Project management considerations across the U.S. and CanadaApril 1, 2020
From supply chain and labour to regulatory process and A/E consulting, there is no aspect of the project management ecosystem that is immune from the impacts of COVID-19. While the situation continues to rapidly evolve, below is a briefing on the considerations clients should undertake in each area.
Impact to the supply chain for materials and/or specified for construction related projects
The current COVID-19 health crisis will eventually resolve. While we cannot accurately predict some of the longer-term implications, what is clear is that the supply chain will be radically different in the short term. Historically, materials and supply market sectors were at or near to production capacity. Manufacturing kept up to market demand, but most of the construction and renovation components were made to order. Manufacturers with highly refined supply chain management had a market advantage with a limited inventory tied to demand. Production shutdowns due to social distancing measures and stay at home orders issued by health and government authorities has disrupted the marketplace in two key ways:
- The market demand for materials and products has continued to build while production has been halted or reduced.
- The duration of shutdowns of supply chain manufacturers differs widely.
Components that manufacturers rely on are facing production challenges. Many suppliers of LED components, plastic connector castings, circuit boards, aluminum extrusions, adhesives and finish coatings are located in areas of the world impacted by COVID-19.
What to expect when we return to full production:
- Limited manufacturer’s stock that is ready to ship. A majority of product will need to be manufactured on demand.
- Extended lead times caused by the staggered restart of the components supply chain.
- Emphasis on larger deposits at order, as manufacturers recover from their shutdown costs and losses.
- Staggered delivery issues for large quantities, where manufacturers may attempt to partially satisfy several users with partial shipments.
- Sales positions that differ from delivery capabilities.
- Limits on product customization as manufacturers focus on their highest margin products.
- Stability and solvency issues with manufacturers.
What to start planning for when production levels pick up:
- Front End” management – work with manufacturers to establish realistic deliverables.
- Re-evaluate the long lead-time materials.
- Realign the project schedule to achieve the deadlines by recognizing the market’s capacity. This may affect the construction sequence based on when materials arrive on site.
- Manage the contracts through deposits with an emphasis on delivery performance.
- Accelerate the shop drawing process to ensure the review and acceptance of the proposal is completed to release production. Many manufacturers are available but working remotely and often at limited capacity.
- Be prepared to align your conceptual design components to market availability.
- Modify the construction process – utilize “hold-to” dimensions, mockups, BIM and 3d coordination to accommodate extended lead times while progressing as rapidly as possible.
Impact to the labour market
We have heard from the construction community and our clients that the impacts to the construction labour market vary by location within North America. In some locations, the construction process has been completely halted by governmental order; restricted to “essential” construction related only to projects in the health care, energy, public works, or residential/shelter facilities or similar industries; or limited only to those considered essential in all market sectors. In areas where construction work is still allowed, the building trades are showing up to work and general contractors are implementing additional safety procedures to ensure a safe construction site. Where projects are in progress and construction is allowed, the projects are proceeding with productivity issues. When there is a COVID-19 case of a construction worker, the project is typically stopped, the site deep cleaned and effected workers are quarantined for (14) days. The project may resume after deep cleaning (per CDC standards in the U.S.). However, there are instances where projects have not resumed after the deep clean. There are reports of social distancing of six feet per health organization standards on sites also, in addition to more separation of teams. For example, an MDF Room where now only one trade can work instead of the typical three or four. Use of masks and gloves are becoming more prevalent, but are equally hard to come by, as shortages of these products are being reported in many sectors. Before any of us had heard of the COVID-19 virus, there was a labour shortage in North America’s robust construction market. Project schedules were already extended as a result. These shortages are only exacerbated by the spread and impact of COVID-19. Most construction office staff are working remotely where required. It appears that the daily flow of information (submittals, approvals, scheduling, RFIs, etc.), which is critical to any construction project, has not been impacted to a great degree. However, if project construction is halted in the field, there is a possibility of office worker furloughs, layoffs or temporary salary reductions. Currently, contractors are looking at their contracts for delay claims or force majeure claims. The claims will include general conditions increases for site delays, productivity delays due to required measures, and costs associated with the intensive cleaning required at infected sites. Most contractors have put in a notice of delay but cannot quantify the delay as this pandemic spread throughout the nation. We can expect more detailed and costly claims when the end of the pandemic nears.
What to expect upon return to full construction:
- Delays in project schedules as all projects resume if there is a quick reversal of governmental stop work orders.
- Expect labour shortages again as the volume of construction increases.
- Extended project schedules due to supply chain delays of construction materials as manufacturers ramp up production.
- General contractor and subcontractor solvency issues for those with debt issues.
- Work will not come up to speed quickly; It will take time for everyone to return to the site.
What to start planning for when construction picks up:
- Consistent communications between your project management team with the construction community to relay labour shortage or material delay information to clients.
- Intense scrutiny regarding contractor payment application approvals. For example, for approval of stored materials, the contractor shall produce a paid receipt of the materials being stored. In case of a bankruptcy, only materials with a paid receipt typically can be released.
- In cases where a client must relocate to avoid financial penalties, negotiations of “expediting” costs will be critical. If the construction market is heated, payment premiums can be expected.
- Where possible, work directly with manufactures to insure deliveries to customers.
- Use of financially solvent contractors with a proven track record. Expect smaller contractors who have been financially impacted to have limited financial resources to fund payrolls.
