The construction industry has made a remarkable recovery from the 2020 COVID pandemic. However, there are signs of a recession looming for the AEC industry. How can companies prepare for a potential downturn in 2022?

 According to a report by Deloitte, the 2020 recession was among the shortest ever, but its impact continues to be observed across both the larger US economy and the engineering and construction (E&C) industry. 2022 may be a challenging year for some companies. Deloitte identifies five industry trends to watch out for.

Industry Growth

The AEC industry responded very well during the pandemic and has come out strong in the recovery period. Total construction spending recovered and peaked at $1.57 trillion in July 2021, a record high for the series and 12% higher than 2019 average levels. Residential activities continued to stay strong despite rising material prices and the spread of the coronavirus Delta variant.  Spending across educational, office, transportation, health care, and commercial facilities observed the largest year-over-year (YoY) decline in July 2021.

Industry Profitability and Performance

During the second half of 2020, the pandemic exposed the vulnerabilities of global supply chains. Supply issues were expected to stabilize moving into 2021 as both global production resumed and supplies normalized. However, pandemic-induced supply shortages persist, affecting key materials such as lumber, paint and coatings, aluminum, steel, and cement, among others.

75% of E&C firms indicated project delays due to longer lead times or shortage of materials. Further, 57% reported delivery delays, indicating that the industry has difficulty predicting when materials would arrive. Overall, supply chain disruptions and volatility are expected to be among the biggest challenges in 2022, and the firms that can navigate through them will likely emerge as winners.

Connected Construction

The construction industry is rapidly evolving as AEC firms, contractors, and professionals across the value chain realize the benefits of, and increasingly deploy, connected construction technologies. According to Deloitte, these technologies can help bring assets, people, processes, and job sites onto one platform—making everyone and everything work smarter. In 2022, connected construction will likely be a catch-all for major digital investments to connect, integrate, and automate operations and bring the entire value chain onto a secure, intelligent infrastructure.

Mergers and Acquisitions (M&A)

In 2020, many AEC firms were focused on being risk-averse and conserving cash to maintain liquidity. However, in 2021 transaction levels for the first nine months were already 152% higher than the full year 2020 and 10% higher than all activity in 2019. Between August 2020 and 2021, US E&C firms acquired as many as 27 targets across the software, electronics, technology consulting and services, and motion picture fields. A move in the right direction, this is further anticipated to pick up pace in 2022 as E&C firms work toward acquiring technologies to help develop a connected, integrated, and automated operations foundation.

Talent Challenges

The impact of not filling job openings can negatively affect AEC firms in more ways than one, including project delays and cancellations, projects being scaled back, inability to respond to market needs, losing project bids, and failing to innovate, among others. Another factor compounding labor shortages is a lack of qualified candidates. This skills gap is partly driven by industry advances into integrating digital technologies with key workstreams to further enhance productivity, efficiency, and worker safety. As we move into 2022, adapting existing talent strategies and forming new talent management and workforce experience strategies could be critical to navigating workforce challenges.

According to Construction Dive, industry experts suggest now is the time for construction companies to start shoring up their businesses. Preserve cash, build backlog and target federal contracts in case a recession sinks the U.S. economy. Industry experts have outlined eight steps for builders and construction industry companies.

Build What You Know

In the face of a recession, contractors should aim for more than 12 months in backlog. Now is not the time to go and try different trades. If you’re a mechanical contractor or you’re a general contractor, stick to the jobs you have a track record.

Monitor Financials

The most important thing a contractor can do during a potential slowdown is to maintain a businesslike approach. That means continually monitoring the financial health of the company and projects to ensure profitability, communicating regularly with customers, subcontractors and employees and keeping a focus on the firm’s specialties.

Cash Is King

A recession would cause profit margins to squeeze as “contractors would find themselves having to compete more aggressively for work. This represents a time to determine whether the firm can cut costs and whether it makes sense to attempt to negotiate larger lines of credit.

Hold Off On Large Expenses

Defer on large expenditures in order to keep cash on hand. Make sure you’re making money on the job and if you’re having problems, make sure you make the necessary adjustments to make the jobs profitable.

Think Twice Before Firing Workers

While many U.S. businesses look to layoffs during an economic downturn, that may prove to be a costly decision for construction firms. That’s because the current lack of available labor means contractors may not be able to rehire quickly when the economy improves.

Keep Hiring

Experts say a downturn can sometimes improve contractors’ ability to hire and retain workers. Companies with a growth mindset will be on the lookout to snap up any available labor even if they may not necessarily have the work for them over the short term.

Increase Civil Work

Federally funded infrastructure projects will be a bright spot in construction no matter what happens with the economy. Nonresidential construction opportunities will likely see offsetting declines as demand for services would likely slow in a recession.

M&A Deals

A tougher economy produces fewer mergers and acquisitions because such deals require confidence among dealmakers and the availability of financing tends to be truncated during moments of economic stress. A positive of a downturn could be the right opportunity to gain market share through acquisition.

 How does your company plan to weather a potential recession in 2022? What strategies will your team use to stay ahead of the competition?