2020 Marcum Northeast Ohio Construction Survey

2020 MARCUM NORTHEAST OHIO CONSTRUCTION SURVEY

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2020 MARCUM NORTHEAST OHIO CONSTRUCTION SURVEY

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The number of 2020 respondents who predicted a recession in the next year doubled once the pandemic reached the U.S.

EXECUTIVE SUMMARY

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Marcum is pleased to provide the results of the 13th annual survey of the Northeast Ohio Construction Survey . When Skoda Minotti and Marcum merged in December 2019, we continued to recognize the value of reporting on the health of our region’s construction industry. Marcum also conducted a 2020 national construction survey, which provides us with valuable comparisons. We first conducted this survey during the Great Recession of 2008. Now, in 2020, we find ourselves in a global pandemic, which reached the U.S. in the middle of our survey response period. As a result, we had the rare opportunity to divide respondents into two groups—those who completed the survey before and after March 15. For the purpose of this report, we refer to the latter group as “post-pandemic” respondents. In some instances, there are notable differences in the responses between the two groups, and we provide commentary to call them out. In our final reminders to respondents to complete the survey, we included a question asking which actions companies were taking to mitigate the impact of COVID-19 on their businesses. A resounding 85% of respondents told us they were applying for the Paycheck Protection Program (PPP), which provides forgivable loan assistance for retaining employees and continuing operations. According to the Associated General Contractors (AGC), construction was one of the top three industries receiving PPP loans. Almost half (45%) of respondents were exploring their business interruption insurance for a virus exclusion, and 36% were exploring whether force majeure provisions existed in their contracts. In 2019, respondents remained cautiously optimistic about the Northeast Ohio construction industry, noting some concern about an eventual market correction. While optimism has waned some among respondents since 2015, the industry has remained strong. That’s not to say there aren’t challenges. The lack of skilled construction workers, material cost volatility, and healthcare costs reported one year ago remain top concerns in 2020. The upcoming presidential election has temporarily diminished the focus on skilled labor, though it still looms as a major issue. Post-pandemic respondents revealed

heightened concern about material costs and the availability of bank credit. While 61% of total respondents report their average job size remains the same, the number reporting an increase in job size was the lowest we have seen since 2013. Despite these issues, overall responses reflect optimism about the health of the Northeast Ohio construction industry:  94% of total respondents report the ability to obtain financing over the past year has stayed the same or improved.  Almost three-quarters of respondents expect their project backlog to be the same or higher in 2020.  67% of all respondents report bonding requirements of less than 40% of their projects and only 7% of respondents felt it would be more difficult to obtain bonding in the future.  53% of respondents expect to see more growth opportunities within Northeast Ohio, an 8% increase over 2019 responses. Our 2020 report provides greater insights into contractors’ priorities, perceived threats and challenges now—and in the 12 months ahead. We hope you find this report to be helpful and, as always, we welcome your feedback and questions. Marcum LLP is a premier provider of full-service accounting, tax and consulting services to the construction industry. Our clients range from small contractors to billion-dollar international construction organizations. Our client base gives us the breadth and depth of construction experience to effectively and efficiently develop the strategies needed to meet your requirements. Visit marcumllp.com/construction to learn more. ABOUT OUR CONSTRUCTION INDUSTRY GROUP

TABLE OF CONTENTS

03 05 06

12 17 18

Executive Summary

Mighty COVID Steps to the Bat

Financial Snapshot

Growth Opportunities

Bonding Considerations During COVID-19

Survey Results

NORTHEAST OHIO CONSTRUCTION INDUSTRY SERVICE LEADERS

ROGER GINGERICH Midwest Construction Group Leader roger.gingerich@marcumllp.com 440.459.5725

MAYFIELD VILLAGE, OHIO MARIE LENARDUZZI marie.lenarduzzi@marcumllp.com 440.459.5788

MAYFIELD VILLAGE, OHIO RANDY BOSLEY randy.bosley@marcumllp.com 440.459.5726 MAYFIELD VILLAGE, OHIO AMY GIBSON amy.gibson@marcumllp.com 440.459.5787

FAIRLAWN, OHIO KYLE ROHRIG kyle.rohrig@marcumllp.com 330.564.8514

FAIRLAWN, OHIO

CHRIS SIVAK christopher.sivak@marcumllp.com 330.564.8540

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Financial Snapshot

94 % 51 % 93 % 84 %

of respondents report that their ability to receive financing has increased or stayed the same.

