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Contractor confidence took a major hit in the second quarter of 2020 due to effects of the COVID-19 pandemic. The Commercial Construction Index (CCI), released quarterly by USG Corp. and the U.S. Chamber of Commerce, plummeted 18 points to 56, the largest quarterly decline since the index’s launch in 2017.
The key drivers of contractor confidence, backlog, new business and revenue, all experienced drops in the second quarter. Contractors’ confidence in the ability of the market to provide new business in the next year has dropped 26 points to 50, demonstrating concern about the pipeline of work. Revenue numbers also dropped 26 points to 44 as many contractors see projects deferred, canceled or temporarily shut down. However, the ratio of average current and ideal backlogs only dropped three points to 73.
Backlog
Fewer contractors, including trade contractors, reported an increase in their backlog in the past three months. Only 20% reported an increase compared to 39% in Q1 2020. Nearly half of contractors reported a decrease in backlog over the past three months.
The average current backlog is nine months compared to the average stated ideal backlog of 12.3 months. While this indicator did experience a slight drop this quarter, current backlog levels are consistent with those reported in the first half of 2018.
“There is a slight shift toward backlogs that are less than six months in the current findings, but overall the findings are not dramatically different than in previous quarters. However, backlog is a lagging indicator of market conditions, and it may be many months before a reduced pipeline causes an actual decline, so this will be an interesting indicator to watch over the next six months,” reads the report.
New Business
The percentage of contractors reporting a high degree of confidence in sufficient new business opportunities in the next 12 months dropped dramatically from the first to second quarter of 2020. Only 16% report a high degree of confidence compared to 54% last quarter. However, the majority of contractors, 59%, still fall in the moderate range rather than reporting low confidence.
Contractors are more optimistic for the next 24 months. A third report a high degree of confidence in sufficient new business opportunities in the next two years, up slightly from last quarter. According to the report, this may suggest an expectation of pent-up demand in some sectors as the economy recovers.
However, large companies are more optimistic than smaller companies, with 29% reporting high confidence levels for the next 12 months and 56% reporting high confidence levels for the next 24 months.
Revenue
Revenue expectations for the next year are pessimistic with 21% of contractors expecting a decrease in revenue in the next 12 months. That’s up from just 2% last quarter. However, most contractors (60%) expect their revenue to remain about the same.
Profit margin expectations paint a similar picture, with 18% of contractors expecting a decrease in profit compared to just 3% last quarter. Nearly two thirds of contractors expect their profit margins to remain about the same.
“Large companies (annual revenues of $100 million or more) express the most stable profit outlook, with only 2% expecting to see either an increase or a decrease in their profit margins,” reads the report.
Methodology
The data in the report is from a Q2 2020 survey conducted only from April 4-27, 2020. More than half of respondents are prime contractors and 46% are trade contractors.
Click here to read part two of this article about contractors’ responses to the COVID-19 pandemic. Click here to read part three of this article about workforce, financing and materials trends.
