The Looming Recession for Civil Construction

Paving a path through the Covid-19 recession

Having seeming to barely have emerged from the previous recession caused by the pandemic, it seems that we are going to be beset by another. While previously there were limitations on free movement which hurt the economy substantially, global politics and efforts to alleviate the last recession may be pointing us in the direction of a new one. Despite large injections of cash into the economy by governments across the globe, this unfortunately has side effects which contribute to the increasing fear of economic downturn.

Covid-19 Pandemic

Construction, while facing supply line issues and increasing labor shortages, was still deemed to be an essential duty and was permitted to proceed. This has sheltered the industry somewhat from the fiduciary effects of the pandemic, but the underlying and growing problems mentioned previously became more pronounced. In particular, construction companies are struggling to retain employees, especially skilled and unskilled laborers. While not new problems to the industry, the pandemic certainly pronounced them, and that trend continues through today. 

That said, a considerable value of projects had been delayed or canceled. As of summer of 2020, $9.6B of infrastructure projects had been delayed or canceled due to Covid, according to the ARTBA. Despite the seeming insulation, consequences of the pandemic still reached the industry. The funding for these projects slowed as less travel was happening, meaning gas tax and vehicle registration income was falling short of expected rates. 

The state treasurer of New Jersey, Elizabeth Maher Muoio, pointed out how disruptive the pandemic had been. The budget of the state was essentially in turmoil, and that the effects of this disruption could easily linger through the end of 2021. While things did certainly seem to turn around economically for a bit, the reverberations seem to be making their way back, and global conditions are not improving the matter.

Gas Prices

Between the start of the pandemic and June 2022, gas prices more than doubled on average for the American consumer. Given the large amount of travel and gas required by the industry, this is yet another additional considerable cost that must be taken on in a time of inflation. But why is the price of gas so high exactly?

The pandemic, as previously stated, hurt the oil industry considerably, with the prices dropping slightly and only recovering to pre-pandemic levels after February of 2021. With low demand, many oil refineries were outright shut down, and were poorly prepared for normal levels of production when the world started to travel again. The Russian invasion of Ukraine also led to US sanctions of Russian oil, somewhat tightening the market further. Additionally, a spill and cyber-attack on a major US oil pipeline led to a further increase of prices.

The green policies of Biden also make it more difficult to increase new oil operations in the US, such as refineries, pipelines, or drilling, which so far has not had a major impact, but that if not addressed is projected to grow into a more significant issues when it comes to gas prices. Oil companies are dragging their feet in general to get more oil into the market, though whether this is to keep prices high for relatively low effort or due to genuine difficulties with production seems up to debate.

Another contributing factor is the slow response of gas stations to actual oil price changes. There is typically a slight delay between gas prices going up going down and that being reflected in gas stations prices. It’s riskier for business to lower prices immediately, since those prices could rise and hurt the business, but it remains a frustration that typically means prices are higher than they should be. Gas stations, however, are not making nearly the profit from the recent oil price hikes that oil companies are, since they’re typically not vertically integrated with the companies that produce oil.

Construction, as previously stated, relies heavily on oil, meaning that price hikes are felt across the board. Be that long drives to job sites that can variably be an expense for the employee, down to the equipment used in the field, oil helps keep the industry going. An increase in price here impacts the entire field.

Supply Chain Issues

The pandemic saw existing supply chain issues grow increasingly more difficult, especially when it comes to steel and lumber. Despite the issues having hopes of alleviating as the pandemic eased, but the issues have persisted longer than expected. These issues existed pre-pandemic, with protectionist policies under Trump regarding supplies like steel exacerbating the situation, and they still persist today. The high prices for these products in the international market have reverberated globally, with the domestic cost of materials remaining high. While it seems that the issues with the supply chain are starting to ease gradually, they have remained a thorn in the side of the industry for far too long. If things slip into a recession again, it is uncertain what will become of the prices and availability of these essential materials. 

Talent Shortage

Construction as an industry, prior even to the pandemic, has been slowly headed towards major issues when it comes to acquiring and retaining talent, especially skilled and unskilled laborers. The risks and downsides like long hours, hard physical labor, safety problems, extended travel, and so on make labor on projects increasingly undesirable for the next generation. Several of these factors are also dissuading younger college grads from joining the industry for positions like Project Manager or Estimator, at least as far as contracting goes. 

Deadlines and compensation become major obstacles for retaining higher end, experienced talent. Anecdotally, we frequently come across experienced contracting veterans who got out of contracting due to frustrations with the long hours, no real career path set by their company, a lack of distinct company culture, extended travel, and mediocre compensation for the work put in. Unfortunately, especially for smaller contractors with not as much money or resources to work with, many of these problems are unavoidable. Smaller contractors make up a majority of the industry, despite there being many giants in the industry, and as such it is very common for employees in the industry to face tough conditions. 

An effective solution for companies is to make themselves distinct and unique from their competition, and to be willing to occasionally take on more cost with specific employees than they might feel comfortable with. We frequently see companies turn down exceptional candidates who make money, save money, and solve problems that are quantifiably worth much, much more than the expense of their salary over many years, yet a company will turn them down despite having an open role that they could perfectly fill due to their compensation. Talent is an investment, that will cost companies some money, but in the end with the right employee, produces an incredible return on investment. Penny pinching alienates both experienced and unexperienced prospects. 

Another solution, while potentially incurring some cost, is to develop company routines and traditions that make employees have something to look forward to. Adding elements of fun into work, things to look forward to beyond just the weekend, is essential in keeping employees happy, and in differentiating the experience of employment. There are companies out there that utterly lack these kinds of traditions and routines, and in our experience word about them can travel fast. 

Layoffs

Both now and during a potential future recession, there will be layoffs. When things are going well, and there is a need for talent at another company, layoffs are a time to get hiring people from companies that are laid off. All too often, layoffs sweep extremely talented individuals up in the mix. For companies doing better financially and that have talent shortages, these are the times where they need to be attentive and help those caught in layoffs. While people do leave the industry outright on occasion, they more frequently will end up working for someone in the industry, which in many cases will be the competition. Being on top of these things helps those out of work, and gets companies talent right away to keep their own businesses moving. 

Remain Adaptable

The last point is something that also has been a slow transition in the construction industry; adaptability. With Covid, for instance, remote work options were necessitated or voluntarily imposed for positions that could work remotely. This was generally speaking a popular shift, as a lot of people enjoy working from home. However, as the pandemic is on its last legs, most companies either lack or are phasing out a remote option, while some have instituted permanent policies or have simply left it open ended. We’ve found that remote work is an extremely popular means of working, yet many companies don’t have this as an available option. For many people seeking jobs, this closes the door entirely, since they either don’t want to relocate or to do anything but remote work. Companies that have this option, even for a singular day of the week, as a tradition, distinguish themselves from the competition and in our experience are more appealing.

This is just an example, remote work isn’t completely feasible for every company or every position, but it was a change in the industry that is popular and should be capitalized on. When these trends arise, companies that are quick to adapt are more likely to attract talent, and are more likely to be able to adapt to the changing conditions of the industry unlike those that fall behind.  

Taylor Maurer

Taylor Maurer

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