BONDING More than one-half (51%) of all survey respondents report that less than 20% of their work requires bonding, a 12% increase over 2019 respondents, but in line with previous years. The year opened on a strong note, and contractors appear to be riding that wave of optimism. Given the current economic climate and a growing public construction market, it would be logical to expect bonding requirements to increase in the future. It should be noted that none of our post-COVID respondents thought it would be less difficult to obtain bonding. However, 93% of total respondents expect requirements to stay the same or improve—a positive outlook for the industry. We see sureties making underwriting and the ability to obtain additional bonding more difficult. BANK CREDIT As stated above, we asked survey respondents if their ability to obtain financing in the past year has improved, decreased, or stayed the same. Only 6% of respondents state that their ability to obtain financing has decreased. This response, which reflects a healthy lending environment, is in line with survey responses from the past few years. By the time the survey closed, however, there was an uptick in the number of post- pandemic respondents ranking the tightening in bank credit as the biggest threat to their business.

OVERHEAD EXPENDITURES Only 9% of 2020 respondents report a decrease in overhead expenditures year-over-year, which is consistent with national survey respondents. A healthy 52% of respondents report increased expenditures over the past year, 13% higher than 2019 respondents predicted. Fairly consistent with one year ago, 42% of respondents plan to increase expenditures in the coming year, slightly more than national respondents. There is also a 5% increase in the percentage of respondents planning to decrease expenses in the next 12 months, no doubt influenced by economic uncertainty. In fact, the percent of post-pandemic respondents expecting a decrease in the future quadrupled from their pre-pandemic peers and the percentage of those predicting an increase dropped consistently.

of respondents report bonding requirements on less than 20% of their jobs.

of respondents expect bonding requirements to stay the same or improve.

The construction market and opportunities for growth remain strong. - pre - pandemic survey respondent

of respondents plan to increase or maintain their budget for overhead expenditures.

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BY LOU COLAGROSSI | ASSURED PARTNERS OF OHIO, LLC Bonding Considerations During COVID-19

If ever there were a time for contractors to be overcapitalized, now is that time.

Bonding companies will want to know and understand how COVID-19 is impacting your operations. For example, if you are performing private work, has the pandemic had a significant impact on your client’s ability to pay? If you or your subcontractors have had projects delayed, there may be a ripple effect when projects start or restart if crews are tied up with other projects. Additionally, supply chain issues are starting to surface, which further impacts schedules. Contractors who rely on their bank lines of credit to operate also could be vulnerable, should their lending institution decide to reduce their exposure to the industry, further complicating your ability to perform. Going forward, there should be more scrutiny over the contracts being bonded. Who’s responsible for the added cost to shut down a project and ensure the site is safe and secure on a temporary basis? We have seen onerous clauses being added, making the contractor responsible for any/all costs as a result of COVID-19 impacts on the project. Have your legal counsel and your bonding company review your contracts before you sign them to assure you are not falling prey to one of these unknown risk factors. Increased communication with your bonding company, bank, and legal team is the best approach in maintaining capacity during these uncertain times.

Lou Colagrossi Vice President/Producter , AssuredPartners of Ohio, LLC 440.895.6387 | lou.colagrossi@assuredpartners.com

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Going forward, there should be more scrutiny over the contracts being bonded.

- LOU COLAGROSSI

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There is potential for lack of work due to projects being postponed or terminated due to COVID-19. - SURVEY RESPONDENT

COMPETITION The number of bidders that contractors compete against is a good measure of the health of the construction industry. There was a significant decrease in those respondents seeing 1-4 bidders, down from 69% in 2019 to 55% this year. Instead, more respondents chose 5-9 bidders, indicating tougher competition. Respondents that saw their average size job increase over the past 12 months declined from 50% in 2019 to 37% this year, the lowest level since 2013, when the economy was climbing out of the recession. With larger markets included in the national construction survey, it doesn’t surprise us that 48% of national respondents report a larger average job size.  In the future (next 12 months), your company’s budget for overhead expenditures will:

NATIONAL

OHIO

Increase

42%

Increase

36%

Stay the same

49%

Stay the same

42%

16%

15%

Decrease

Decrease

BACKLOG This year, more than one-quarter (26%) of respondents expect a decrease in their construction backlog year over year, the highest percentage since we began asking the question in 2018 and up more than 8% from a year ago. The good news is that 24% of 2020 respondents predict their backlog will increase by more than 15%, compared with 18% of respondents in 2019. Overall, 74% see backlog remaining the same or improving, a healthy indicator that is right in line with the rest of the country.

