Engineering and construction companies adapt to the ongoing impacts of the pandemic with digital investments and partnership approaches
By Michelle Meisels
The US engineering and construction (E&C) sector continues to feel the effects of the COVID-19 pandemic across all aspects of business. In a few short months during 2020, the industry lost $60.9 billion in GDP and total jobs decreased to roughly 6.5 million, effectively wiping out two years of GDP gains and four years of job gains. Despite these sobering numbers, there are reasons to be optimistic. The industry has applied learnings from the 2008 recession and is positioned to make the best out of 2021. To do so, E&C firms will likely need to make digital investments that could better enable connected construction and increase efficiencies as well as lean into traditional and nontraditional partnership approaches.
E&C firms that add to the lessons they’ve learned by embracing digital and forming strategic alliances will likely be better prepared for whatever comes next.”
Let’s start with the resilience of the E&C industry during what has likely been an unprecedented year. As a learning from the 2008 recession, the E&C industry has been increasingly conscious of its capital allocations and cost structures. These efforts, combined with additional post-outbreak cost reduction efforts and strong order books (1.3x book-to-build ratio based on 2019 data), have ensured enough cash and credit line buffers for companies to survive and cover liabilities in the short term. In fact, in a Deloitte executive post election poll, 68% of the E&C executives surveyed characterize the business outlook for their industry as somewhat or very positive. Naturally, this perspective depends on where an E&C firm sits within the different segments, but the broad consensus seems to indicate a positive outlook on 2021.
Because of the varied nature of E&C end markets, there could likely be ongoing weaknesses in certain areas (commercial office space, for example) well into 2021. Therefore, the industry is looking for bright spots, and one may be public and infrastructure building starts and related investments. In the Deloitte post election poll, 70% of E&C leaders agree that new infrastructure projects, if fully approved, can help jump-start the economy.
While the industry continues to look for bright spots and new opportunities, one ongoing focal point will likely be how to make technology investments that can improve productivity, efficiency and margins. As we mentioned in our mid-year update, modularization and prefabrication are two approaches for creating long-term efficiencies in which E&C companies continue to invest. Another approach is to change the focus of technology investments from isolated projects to integrated, enterprise-level initiatives. Firms should make technology investments that solve business-level efficiency problems instead of stand-alone project-related issues.
Through enterprise-scale technology investments, E&C companies can develop a connected construction foundation — a dynamic, always-on network that provides continuous access to information, analytics, and insights. Benefits are expected to include as much as a potential 10% to 30% reduction in engineering hours, up to 10% reduction in build costs, and up to 20% reduction in operating costs, improving overall margins for E&C firms throughout the entire project life cycle.
In yet a different approach to investing in technology, E&C firms continue to pursue traditional and nontraditional partnerships during 2020, and this will likely continue into 2021. Merger and acquisition (M&A) activity during 2020 involved acquiring smaller and more specialized firms, including design, engineering, or technology companies; fabricated metal manufacturers; and specialized contractors. In a Deloitte post-election poll, 28% of E&C executives surveyed believe the main approach for the industry will be increased M&A activity to help diversify the business. Such moves are likely to accelerate in 2021 as companies launch their initiatives to diversify digital product portfolios and expand offerings in connected services and advanced technologies.
As we move into 2021, more E&C companies are expected to target different business models (such as alliances to complement their expertise). These alliances can likely also include E&C companies embracing public-private partnerships (PPP) and making them part of their network. Nontraditional M&A approaches, such as forming alliances with technology vendors via the developing ecosystem, can help E&C companies gain access to new capabilities and turnkey solutions faster and without the need for up-front investments.
Connected construction presents a host of efficiency- and productivity-enhancing technologies and can enable new business models and strategies. There may be another disruptive event around the corner that could catch the world off guard. E&C firms that add to the lessons they’ve learned by embracing digital and forming strategic alliances will likely be better prepared for whatever comes next.
Michelle Meisels is a principal in Deloitte Consulting’s Technology practice and leads the Engineering & Construction practice.
Editor’s note: This article is an summary of Deloitte’s report, “2021 engineering and construction industry outlook” To read the full report, visit www.deloitte.com/us/engineering-construction-outlook