Adapting to the impact of COVID-19 with new project opportunities and acceleration of trends like prefabrication and modularization
By Michelle Meisels
The United States engineering and construction (E&C) sector is feeling the effects of the COVID-19 pandemic across all aspects of business. The pandemic has brought public health and safety to the forefront while also having an impact on the types of projects gaining speed and the methods firms are adopting to complete them. The industry has responded by realigning jobsite policies and accelerating digital transformation.
The industry is facing several short-term challenges such as supply chain delays, projects being put on hold, difficulty obtaining permits, a rise in project cancellations, and an increase in claims and litigation. The pandemic seems to be shining a spotlight on contract clauses and testing the sanctity of contracts—a cornerstone of a market economy—like no other event. E&C companies are likely to take steps to protect themselves by restructuring and renegotiating contracts.
As E&C firms seek to replenish their project books from delays and cancellations, the pandemic has identified a set of growth sectors. While hospitality, retail and entertainment projects are losing steam — as highlighted in Deloitte’s mid-year outlook for Engineering & Construction — two sectors likely to provide opportunity in coming months are healthcare and public utilities. Both sectors are seeing continued activity for infrastructure investments amid the broader economic uncertainty.
A number of E&C companies are responding to this evolving scenario by realigning their focus. There have been recent projects in New York and Boston cited widely in the news for temporary medical facilities to facilitate an overflow of COVID patients. As the virus continues to wax and wane in hotspots across the country through the rest of 2020, there will likely be further demand for surge medical capacity.
Public utilities are another segment likely to remain on a positive capital investment trend in 2020. Despite facing some revenue constraints due to dramatic shifts in consumption across business and residential users, some utilities could be in a relatively strong position to seize several new growth opportunities this year. Utilities retain robust access to capital and credit markets and many are doubling down on capital project development to maintain growth and prepare for future consumption trends.
Energy utility capital expenditure is expected to be at a record high of $141 billion in 2020, according to reports by S&P Global Market Intelligence. Considerable motivation exists for heightened spending due to the pent-up demand for replacing and modernizing aging infrastructure. This is likely to create several opportunities for E&C companies to tap this growing infrastructure demand. While there may be several short-term challenges, including delayed projects, stalled construction, and difficulties related to procuring materials and equipment, record transmission-and-distribution-dominated capital expenditures are likely to continue in the near term.
Another opportunity in the face of the current environment for E&C firms is increased adoption of modularization and prefabrication. Even before the effects of the pandemic were felt this spring, most E&C companies faced cost pressures and labor shortage issues, two challenges that were nudging many firms toward solutions like modularization and prefabrication of components. Not only can these approaches solve for labor shortages, they can also help E&C firms overcome schedule overruns.
Assembly line efficiency and the controlled environment of a construction “factory floor” can bring cost savings with higher efficiencies in labor productivity and shortened project schedules. Qualified construction professionals are likely to be attracted to safer and cleaner environments enabled by modularization plants. Many E&C contractors see these benefits and are adding module assembly yards. These are strategically located sites for fabrication and assembling building components that can then be transferred to a construction site for rapid assembly. This is likely to improve contractors’ productivity and margins, especially during a time when on-site labor is reduced due to physical distancing safety protocols.
The healthcare sector stands to likely benefit from modularization and prefabrication techniques as this allows them to rapidly increase capacity. Hospitals and healthcare facility contractors are turning to modular, primarily for building components such as bathroom pods and headwalls. However, entire hospitals have also been constructed utilizing modular construction techniques.
Modular construction techniques have the potential to offer quiet, safe, and clean environments for medical, surgical, clinical and dental uses. Overall, modularization and prefabrication techniques have potential cost saving benefits of more than 10% and can help in reducing the project delivery timelines by more than 30% for medium size construction projects, according to a report from a major engineering and construction firm.
To effectively thrive in the second half of 2020, E&C companies should focus on leveraging a management framework that addresses workforce and construction site safety, force majeure events, and supply chain disruptions. Identifying projects in sectors that have short-term needs for structures can help mitigate the impact of project delays and cancellations. Accelerating digital transformation capabilities are likely to build firms’ resilience in the face of pandemic.
Increasing the use of prefabrication and modularization are likely to bring much needed benefits to many firms. While the pandemic is likely to impact annual growth in 2020, it has highlighted the importance of building resilience into operations to weather uncertain time and emerge stronger in the future.
Michelle Meisels is a principal in Deloitte Consulting’s Technology practice and leads the Engineering & Construction practice.