will likely bolster the trend toward adding technological advancements such as digital services for automated service enhancements, equipment service tracking, and mapping features to used equipment. Consequently, prices for most used equipment should remain stable. However, in the current market, equipment in good condition with lower hours of service is often priced at a premium, while prices for equipment in lessor condition with higher service hours continue to decline. In either case, the age of the equipment is not always a critical factor in determining its value.
For many of the same reasons, the equipment rental market has also experienced continued growth. The emergence of new technologies such as those described above, come at a high price. Thus, many contractors prefer rental construction machinery. Renting equipment not only saves the cost of buying new equipment but reduces costs incurred for labor, maintenance and operations. Construction equipment rental companies also perform all these tasks on a regular basis to reap long-term profit from the machinery. For example, Caterpillar Inc. offers quick response teams to help customers at remote locations through mobile servicing vans. The global construction equipment rental market was valued at $92.9 billion in 2019 and is projected to expand at a compound annual growth rate of 4.9% by 2027.