We are most focused on improving profit margins and retaining clients until we see

the outcome of the 2020 election. - pre - pandemic survey respondent

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We are a family company and we only grow from within. We hire apprentices and train them to replace us.

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TOP POLITICAL ISSUES Consistent with years past, and in line with the national construction survey, healthcare and material price volatility are the top two political issues for our 2020 respondents. Healthcare continues to be a turbulent issue, especially in an election year. The uncertainty surrounding material prices was only exacerbated once the pandemic closed down businesses in China, the original epicenter of the virus. The availability of credit replaced income taxes as the third-most important political issue, a ranking it hasn’t held since 2015. This shift doesn’t surprise us given the economic repercussions of the pandemic. Contractors are looking ahead to potentially stricter lending requirements. We also noted a shift in the ranking of minority business enterprise (MBE) and women business enterprise (WBE) contract requirements. After being one of the least important political issues for several years, it was ranked No. 5 by respondents. One explanation could be the $1.5 billion in public projects in progress in Northeast Ohio, including MetroHealth, the Cleveland Clinic and University Hospitals. These companies participate in the community benefit agreements (CBAs) with the city of Cleveland, which set standards for using local labor and contracting firms and, in particular, minority and female workers and firms. The social environment around race and business is likely another contributing factor.

THREATS For the seventh straight year, securing skilled labor was selected as the greatest threat to our respondents’ businesses in the next 12 months, though we did note a 17% drop in those choosing this threat in 2020. The reason? We included the 2020 election as one of the choices this year, and that is where most of those responses went. Once COVID-19 entered the picture, there was more than a 50% drop in skilled labor as a great threat. Instead, lack of work sharply increased and was the No. 1 threat according to post-COVID respondents. Going into 2021, this will be an interesting issue to track. In addition to skilled labor challenges, post- COVID respondents cited material price volatility and the availability of credit for project owners among their greatest challenges.

- survey respondent

We are most focused on improving profit margins and retaining clients until we see the outcome of the 2020 election.

ESOPS For the first time, we asked respondents whether they have explored employee stock ownership plans (ESOPs). Almost one-quarter of respondents were unfamiliar with ESOPs. See our ESOP article to learn how these plans can benefit employees, and how they can serve as a viable transition plan for construction firm owners.

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BY MICHAEL J. FRANTZ, JR. | FRANTZ WARD’S CONSTRUCTION GROUP Mighty COVID Steps to the Bat

Until recent events, our market was relatively strong. It’s very hard to say at

the moment with so much in flux - post - pandemic respondent

Approximately half of those surveyed recognized the importance of typically ignored force majeure and cancellation provisions in contracts. Unfortunately for many, the failure to negotiate and assess these provisions left those contractors with nowhere to turn when labor dried up due to stay-at-home orders and the general unease of employees. A strong, specific and well thought-out force majeure provision would have enabled those same contractors to recoup not only time, but also the added costs incurred as a result of COVID-19-related delays. Many contractors also recognized the importance, albeit in some instances too late, of a comprehensive insurance program, including business interruption insurance, which would respond to the lost business caused by COVID- 19. Again, a thoughtful analysis of the risks facing the company and the tools available to mitigate those risks would have surely improved many of the negative results contractors experienced as a result of the pandemic. Finally, a streamlined and efficient safety plan is an absolute necessity to help reduce the inevitable COVID-19-related productivity impacts. The concept underpinning all of this is that post-COVID-19 construction professionals should give more thought to the project front-end in order to avoid risk, rather than simply react to the negative impacts of those risks. This will be a change, but if we adjust and adapt to this new normal, there will be no joy in Mudville and Mighty COVID is sure to strike out.

