- While construction activity has not been shut down, coronavirus (COVID-19) is impacting demand across the built environment sector
- An economic downturn may to lead to project delays, deferrals and cancellations
- Contingency planning now will help you respond effectively as things develop and change
- Liquidity and cash flow will be crucial, so look to liberate cash, reduce costs, and build a working capital buffer
It’s apparent that the impact of COVID-19 on the built environment sector may be significant, and potentially far-reaching. Historically, forecasting beyond six months has been difficult for disciplines across the built environment, and current uncertainty over the extent and duration of containment policies will likely exacerbate this.
Danny Chung, Macquarie Business Banking’s National Head of the Built Environment notes that anecdotal evidence suggests clients are finding it difficult to forecast beyond June, yet many expect jobs and cash flow to be stable until mid-2020. According to the Australian Bureau of Statistics (ABS), 74% of construction businesses reported a drop in demand in March, even before the most austere containment policies had come into effect. In response, 23% had reduced work hours, while 13% had sent staff on paid leave1.
In response to this, some state governments have altered construction hours and approval processes, to support demand, with assessment of significant developments and rezoning benefiting from this. There may be further developments later this month, as the planning system acceleration continues, pushing projects through. Construction is still deemed to be an essential service by the government; therefore employment should be stable if projects continue.
However, with a wide-ranging economic downturn forecast, there may be an increase in future project delays, deferrals or cancellations, and potential for supply chain challenges, if the availability of building materials tightens. That’s without considering the direct effects of coronavirus cases on individual building sites.
At times like these, adaptation and planning are essential. Fortunately, built environment businesses are accustomed to a highly cyclical market. In Macquarie Bank’s 2020 Built Environment Industry Pulse Check, 84% of firms said they had the ability to respond effectively to political, macroeconomic, competitive or external factors.
Anecdotally, clients are advising that government related jobs are continuing unabated, and demand for workers on these projects is strong. However, smaller private sector projects are showing weakness because projects tend to be driven more by sector and state factors.
Market segments where clients are seeing stronger growth are healthcare, aged care, built to rent, and workplace design. Education is conflicted, with primary and secondary schooling showing growth, but tertiary education falling. Retail has also shown weakness across our client base, with demand for services diminished since social distancing measures have prompted temporary closures. It remains to be seen if increased adoption of online services will see more retailers pivot from traditional bricks and mortar into logistics and supply chain work.
It’s important to act now to ensure your business can continue to operate despite external factors, exacerbated by COVID-19. In this guide, we’ve listed some of the issues you should consider across four key areas of your business.
1. Strategic planning
- Review and update your business continuity plan. Consider high risk contingencies, such as:
- a staff member contracting coronavirus
- a site being shut down due to COVID-19 exposure
- key staff being required to self-isolate
- Re-examine your project pipeline, classifying projects as committed (contracts signed, and work commenced) and uncommitted (no contracts signed). Plan for scenarios where uncommitted projects are deferred or do not go ahead as initially proposed.
2. Client management
- Contact key clients, especially those in the pipeline, to firm up when projects will proceed.
- Liquidity and cash flow will be crucial. Consider freeing up cash and reducing costs. It is important to balance culture – and the ability to execute and win work – against the future of the firm, as you review costs
- Create a six-month financial plan and cash flow forecast. Use scenario planning to consider your response to different conditions. This strategy should look at all aspects of your cash flow and examine where any deferrals can be implemented
- Consider counterparty risk – the risk that clients may not be able to pay invoices as they fall due. Accelerate progress payments where possible and write off bad debts if necessary. Critically assess debtors and allocate time and resources to collecting payments
- Review your equity strategy to ensure you have sufficient working capital, while minimising borrowing costs.
4. People and culture
- Consider key staff retention strategies
- Consider contingency plans (for example, moving to a nine-day fortnight or four-day week)
- Ensure you understand the federal and state industrial laws, and how they may impact your business
- Communicate regularly with your team and be transparent, while maintaining a strong and resilient culture
- Examine working partnerships with other firms within the built environment. Historically, firms have co-designed or worked on different aspects of projects, harnessing the expertise of each business. As firms potentially rationalise their cost base, these joint ventures and working partnerships will become more important.
How Macquarie can help
The Macquarie Built Environment team is here to help you, with personalised support, delivered by industry specialists.
To find out more, contact your Macquarie Relationship Manager, call 1800 442 370, or visit macquarie.com.au/business-banking/built-environment-industry.html