Construction Contracting After COVID-19
I’m a lawyer, not a doctor. Neither am I an economist. So, I’m not going to offer medical advice. And I’m not going to make any prediction about when the economy will recover. But this is clear to me. Post COVID-19, changes are coming. No industry is exempt, certainly not construction contracting.
I’ve witnessed four complete business cycles during my productive lifetime. These were the good years for contractors:
- 1975 to 1978 -- recovery after the Viet Nam war
- 1982 to 1984 – recovery from the recession of 1982
- 1990 to 2005 – the longest expansion in US history
- 2010 to 2020 – recovery from the Great Recession
And there were bad years: 1974, 1981, 1989, 2009. Each of these coincided with an economic recession. Employment in the construction industry dropped by 10% or more. Typically, residential construction was the hardest hit.
What Happens Next?
Economists agree we’re on the threshold of another recession. If history is a guide, construction activity will be down for at least several quarters. Hardest hit: discretionary work like home improvement. Casualty loss work is different. It comes and goes with the seasons and tends to be local. But it’s a good option for residential contractors with the patience and the administrative skills to deal with adjusted losses.
Expect labor and material price changes. Material shortages are likely as industry adapts to changes in work requirements. To see what I mean, walk in any supermarket. Some shelves are bare. Promotions and discounts are largely gone. Any retailer that’s open can sell anything in stock. No need to cut prices. Building material dealers may face the same uncertainty in the coming months.
Over the last decade, construction costs (labor, material and equipment) increased barely 2% a year. That’s not typical. If you aren’t old enough to remember the 1970s, then you don’t remember when construction costs jumped 1% or more a month. Inflation back then was driven by record deficits that financed the Viet Nam war. Expect the debt bomb of 2020 to put similar pressure on construction costs well into the next decade.
In uncertain times, you need contracts that anticipate problems. For example:
Supply of labor and materials. Think about the imported materials on your jobs. How much comes from abroad? Lumber, cement, nails, wallboard, electrical and mechanical parts, plumbing fixtures, appliances, tools? If the US de-couples from supply chains that extend back to China, many of these materials may be in short supply for at least a while.
Cost inflation. There’s risk in any job that lasts more than a few months. For example, if the job won’t be finished for six months or more and costs are increasing 1% a month, most of your profit margin could be drained away by higher prices.
Plan for material shortages and price changes. You’re not an insurance company. You shouldn’t have to absorb all the losses. Write contracts that:
- Allow substitution of materials when necessary to meet job requirements.
- Pass higher costs to the owner when prices increase before work is done.
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