The Covid-19 outbreak has hit the construction industry hard, with contractors facing budget overruns, delays and an overall lowering of productivity due to lockdown measures and other restrictions.
Materials are also taking longer to source due to reduced manufacturing output and other supply-chain issues.
These are difficult challenges, but contractors in the GCC need to balance short-term measures to survive the crisis with medium-term measures to prepare for the eventual recovery.
The ultimate impact on the GCC’s construction industry is still unclear, but we estimate that contractors in the region could lose approximately $30bn in revenue (20 per cent of the GCC’s total construction market for 2020) if the current lockdown remains in place for three months.
If it extends through the end of 2020, the revenue impact would be about $65bn, a drop of around 45 per cent.
Many factors lie beyond contractors’ control. Nonetheless, management teams can take five initiatives over the coming months to cope with the crisis and prepare for the recovery.
The Covid-19 epidemic has been a massive disruption to the construction industry, but it will eventually end
> Preserve liquidity
The immediate priority is to preserve liquidity by limiting unnecessary expenditures in areas ranging from corporate costs to petty cash on projects.
Contractors can also reduce manpower costs, by negotiating paid and unpaid leave policies on shuttered projects. They can also increase liquidity through sale-and-lease-back programmes of selected assets.
> Maximise revenue
Companies should seek to retain revenue by continuing work on project sites where it is still safe. For example, sites with the right safety protocols can be retained if allowed by local authorities.
Simultaneously, contractors can reallocate excess staff to operation and maintenance functions, which will likely be less affected during the crisis, or to crisis-related programs led by local authorities
> Adopt operational excellence
Contractors can implement procedures to improve their operations. Updating their health policies and operational procedures will allow them to adapt to pandemic conditions—and future disruptions.
Contractors can adjust work processes, teams and schedules to accommodate social distancing. For example, rather than bringing everyone to the job site for a single eight-hour shift, they can shift to smaller teams that work on staggered shifts. Technologies such as drones can reduce the size of teams on job sites—particularly for functions such as inspections.
To minimise delays, companies must analyse their supply base, identify potential bottlenecks, and replace or diversify their suppliers as needed
Longer-term, contractors should review their crisis-management capabilities and ensure they are prepared for future disruptions.
Another operational area for attention is supply chains. To minimise delays on projects, companies must analyse their supply base, identify potential bottlenecks, and replace or diversify their suppliers as needed. Companies should also reassess inventory levels, taking into consideration new lead times to ensure business continuity.
Given the low output of building material manufacturers, some companies may opt to negotiate longer-term contracts with suppliers—for example, agreeing to buy a larger allotment of capacity at a discount.
> Adopt an agile business model
In the medium term, construction contractors should adopt an agile operating model to become more resilient.
They can examine how to improve their cost structure by replacing fixed costs with variable costs whenever possible. For example, salary structures of employees should have a lower base salary and a higher variable cost component aligned to performance.
Companies should revisit their decisions about which capabilities to retain internally and which to outsource. In general, core activities such as project management and control should be internal, whereas some support and secondary services could be outsourced to reduce fixed costs.
More advanced technologies such as robotics and additive manufacturing can reduce unnecessary manpower costs
In addition, contractors should invest in digital technologies to become more agile and react better to market disruptions. For example, companies can deploy enterprise resource planning systems at the project level to better manage in real time financials, workforce deployment, scheduling and overall logistics processes.
More advanced technologies such as robotics and additive manufacturing, among others, can reduce unnecessary manpower costs. Alternative building methods such as modular, off-site construction can improve productivity and project delivery times. All of these technologies have a common theme—they help contractors become more efficient, more productive and less dependent on manpower.
> Diversify into more stable businesses
Given that disruptions could recur with frequency and severity, contractors should consider diversifying into service offerings and sectors that are less volatile to market shocks.
One example is operations and maintenance—a natural adjacent market that is downstream in the construction value chain and which can be digitally managed.
The Covid-19 epidemic has been a massive disruption to the construction industry, but it will eventually end. By taking these steps discussed above, contractors can limit their losses during the crisis and emerge stronger for the future.
About the authors
This piece was written by Marwan Bejjani, partner, Alessandro Borgogna, senior executive advisor, and Elias Karam, manager, at Strategy& Middle East (part of the PwC network)
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