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Mind you, this applies strictly to new construction, he emphasized. Conversely, remodeling is not generally cash-flow positive. While the same stages could apply, they cannot mask underlying problems as with new construction, he explained.
“What that effectively means is that in new construction – and we see this all the time, even in good times – building companies doing new construction can continue signing new contracts effectively below cost and that can go on for years. But it’s like a cancer, really, because it’s eating away at the health, the strength, of the building company which is their reserves, their equity. If left unchecked, that building company will topple over and die at some point.”
But let’s start at the early stages of malaise, maybe a scenario starting with a figurative cold perhaps accompanied by low-grade fever. “To put this all into perspective,” Stephens said, “when we look at stage zero – which is the potential for a loss on a contract – this affected virtually every building company in the world with what’s happened with COVID. As a result, construction inflation virtually put every fixed-price contract underwater potentially.”
A brief timeframe opened up to be proactive on this, but forces emerged too fast: “The opportunity at that point was to renegotiate the contracts before they started,” Stephens said. “But this situation came in so fast, most building companies didn’t really have this opportunity. They started contracts that then turned negative quite quickly afterward, so this is why a lot of building companies ended up on stage one loss on a building contract.”
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