You are minding your own business, enjoying the successes of a generally healthy construction market, and WHACK — you catch a bat right to the face. No, not the animal, but a Cosmic Bat that forces you to adjust and adapt. As Marcum’s 2020 Construction Survey results illustrate, for many in the construction industry, COVID-19 was just that bat. Recent reports confirm the impact already being experienced by the construction industry. Several large domestic and international contractors report significant declines in profits since April. Studies by various trade organizations have found that these impacts are largely attributable to the significant loss of productivity on projects due to the pandemic and will not be short-lived. Much of the available data shows that taking necessary precautions, such as temperature checks, and following COVID-19 protocols, such as social distancing, sanitizing equipment, and strict PPE requirements, caused a roughly 20% decline in productivity by the contractors included in the studies. It appears that these new precautions and protocols are here to stay, ushering in a “new normal” on construction projects throughout the world. Marcum’s 2020 survey results show that most construction professionals are focusing on how to navigate this new normal, rather than trying to avoid it. The majority of contractors identified strategic planning as their top priority in the wake of COVID-19, followed closely by organizational planning and reducing operational costs. So, the question becomes: how do we best implement a new way of thinking in the face of reduced productivity and profits? First, construction professionals must anticipate and account for the lost productivity when bidding projects and negotiating change orders on existing projects. During this period of uncertainty, accurate bidding and estimating is going to be more critical than ever to a contractor’s success on a project. Additionally, those too-often overlooked contract terms and conditions will play a pivotal role in contractor success.

Michael J. Frantz, Jr. Partner , Frantz Ward’s Construction Group 216.515.1624 | mjfrantzjr@frantzward.com

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RECESSION ASSESSMENT Even before the pandemic, the Northeast Ohio construction industry was bracing for a potential recession. In fact, 44% of all regional survey respondents predict a recession in the next year, compared with 49% of national respondents. We asked which actions respondents were taking in preparation, and 86% of respondents report they are planning for a recession in some fashion. Managing cash flow and planning are the top two answers both pre- and post-pandemic, though the majority of respondents turned to planning once the virus became a factor. Contractors have had to turn their attention to ensuring safe jobsites, training workers on new protocols and providing uninterrupted service to customers. Actions spiked in every category among post-COVID-19 respondents.

We are most focused on improving profit margin s and retaining clients until we see the outcome of the 2020 election. “

Now that new tax laws are in effect, did you realize tax savings over the past year?

OHIO

NATIONAL

37%

Yes (positive)

38%

Yes (positive)

No (negative)

6%

14%

- post - pandemic respondent

No (negative)

20%

23%

No Impact

No Impact

26%

36%

I don’t know

I don’t know

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GROWTH OPPORTUNITIES After a slight drop in optimism regarding growth opportunities within and outside of Northeast Ohio in 2019, 53% of respondents predicted more opportunities within the region in 2020, an 8% increase over the previous year. Interestingly, the same percentage of national respondents predicted growth opportunities within their regions. Our pre- and post-COVID-19 comparison tells the full story. Without the pandemic, optimism for opportunities within the region would have tracked closer to 60%. Optimism among post-COVID-19 respondents drops to just 36%. We see greater consistency in respondents’ optimism for growth outside the NE Ohio region with no change year over year or pre- and post-COVID-19, indicating that optimism prevails. Respondents were invited to provide comments about their growth opportunities. Several are focusing on improving their profit margins.

We believe that as long as firms work with their internal teams and professional advisors to address labor safety issues and material sourcing, and have a pandemic plan in place, they will come out of this in good shape.

- JOSEPH NATARELLI MARCUM LLP

 In the next 3 years outside your region, do you see your business having:

OHIO

NATIONAL

More opportunities Same amount of opportunities

More opportunities Same amount of opportunities

50%

46%

40%

42%

14%

8%

Fewer opportunities

Fewer opportunities

 In the next 3 years in your region, do you see your business having:

NATIONAL

OHIO

53%

More opportunities Same amount of opportunities

More opportunities Same amount of opportunites

53%

32%

38%

15%

9%

Fewer opportunities

Fewer opportunities

Growth opportunities exist but need to be cultivated over time and carefully. We are pursuing slow growth both through increased volume with existing clients and by acquiring select new clients . - post - pandemic survey respondent

