Anticipated growth of mega-projects could polarize the construction industry into large general contractors and small subcontractors, with little room in the market for mid-size firms, warns a new report on trends impacting the sector released by the Canadian Construction Association (CCA).
Such projects will attract large foreign firms, which have more robust balance sheets and capacity, the report notes, resulting in money being taken out of Canada and from domestic firms.
According to the report, governments at all levels have been moving to a practice of amalgamating projects, in some cases into mega-projects, acting as a sole funder and issuing a single contract to one large general contractor, essentially decreasing the number of firms that can compete.
But by combining projects, the report notes, they risk “hollowing out” the Canadian construction industry.
“This decreases the number of firms that can compete for the projects and limits the capacity of large firms to bid on other projects concurrently,” the report states. “Also, medium-sized firms can’t compete at this level as they don’t have the capacity and can’t compete on price.”
CCA president Mary Van Buren says smaller firms are squeezed out of bidding on mega-projects because the administrative burden is too complex and resource-intensive for them to handle.
It reduces the number of capable contractors able to bid and it invites bids from international firms,
— Mary Van Buren
Canadian Construction Association
“Some believe that, as projects grow in scope and complexity, for example billion-dollar P3s, that only the very large firms will be able to compete,” she explains. “This will squeeze out the mid-size firms who, for example, might have built one or two schools a year but cannot build 10.”
Contractors see a polarized and consolidated future, with potentially only smaller and very large general contractors in the ICI sectors as medium-sized firms will either have to grow their capacity and balance sheets or get more specialized and become smaller to carve out a niche in the larger projects.
Alternatively, the report states, mid-sized firms will have to become more comfortable partnering with their peers in joint ventures to obtain large projects that they are unable to obtain alone.
Van Buren says the situation will result in a decline in mid-size contractors being able to bid on projects.
“It reduces the number of capable contractors able to bid and it invites bids from international firms who have larger balance sheets, some of whom are backed by their governments, thus creating an uneven playing field,” she points out.
As projects grow in size and complexity, it will attract the larger firms from outside Canada as they will also have bigger project price tags. The report states this decreases the number of firms that can compete for the projects and limits the capacity of large firms to bid on other projects concurrently.
Industry experts worry that bid qualification conditions such as experience on similar projects, retained expertise and liability insurance are becoming too complex and burdensome for many firms to navigate.
In such an environment, the report states, some capable contractors are deterred from bidding on projects for which they are well-suited, and the competitiveness and overall health of the industry declines.
Because foreign activity in the Canadian market means less money stays in the country, the report notes that governments should look to help domestic firms grow to compete with international players.
Van Buren says Canadian infrastructure is aging and the next two decades will be critical for the country to remain one of the best in which to live and invest.
“Having good, strong Canadian firms will help Canada ride the wave and be a leader,” she says.
The report notes that contractors are also worried that countries will pursue more protectionist policies and increase tariffs and other trade barriers on resources essential for the construction industry or close market access altogether, and that the change in regulatory environment, cancellations of large projects and the slow disbursement of infrastructure money from the federal government could mean slow times for construction in the next five to 10 years.
However, if governments were to announce clear timelines and investment commitments, simplify consultations and assessments, and secure more access to foreign markets it would positively affect the industry outlook, the report states.
Van Buren says construction primarily operates in a boom and bust cycle and been dependent on political policies that can change every four years.
“Projects get started and sometimes then deferred, or outright cancelled,” she explained. “When the investment flows, this increases cost of materials and wages, creating workforce shortages.
“In the bust, workers are laid off, there are no or very limited opportunities for apprentices, cutting off the flow of skilled tradespeople. These people can not be minted overnight during a boom, which means projects get delayed or deferred.”
The CCA report also touched on the issue of associations themselves, noting that industries that go through rapid disruption, as the construction industry is poised to do over the next five to 10 years, need a strong, singular voice and information hub to communicate with government and other industry allies.