Impact to regulatory process for permit regarding document review and inspections
The impact of COVID-19 has resulted in disruptions in the building permit process across most municipalities. Although these disruptions were anticipated with the announcement of provincial/state and municipal State of Emergencies, accurately forecasting a timeframe of when the regulatory process will return to normal operations is still uncertain given the rapidly evolving environment. In general, the building permit process goes through an application period via package submission, document review and clarification period, permit issuance, progress inspections, final inspections, occupancy, and permit close out. Keeping the process moving is dependent on the successful approvals of the preceding activity. Depending on how each municipality functions administratively, the level of digitization their system allows, and how city officials have defined “essential service,” project managers are trying to compress and prepare for the activities that will be delayed in the permit process. There are numerous examples throughout the U.S. and Canada of building officials suspending or modifying services for:
- New Building Permit, Sign Permit and Zoning intake, review and issuance.
- Building inspection by city inspectors other than emergency inspections.
This poses immediate challenges for clients that have recently executed new leases and requires reevaluating exit strategy timing on expiring lease terms. Project managers can consider front loading client schedules to initiate soft cost activities (design work, etc.) to mitigate against an accumulation of resource demand once the permitting office reopens. Trying to prepare all the design documents and be ready to apply for the permit when available can help keep the schedule delays limited to the time the permit office is closed. However, if a building permit has been issued (and not revoked), construction or demolition can proceed in accordance with the permit, provided the owner/agent submits a progress report at each mandatory inspection stage. Many municipalities have made provisions for the contractors to digitally submit progress reports (in lieu of progress inspections) that must demonstrate, with supporting documentation (photographs, site visit notes, videos), that the construction was carried out in accordance with the approved drawings and the requirements of the particular building code governing the project. The good news is that the immediate work that is planned can continue, however, planning for eventual disruptions in the supply chain of materials and labour force will need to be reconsidered into the overall schedule. Occupancy inspections will continue on a case by case basis and to critical building permits. Understanding many municipalities will have taken a similar approach in their building permit process, how are project managers dealing with schedule impacts overall?
Impact to the design and documentation process, as well as construction administration
Based on our conversations with clients, design consulting and vendor communities, for now, the planning, design and documentation process and construction services continue to move forward if a financial commitment has been made for the project. We have seen some pauses and postponements as clients determine whether they can continue to support the process financially or in markets where ‘stay in place’ orders have stopped construction.
- For the moment, for larger owner/occupiers, who are in the middle of the process, the associated fees to continue the work may not be a burden.
- For the industrial work in progress, that is supported by investment funds and where the need will continue to grow, we do not see this work stopping unless forced to by work stoppage.
- Some projects that were just starting with site search, test fits and lease negotiations have been affected by the uncertainty, as clients contemplate layoffs and furloughs to ensure they can emerge from this period of uncertainty.
- Retail and hospitality have been most immediately and deeply hit, as population movements have decreased.
- Healthcare is focused on the immediate, hopefully short-term, emergency demands.
- Dependence on remote access and the additional traffic may prompt an increase demand for data centers as the workforce expectations may change as a result of this moment in history.
What to expect soon:
- The backlog of work that has been keeping consulting firms going, while new projects have halted, could result in personnel impacts from staff reductions.
- If a project is in construction, there may be supply chain disruptions as manufacturing is stopped and imports are delayed. If the construction can be completed, the furniture, fixtures and equipment may not be able to be shipped or completed for occupancy.
- The construction administration process is becoming difficult, as consultant firms will not require employees who are uncomfortable with the risk of exposure, to visit jobsites. As construction and governmental inspections are halted this may become less of an issue.
- In particular, many governmental offices in urban areas are making it difficult, if not impossible, for construction work to continue as offices modify their hours, field inspections stop, due to halted construction.
How to manage during this time:
Clients, consultants and contractors need to collaborate closely on the benefit/possibility of continuing the design process. Keeping the consultants engaged will support their business and getting the documentation done will make sure that it can be ready to submit for approvals/permitting and be on top of the pile. For the design work that has been paused or postponed, this is an opportunity to re-evaluate the vision and objectives for the project as people get used to working differently and how it can affect the real estate decisions. Project specifications are being re-evaluated from a risk perspective. Small suppliers’ business continuity issues, potential delivery schedule delays and manufacturers’ ability to catch up post shutdowns, need to be addressed. Shifting to smaller manufacturers that are still running in less affected markets is an option, if there is confidence they can deliver. In any case, it is still possible to get the orders in, so that the raw materials can be secured and ready to go. Identify how delays may affect lease hold overs and the migration into the new space. Project Close Out documentation of required forms necessary for reimbursement of the Tenant Improvement Allowance are understood early to ensure timely submittal to the landlord. Many building officials and consultants are exploring the opportunity of virtual inspections via photos or video and after hour inspections to maintain progress. Work with contractors to implement job site safe work practices, replace sub-contractors that have shut down or who may not be in business once the work resumes. We are all trying to navigate these challenges, leveraging technology and new ways of doing business. Virtual meetings and presentations help teams stay connected and managing the communications is more important than ever.
The spread of COVID-19 and the containment policies being introduced are changing rapidly. While information included is current as of the date written, the views expressed herein are subject to change and may not reflect the latest opinion of Avison Young. Like all of you, Avison Young relies on government and related sources for information on the COVID-19 outbreak. We have provided links to some of these sources, which provide regularly updated information on the COVID-19 outbreak. The content provided herein is not intended as investment, tax, financial or legal advice and should not be relied on as such.