The Constructor

How will COVID-19 affect the Construction Sector? [PDF]

COVID-19 and Construction Sector

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The coronavirus pandemic has created turmoil in the construction sector. Once back on track after the lockdown, the government will have to take some concrete steps to support the industry and economy. Landing back to the normal and full recovery from this downfall is likely to be slow for the construction sector.

Recovery in employment levels in the sector and meeting project timelines and budgets will be critical to the revival of the overall economy. It will depend majorly on short-term revival actions and medium to long term resilience strategies implemented by various stakeholders.

Government, developers, and contractors will have to collectively play their parts to ensure a revival in the overall construction ecosystem.
After agriculture, the Construction industry in India is the second-largest employer, and it is, therefore, critical to the country’s economic stability. With an industry size of INR 10.5 trillion, it contributes to around 8 percent of the nation’s GDP and employs nearly 57.5 million people.

Also, being a core sector, numerous industries that are dependent on the construction activity in the country. For example, the construction equipment manufacturing industry comprises around 500 companies and is estimated to be sized at INR 375 billion by 2020.

With the real estate projects and the infrastructure projects such as irrigation, bridges and flyovers, metro and expressways on a grinding halt, the construction equipment segment is badly impacted. However, positive signs are visible as construction activities are restarting slowly in safe zones where the coronavirus impact is minimal.

The construction sector is expected to encounter a simultaneous reduction in both supply and demand on account of this pandemic. As the sector is driven by infrastructure projects to a great extent, it is expected to be hit by the current levels of uncertainty, consumer sentiments and dismal business, loss of income as well as the allocation of government funds towards COVID-19 management.

Overall, low economic activity in other sectors would impact construction services through forward linkages. A fall in output of construction would also have a multiplier effect through backward linkage, causing further shrinking of the overall economic activity. For economic sustainability in a post-crisis reality, the construction industry will need to quickly devise ways to keep the masses employed, enhance the quality of living, and, more importantly, meet project timelines and budgets.

The COVID-19 crisis is expected to hit labor-intensive sectors, particularly hard. In the construction industry alone, migrant workers form a large part of the manpower and usually stay in labor colonies at construction sites. As per CREDAI, prior to lockdown, there were nearly 20,000 ongoing projects across the country. The work was being undertaken on as many as 18000 sites, and more than 30 percent of workers were staying away from sites due to the fear of coronavirus infection. Together these projects involved a workforce of 8.5 million.

Unlike during the economic crisis of 2008, the government now has very limited options to undertake corrective measures, owing to the financial stress, which was already dominant in the pre-COVID period. Though funds are being allocated for various relief measures, the ability to fund and spend on infrastructure projects in the coming one to two years is likely to be impacted.

A report published by KPMG summarized the impact assessment through the following points:
1) Under development projects are the worst hit with a minimum impact of two to three months.
2) Due to the delays created in the construction projects by lockdown, there would be an extra interest cost on the working capital loans, which will be required to be borne by the developers or the contractors depending upon the risk-sharing mechanism.
3) The labor costs for skilled workers are expected to rise by 20 percent to 25 percent while that for the unskilled and semi-skilled workers is expected to rise by 10 percent to 15 percent.
4) Revised standard operating protocols duly incorporating social distancing, PPE, and hygiene would drive up project costs in the short term.
5) Implementation costs may not vary much for linear projects like irrigation canals, pipelines, transmission lines, roads, etc. However, for non-linear projects, the costs may rise by 2 percent to 5 percent.
6) The projects dependent on specialized equipment, electronics, and specialized materials are more likely to be hit by hindrances to the supply chain largely due to the force majeure clauses. The recovery of liquidated damages would not be possible for the developers, unlike certain sectors, such as solar projects where the pandemic as a part of Force Majeure Clauses (FMC) is not included in the Power Purchase Agreements with some of the major solar power developers in India.

The current unprecedented situation has prompted the companies to adopt intelligent and effective means to overcome the challenges. Technology is increasingly being utilized in every aspect of operations, with remote monitoring becoming the new normal in machine operation and project execution. Telematics can actually help with social distancing; fleet owners can keep track of their equipment remotely from the safety of their offices/homes.

All these difficult situations that the industry is going to face in the coming months demand more generous policy support from the government and relaxation on various fronts that will help the industry and the players gain strength to survive the adversities.

KPMG's Assessment of Economic Impact on Construction Sector in India

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