Engineering & Construction in a post-COVID world: weathering the storm
Overview
Engineering and construction (E&C) companies are used to cyclical downturns, but the speed and strength with which COVID-19 has struck is unprecedented. Projects are being delayed or cancelled. Supply chains are under threat. Employee and subcontractor labour health is a concern, and there are practical challenges around social distancing on construction sites. Companies that have had to furlough workers might find the future availability and skills of those workers uncertain. And because many construction and contracting companies operate without substantial capital reserves, the impact of the lockdowns could force some to restructure debt, seek new sources of capital or risk insolvency.
It could get worse before it gets better. PwC’s latest COVID-19 CFO Pulse Survey found that 81% of CFOs are considering cost reductions in response to the crisis, and 60% say they are planning to defer or cancel investments, particularly in areas such as facilities and capex, operations, and workforce.
It is an extraordinarily difficult time, but swift yet thoughtful action can help E&C leadership teams manage the immediate crisis, stabilise supply chains and reinforce their companies’ financial position to emerge from the crisis with a more solid foundation.
Manage the immediate crisis
For most E&C companies, financial stability is the top priority. Achieving or maintaining stability amid so much uncertainty clearly requires reviewing capital and corporate cost budgets as well as options for raising funds, including government stabilisation or stimulus packages.
Yet the lack of clarity regarding the E&C marketplace, supply chains and the wider economy makes any cost-containment or other finance decision extremely challenging. There’s no perfect answer to this uncertainty, but a robust scenario analysis — using models that estimate financial needs and opportunities, based on a wide range of scenarios for COVID-19’s duration and impact — can help companies navigate it.
These models require the most accurate data available, typically detailed at a project level due to the bespoke nature of and contractual arrangements for each project. You will need processes to continually gather new and better data, in order to accurately update your scenario analysis. Many E&C companies that haven’t already started using advanced data analytics may therefore want to consider doing so. These tools will prove their worth in helping navigate this crisis — and will continue to create value after it’s over, by supporting better-informed decision-making.
Keeping your workforce safe, engaged and skilled is another challenge. Your E&C company may face limits on how many employees can work from home: many workers simply must be on the job site. Beyond providing them with appropriate protective gear, you can take additional steps to help them stay safe, such as staggering shifts, mandating safe distances between workers, and banning visitors. Apps can help keep track of workers’ locations while on the job, in full compliance with privacy regulations, so you can quickly identify potential exposures to the virus.
For employees who can telecommute, redouble your cybersecurity efforts: more sensitive information will now pass through the Internet and home systems. Communicate regularly with these work-from-home employees, as well as those whom you’ve had to furlough, and offer upskilling options. This crisis could last for months. You don’t want these employees’ connection to your company or their skills to atrophy while they are at home and potentially idle.
Stabilise your supply chain
COVID-19 has had profound economic consequences, and some of your vendors and subcontractors may not survive. Others may not be able to fulfil contracts right now. Overseas suppliers may be especially prone to delays. For many E&C companies, it is an extraordinary challenge to obtain visibility into and manage the behaviours of their disparate supply chains at site level.
To find vulnerabilities in your supply chain and choose how to respond, you need to maximise visibility. Reach out to your suppliers, gather data and build a dashboard that you continue to update and refine over time. Based on what the dashboard reveals, consider the legal and financial implications, as well as their impact on margins, cash flow, loan repayments and terms. Make sure that your project controls, risk management and governance processes can handle all the supply chain changes you consider.
For critical suppliers whose long-term prospects are sound, you may want to offer contractual flexibility (if appropriate) and technical support, including help in tapping government funding as part of recovery and stimulus programmes all over the world. Yet you also must be ready to pivot to new suppliers as needed.
Reinforce the company's financial position
Many E&C companies are facing a financial shock, with an especially significant impact on their cash flow. In the short term, they should conduct an extensive project-by-project forecast and source government financial support. In addition, management teams should consider contractual terms, the recoverability of receivables in a site shutdown, and the inevitable inefficiencies created by remote working and on-site distancing restrictions. In the medium term, many organisations will need to renegotiate lending arrangements and raise new equity.
As you work through this crisis, aim to build resources for the future too. If you can come through this period with a robust balance sheet, you’ll be well-placed to gain market share, because you can bid for future work from a position of strength. You’ll also be able to attract and retain the best talent and reposition your business through tactical M&A. Emerging from this crisis, the strongest players will have opportunities to grow stronger still.
To develop and execute a financial strategy that will help your company be among that elite group, make sure that your finance team has information and forecasts that are as accurate as possible, supported by top-notch analytics.
Looking ahead
When the pandemic ends, E&C companies will face a new world. The marketplace will change, as some national governments will be eager to invest in infrastructure to jump-start their recovery, and others may face new resource limitations. Portfolios will also change, with both public- and private-sector project owners placing a new emphasis on sustainability and resilience.
Cities will need to serve more residents who work from home — likely leading to greater investments in telecom and smart city initiatives. Among the many potential private-sector shifts on the horizon, commercial real estate may undergo a prolonged downturn, while the growth of data centres may accelerate further. The competitive landscape will change too, as stronger players acquire weaker ones, and still others emerge from bankruptcy with clean balance sheets and a ravenous appetite for projects.
It’s a formula for continued uncertainty: your company’s client base, competitors and project book may differ dramatically from their pre-COVID reality, but it’s impossible to foresee exactly how. Yet companies that emerge from this crisis with solid finances, a resilient supply chain, skilled workers and the capacity to gather and analyse the data that decision-makers need, will be well-placed to pivot and seize new opportunities. Those organisations will be market leaders no matter how the post-COVID world evolves.
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