Public works projects are expected to decline through the rest of 2020 and into next year. Due to the unique nature of the funding for public projects, pandemic shutdowns have been particularly hard on contractors performing work for counties, cities, and states.
Several industry organizations have attempted to quantify the effect that COVID-19 will have on the public works industry going forward. Keep reading for contractor takeaways and next steps.
Public Works Forecast to Decline
First, let’s get the bad news out of the way. According to some recent research, the future of public projects, and commercial/institutional construction in general, is dire. How much it is predicted to go down depends on what type of construction you’re talking about. Here’s a recap:
From the AIA Consensus Construction Forecast:
- Commercial construction is expected to decline by 12% in 2020 and 8% in 2021
- Institutional projects are expected to decline 4.5% in 2020 and 1.7% in 2021
- Silver Lining: Public safety and healthcare projects may go up in response to new requirements to keep the public safe and healthy in these institutions
- $9.6 billion in infrastructure projects have been delayed or canceled
- 16 states report $5 billion in projects delayed or canceled
- 20 localities report $4.54 billion in projects delayed or canceled
According to the National League of Cities, 74% of municipalities have already started making budget cuts ahead of anticipated shortfalls in revenue.
As bad as all this seems, it is better than other industries are faring, like travel and hospitality. Also, there appears to be some light at the end of the tunnel, although that may turn out to be the train of the second wave.
Municipal revenue is down
In general, public entities are expecting their revenue streams to slow to a trickle due to less people working, shopping, and driving.
Most governments require tax revenue (income, sales, or fuel tax) in order to stay operational. When many people lose their jobs and are forced to stay home at the same time, a significant source of funding disappears.
Also, the initial federal stimulus packages (including the additional unemployment income and the PPP loan program) are expiring or have expired. These provided a quick boost to everyone’s income, allowing people to pay their bills and spend a little more.
These packages also provided needed additional funds for local and state governments to use for pandemic response and to refill their bare coffers. Without additional help from the federal government, some local governments may not have enough money to stay operational, so construction projects are being cut.
Now that most states have at least attempted to reopen and resume business as usual, there has been a resurgence of COVID-19 cases since mid-June.
Some states have even shut down for a second time in the hopes of controlling the spread of the virus. These closures have slowed or stopped the economic recovery, leaving cities and states unsure of what the future holds.
As a result of all this, 44 states, transportation authorities, and local governments are projecting reduced revenues for 2020.
Still time for the Public Works decline to turn around
The economy showed signs of recovering quickly as states began to reopen in early summer. It remains to be seen if this trend holds steady.
Other factors that could help governments and agencies recover lost income and help public projects get back on schedule.
Release of a vaccine
No one knows for sure when a vaccine will be ready for widespread use. The Trump administration has asked states to prepare for vaccine distribution beginning in November, but gave no indication of actual delivery timing.
The earlier the better for the construction industry. A vaccine may return our jobsites to normal levels of operation and help other industries that fund the tax base for public project funding.
Healthcare facilities, restaurants, and public safety buildings will continue to need retrofitting to meet new requirements for social distancing, crowd size control, and physical barriers.
Office buildings will also need to be remodeled to provide workers more space between them and their coworkers and to provide barriers. These coming requirements will create new jobs that will need to be fast-tracked to address potential health issues.
A new federal stimulus bill is in the works. Depending on the terms of the agreement that ends up passing, added monies could be available for federal infrastructure projects. Many “shovel ready” projects have already been identified around the country, so work can theoretically begin as soon as a bill is passed.
How public works contractors can weather the decline
What can a construction company do to improve their chances of surviving the slowdown in public projects?
Protect your bond claim rights
Funding for government projects isn’t always in place before the shovel hits the dirt. Construction investment is often based on revenue projections in order to determine how much they expect to be available.
Unfortunately, the decline in tax revenue could affect some construction projects already underway. Public works jobsites could be shut down entirely, or delayed until the fiscal decline is sorted out.
On the bright side, this is why most government projects require the GC to post a payment bond. As long as they have followed the required steps, unpaid subcontractors or suppliers can make a bond claim to recover payments that are overdue.
Make a bond claim now
Levelset takes all of the guesswork out of the claim process. We’ll verify your rights, research the project information, and ensure your claim is done right.
A bond claim can help a construction company that relies on public works projects to get cash quickly that will help them prepare for the expected decline.
Diversify your project portfolio
One of the best hedges against a recession of any kind is to diversify the types of projects you work on.
If you are currently only doing public work, it is a good idea to start transitioning into private projects as well. If you can add an additional trade or service to your company, or branch into residential work, now is a good time to do so. Basically, the more baskets you have, the better your chance of catching eggs.
Communicate with government offices
Keep in contact with your local governments at all levels. Ask them what their plans are and begin to plan your own response accordingly. You’ll have the inside track on what to expect down the road. Some projects with mixed private and public funding (i.e. P3 projects) may go on as scheduled, while others may be scrapped completely.
Look for projects contracted by businesses that are deemed essential services. These companies have to remain in business no matter what and are likely still receiving revenue. There may be projects coming up in response to the pandemic, such as reworking spaces and installing barriers that will be necessary.
Overall, public work is set to slow down for the near future as municipalities struggle with emergency response and additional costs that the pandemic caused. They also have to look ahead and try to predict their future income and provide for additional emergency response efforts.
Shifting your income sources to more private work, diversifying your services, and getting inside knowledge from your local public entities will help keep your company operational and making money.