There’s good news and bad news when it comes to the outlook for the U.S. construction industry. First the “good” news: while data from ResearchandMarkets.com indicates the market was expected to contract by 6.5 percent in in 2020, the downturn is anticipated to be much less in 2021 at 2.0 percent. Now the bad news: with the Covid-19 pandemic still on everyone’s radar and cases of the virus starting to climb again in some areas, the industry is hardly going to fully rebound next year.
In general, projects that were in process or near completion will still remain on hold, especially in the commercial sector, due to the uncertainty surrounding the economy, falling demand, and concerns related to COVID-19 safety measures at construction sites.
To help bolster the industry, the Federal Reserve is expected to keep interest rates at the zero-lower bound for the foreseeable future and will also continue to support the recovery through large-scale asset purchases and emergency lending programs, both of which may help commercial builders who have seen fewer new projects this year and residential builders hit by struggling housing starts. Credit rating organization, Fitch Ratings, noted that while the market for homes was down overall in 2020 and not expected to grow significantly in 2021, the demand is still stable due to a housing shortage, low residential mortgage rates, and more people working from home.
To learn more about this topic, join our webinar, "Your 2021 Strategic Blueprint for Building Accounting Firm Growth in the Construction Niche" on November 12, 2020 at 2:00 p.m. Eastern Time. THIS EVENT HAS ENDED. VIEW IT IN OUR ARCHIVE HERE
While the industry is not going to be experiencing the growth it has for nearly a decade, there is still significant opportunity for accountants to expand and deepen their relationships with construction industry clients by helping them plan their cash flow and expenses carefully for short and long-term needs as well as partnering with their clients’ bankers and financial professionals to help them navigate 2021 which, despite some encouraging signs is still likely to be an uncertain year for many construction clients.
In addition, if another round of government emergency assistance comes to fruition soon, construction clients will continue to need support with any additional Small Business Administration (SBA Funding) as well as understanding the impact of these programs on their tax and overall financial positions.
Helping clients through slow payment cycles—even longer than ones which have been typical in the construction industry is another key area where accountants’ advisory skills can shine in this niche.
The Construction Financial Management Association (CFMA) reported that in 2020, “the coronavirus forced a surge in disputes. From February to April, during the initial wave of the virus, mechanics lien claims jumped as much as 63 percent as construction businesses raced to free up cash flow by collecting on outstanding accounts. Yet, even amid a rise in bankruptcies and a dramatic economic contraction, 39 percent of contractors say they did not change any of their business practices in response.”
Conversely, CFMA reported that a third of construction contractors applied for SBA funding (31 percent) to ease short-term cash flow in the. Others reported these financial management moves:
- Adjusting credit policies to be more selective about their customers (21 percent).
- Started sending more collection notices (18 percent).
- Began taking their lien rights more seriously (15 percent).
- Just 7 percent reported filing a mechanics lien or bond claim on more projects than usual.
For firms serving the construction industry, this propensity to resist change is likely unsurprising. CFMA also reports in a pre-pandemic survey, contractors showed a clear trend of accepting slow payments as the price of doing business.
Looking more closely at the industry data, some signs of the upturn are starting to emerge, for example Associated Builders and Contractors’ Construction (ABC) Backlog Indicator rebounded to 8.0 months in August, an increase of 0.2 months from July’s reading, according to an ABC member survey conducted August 20 through September The August backlog is a half-month lower than in August 2019.
Most industry watchers expect that the industry will continue to be unsteady in 2021 with subcontractors and suppliers disproportionately affected by negative or troubled cash flow. Data from CFMA shows general contractors are twice as likely than sub-tier parties to get paid on time, with 36 percent of general contractors reporting they always get paid according to contract and only 15 percent of sub-contractor saying the same.
For accountants who serve construction clients the issues this industry is facing due to the market environment precipitated by Covid-19 presents ample opportunity to continue working as trusted advisors who can help them navigate the challenges of 2020 and beyond. Understanding the market forces and outlook your construction clients are impacted by is an increasingly important part of being a preferred partner when serving this niche.
To learn more about this topic, join our webinar, "Your 2021 Strategic Blueprint for Building Accounting Firm Growth in the Construction Niche" on November 12, 2020 at 2:00 p.m. Eastern Time. THIS EVENT HAS ENDED. VIEW IT IN OUR ARCHIVE HERE