Like other essential industries, the construction industry has faced many challenges during the COVID-19 crisis. A series of factors has led to reduced profits as contractors deal with labor shortages, higher prices for materials and low margins on projects.

In the early months of the pandemic, construction business dropped and many contractors struggled to pay their employees and keep their companies running. Government assistance programs such as the SBA Paycheck Protection Program and the employee retention tax credit help ease some financial challenges during the crisis.

The rapid rebound of the U.S. economy brought new challenges. Companies are now struggling to hire skilled workers in a competitive employment environment. In addition, the effect of COVID-19 on the global supply chain has caused shortages in construction materials and higher prices for lumber and other materials, resulting in increases in construction project costs and lower profits.

Rising inflation has added another constraint to profits. The U.S. construction industry is dependent on sourcing materials such as steel and stone from other countries. Factories producing these materials have experienced shutdowns due to COVID-19 and supply chains have backed up at harbors and freight terminals. As a result, construction materials are harder to obtain. Although construction materials generally increase each year due to inflation, prices have jumped significantly in 2021.

Bidding Low and Getting Squeezed on Margins

In the early months of the pandemic, many contractors bid low just to stay afloat and have projects in the works. The combination of low bids and higher materials and labor costs have resulted in a mismatch that is squeezing contractors’ profits.

A recent survey by the Associated General Contractors (AGC) found that bid prices and input costs have increased by 0.5% and 12.8%, respectively, since the beginning of the pandemic. The survey also found the significantly higher costs for materials cut into profit margins and even resulted in losses on projects.

Construction companies with fixed-price contracts may have had work for their employees, but higher construction costs took a significant bite out of their profits. Usually, there is a window of time between the signing of a construction contract and final delivery of products for the project. It’s not been customary for construction companies to factor in increased materials costs beyond a narrow margin after the contract has been signed. Costs are estimated before the bid is submitted, based on current costs and a small inflation factor, if any. As a result, unforeseen increases are difficult and often impossible to recoup.

Lessons Learned from the Pandemic on Bidding Projects

Many contractors are reevaluating their process for submitting bids and instituting protocols that allow them to address unforeseen events which may increase their costs on a project. New approaches include:

  • Evaluating existing costs and adding clauses in contracts that allow for price adjustments and cost increases when bidding for a project.
  • Obtaining accurate and complete information on materials that will be used for the project and studying the historical inflation rate to accommodate potential changes into the estimate.
  • Tracking material supply chains and determining the timing required for ordering materials.
  • Identifying materials that may be in short supply or have volatile prices. Contractors may consider pre-ordering those materials before prices increase.
  • Negotiating with suppliers to set fixed prices on specific materials can help contractors prepare for supply chain uncertainties.

If you have any questions about this please contact your ALL tax advisor or call us at 617-738-5200.

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