How To Make the Most of a New Wave of Infrastructure Funding

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February 23, 2022


Overview

The post-pandemic global expansion in infrastructure spending, intended to address critical needs and kickstart economies, is a considerable boon for construction companies. At the end of 2021, President Joe Biden signed a $1.2 trillion infrastructure bill into law. The U.K. has promised £650 billion in infrastructure spending over the next 10 years.

The EU has announced their 800-billion-euro NextGeneration plan to support the economic recovery and build a greener, more digital and more resilient future.

Construction and infrastructure industries across the globe will play a major role in these plans.

While additional infrastructure spending is a positive development for the construction industry, it will come with challenges. Some obstacles have arisen because of the persistent COVID-19 pandemic — inflation, supply chain issues and labor shortages. There are others — such as the issues with the traditional design/build construction model, questions of risk allocation between project owners and contractors, low operating margins and business inefficiencies — that have plagued the industry for some time.

In response to these challenges — and seeking to benefit from the increased spend— contractors are looking at ways to make better decisions about the way they improve efficiency and manage their risks, including the use of technology and the early and increased collaboration with project owners.

In Depth

Construction industry leaders are having to make decisions about an increasing number of volatile issues. On top of an increased focus on risk and who takes it on, more and more attention is being placed on environmental, social and governance (ESG) strategies. As a result, many companies are rethinking their traditional models.

Contractors always seek to balance risk, but several issues have been exacerbated by the COVID-19 pandemic. The cost of materials is one of them. Copper prices jumped 130 percent from March 22, 2020, to May 9, 2021, when they hit an all-time high of $10,512 per metric ton. The World Bank predicted aluminum prices could hit $2,050 per metric ton this year, up from $2,000 in 2021 and $1,703 in 2020. Benchmark crude oil prices jumped from $50 per barrel at the start of 2021 to hit more than $100 in February 2022 following the Russian invasion of Ukraine.

“Between the time you submit a bid and the time you start ordering material, the price of that material can increase substantially,” says Helena Fernandez de Bobadilla, EMEA construction industry vertical leader at Aon. Project owners try to allocate that price risk to the contractors, she adds. Only very few owners are offering contract review caused by this exceptional circumstance and, in most cases, it is more related to delay exemptions. Before COVID-19, contractors would typically pass on that risk to their suppliers and subcontractors. But in most cases that is not possible anymore. Therefore, the risk now relies mostly entirely on the main contractor.

“Another issue that contractors face is a shortage of labor,” says David Bowcott, chief commercial officer in the Global Construction and Infrastructure Group at Aon. “You’ve got a massive project pipeline and you’re facing shortage of materials, a shortage of labor, inflation, supply chain issues. The contractors are saying, ‘This is great, but who’s going to build it? We aren’t.’”

To avoid overtaxing labor and materials resources, governments and construction companies could consider working together to appropriately stage the flow of new infrastructure projects.

“That would be very helpful, because then you’re not just stretching the labor market in one area and having huge cost increases,” says Tariq Taherbhai, chief operating officer, Global Construction & Infrastructure at Aon.
The industry can manage what’s ahead by focusing on a few key areas:

Supply Chain Challenges

As global supply chains struggle to recover from pandemic disruptions, construction companies can find it challenging to get the materials needed to complete projects on time and on budget; the supply chain crunch can lengthen lead times for building materials and increase prices.

“Previously, the industry worked on a ‘just in time’ supply chain. We aggregated our supply chains around a few specific regions, China being one,” says Bowcott. “Now you’ll have situations where it looks like the building is done, but it’s missing a microchip so the air conditioning doesn’t work.”

Taherbhai notes that supply chain disruptions are not unique to the construction industry and will require broad solutions if companies are to maximize opportunities associated with infrastructure spending. “Until supply chain issues can be sorted out, everyone is dealing with those high prices or sheer lack of availability of material,” he says.

Emerging ESG Pressures

Construction companies must also join the increasing list of industries focusing on ESG imperatives. The construction industry is a significant contributor to greenhouse gas emissions. According to the UN Environment Program, buildings and the construction industry account for 38 percent of all energy-related carbon dioxide emissions.

Construction companies that engage with ESG now will ultimately win more contracts and turn more profits, says Fernandez de Bobadilla. In the U.K., for example, the government requires a bidder for large public contracts to produce a Carbon Reduction Plan setting out how it intends to achieve net-zero carbon emissions by the year 2050. On the positive note, embracing ESG gives contractors the opportunity to access green finance, which is growing exponentially.

From a social perspective, there is increasing focus on diversity, equity and inclusion measures directed towards the employees. Also, the most ESG-advanced contractors are looking to additional “community benefit” projects they can deliver alongside the primary project, Fernandez de Bobadilla says.

Sharing the Risks

Project failure is a major risk for contractors. It can stem from a variety of factors including insufficient design information at the time of the bidding, projects deviating from original specifications and contractors simply being allocated much of the project’s uncertainties. All of this leads more often than not to cost overruns as well as delays. “Project failure is really the major challenge from a contractor’s perspective,” says Fernandez de Bobadilla.

The current cost environment in connection with the design/build model — with a single entity responsible for both the project’s design and its construction — can put pressure on contractors. Some might be tempted to invest less on design and submit low bids on projects for which the planning ultimately proves inadequate, Bowcott says. “The whole industry is based on measure twice, cut once. Some projects there’s not even any measuring going on.”

“The current design/build model is under a lot of scrutiny,” says Bowcott. “The owner is trying to push as much risk to the contractor as possible.”

“The good news is that governments and private sector owners are looking at this and saying, ‘What’s wrong with this model?’” says to Bowcott. While owners often want the contractors to design projects and then bid — without paying them for the design work — it’s necessary for owners to be involved in the design process to ensure the project’s success, Bowcott explains.

As part of these changes in decision-making, contractors are pressing to share risks more equitably with project owners. “I think everybody is looking to have a more balanced risk allocation,” says Fernandez de Bobadilla. “Discussions are being held at very high levels. You can’t just have the contractor taking all the risk.”

The Promise of Technology

As they wrestle with the challenges confronting them and look to maximize opportunities, construction companies are following multiple paths. One strategy is increasing the use of technology. The ability to aggregate and analyze data is bringing efficiency to the construction process, improving the tracking of design changes and helping contractors manage costs and improve project outcomes.

New construction technology tools also help improve worksite safety, allow contractors to effectively manage supply chains and track materials, and monitor such potential perils as water intrusion in buildings. Construction companies are also using technology to address insurance cost challenges.

“The insurance community is starting to give credit for the mitigating impact of technology on construction,” Bowcott says.

Rising to the Challenges

While supply chain disruptions and other challenges require global solutions, construction companies can address some issues with greater collaboration with project owners, improved allocation of risks and bidding that realistically reflects existing conditions.

Construction companies stand to benefit from opportunities created by government infrastructure plans and economic recoveries. Successfully addressing these changes and accompanying challenges will allow the industry to thrive.