In reflecting back on 2020, no one could have predicted the challenges that awaited contractors. A worldwide pandemic, urgent and immediate health and safety adjustments, site shutdowns and uncertainty around construction spending were just a few.
In this Surety Corner, we will try to examine what we believe are the overarching trends we expect contractors will experience in 2021.
Interest rates
The hope is that 2021 is the year that the globe emerges from the COVID-19 pandemic. Governments across Canada have rolled out plans to begin vaccinating the population with most of the general public expected to receive the vaccine in late summer to early fall. Before that, there will continue to be tough times for a number of industries. Governments in Canada will continue to provide relief to these industries in terms of wage subsidies and loans so they can hopefully ride out the remaining period. Interest rates will be another tool that governments will use to continue to ensure that businesses have cheap access to cash. While low interest rates provide relief to businesses that need access to cash or are servicing heavy debt loads, they continue to make it a challenge to find low risk options to make a return on your money. This is no different for construction businesses. Using this low interest rate environment to reduce debt load and invest in your business will be the key to success after the pandemic.
Capital spending and shrinking margins
As noted, industries like retail, travel, commercial real estate and others have struggled throughout the pandemic.
For contractors focused on these industries and private works in general, late 2020 was a major challenge as private construction spenders were cautious to deploy their capital. Fortunately, government continued to roll out their spending in 2020 and so many of those private-sector contractors started to look to government work to augment the decline in private spending. This has started to increase competition and is applying pressure on gross margins on government work.
Furthermore, after significant spending to help individuals and businesses, the willingness to continue to tackle the infrastructure gap in a meaningful way is uncertain as governments will need to rein in spending at some stage. With the uncertainty in future spending, ensuring your business is nimble and lean, particularly when it comes to corporate overhead, will set your business up for long-term success.
Technology adoption
Canada continues to lag behind other major global economies in adopting technology in construction. Whether it is autonomous equipment, 3D printing or drone technology, Canadian companies need to continue to innovate to ensure they remain competitive both at home and abroad. The risks of being a first mover in adopting technology are high but finding ways to include technology in your strategic plans and to move your business forward with technology will ensure its relevance in the future.
Relationships
In 2020, relationships with our business partners and stakeholders were tested as we struggled to transact business as we had in the past, face-to-face. Whatever uncertainty lies ahead, ensuring that we find ways to keep our relationships strong with our business partners remains a key to success.
This includes bankers, surety brokers and underwriters, subtrades, suppliers and customers. When times are tough the energy we spend on these relationships during the “good times” comes to bear as well-connected teams tend work together to support each other and ride out the more challenging periods. We are hopeful for the future but whether good or bad, strong relationships will always be a key component of success.
Credit
The pandemic has been a tale of two stories, some companies have seen record profits and revenues while others have seen significant losses and are struggling to remain afloat. Many companies have survived thanks to the continued subsidies and support from government. As government support inevitably tapers off, the true test will be whether or not those struggling companies are able to survive in the long term.
This represents risk for contractors on several fronts. What once were strong subtrades could now be struggling, representing default risks on projects. Well known construction purchasers and general contractors could also struggle with cash flow and this could lead to receivable risks for contractors. Banks or surety companies who begin to see losses could tighten and restrict access to credit. Ensuring you are choosing your partners carefully and assessing their risk to your business will be as important as ever as you navigate 2021.
As always, we are hopeful for the future. Our experience has been that the Canadian construction industry has the heart, the talent and the ability to succeed and we expect this to continue as we head into 2021. We wish you success, happiness and health.
Jamie Collum is the vice-president of construction for FCA Insurance. He has delivered numerous seminars and presentations on construction bonding and general industry updates in Ontario to various construction associations over the years. Andrew Cartwright is the vice-president of surety for FCA Insurance. Andrew recently joined FCA after a decade long tenure as RVP for a large national surety company.
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