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1| Given the COVID-19 pandemic, please indicate what actions your company has taken in order to mitigate the impact of the virus on your business. (Check all that apply)

5| Do you use union or non-union labor? Union

Environmental regulation

6th 7th 8th 9th

11| Over the past 12 months has the average size job that you bid on: Increased 37% Decreased 2% Stayed the same 61% 12| What is the average number of bidders that you are competing against? 1-4 bidders 55% 5-9 bidders 39% 10-15 bidders 4% 16 or more bidders 2% 13| What do you see as the biggest threat to your business over the next 12 months? Banking (tightened credit) 5% Increased difficulty in securing bonding 0% Labor costs 5% Securing skilled labor 38% Lack of work 17% Material costs 9% Unfunded pension liability 0% The 2020 election 16% Other 11%

Worker’s compensation

25% 47% 28%

Union issues

Non-union

Sustainability/energy efficient initiatives

Both

Explore your force majeure provision in your contract, if it exists

36%

6| What percentage of your work requires bonding? Less than 20% 51% 21 to 40% 16% 41 to 60% 11% 61 to 80% 5% Greater than 80% 18% 7| What is the current outlook on your bonding capacity? It will be significantly more difficult to obtain bonding 2% It will be somewhat more difficult to obtain bonding 5% It will be neither more nor less difficult to obtain bonding 76% 8| In the next 3 years in your region, do you see your business having: More opportunities outside my region 53% Less opportunities outside by region 9% Same amount of opportunities 38% 9| In the next 3 years outside of your region, do you see your business having: More opportunities outside my region 50% Less opportunities outside by region 8% Same amount of opportunities 42% 10| Which of the following actions are among your company’s top priorities? (Select all that apply) Cutting operational costs 34% Getting into new construction trades 12% Organizational planning 48% Managing your material vendors 23% Restructuring company to position for growth 35% Seeking M&A opportunities 14% Seeking new markets 40% Strategic planning 51% Finding solutions for skilled labor 48% Other 5% It will be somewhat less difficult to obtain bonding 7% It will be significantly less difficult to obtain bonding 9%

16| Do you expect your construction backlog at the beginning of 2020 to be: Lower than the beginning of 2019 by more than 15% 11% Lower than the beginning of 2019 by less than 15% 15% About the same as the beginning of 2019 30% Higher than the beginning of 2019 by less than 15% 20% Higher than the beginning of 2019 by more than 15% 24% 17| As of January 1, 2019, private construction companies are required to be compliant with the Financial Accounting Standards Board’s new revenue recognition rules. Do you feel your company is ready to be compliant with the new rules? Yes 53% No 2% I don’t know 45%

Explore your business interruption insurance to see if it has a virus exclusion

45%

Apply for the Economic Injury Disaster Loan Program

36%

Apply for the Paycheck Protection Program (PPP) Layoff, terminate, or furlough any employees due to COVID-19

73%

18%

Stop paying rent during this pandemic

9% 0%

Stop making loan payments during this pandemic File claims on your subcontractor default insurance (SDI) policies for any subcontractors that fail to deliver contractual obligations

9%

2| Please classify the type of construction work that you perform. (Check all that apply) 41% Subcontractor 47% Construction management 26% Design/build 21% Federal government contractor 4% Service provider 9% Construction and materials supplier 8% Other 16% General contractor

14| What are you doing to address the lack of skilled labor? (Check all that apply) Increased compensation

18| Have you explored ESOPs? Yes, we are looking into it

11%

56% 11% 30%

Yes, we are structured as an ESOP

9%

Conducting stay interviews

Yes, but we do not plan to explore any further

11% 45% 23%

Performance evaluations

3| Please indicate your company’s annual revenue. Under $1 million

No

Partnering with trade schools/high schools 34% Employee recognition and appreciation programs 47% Other 23%

What is an ESOP?

14% 29%

$1 million to $4.9 million $5 million to $9.9 million $10 million to $20 million

19| Over the past year, your company’s overhead expenditures have: Increased 52% Decreased 9% Stayed about the same 39% 20| In the future (next 12 months), your company’s budget for overhead expenditures will: Increase 42% Decrease 16% Stay about the same 42%

9%

15| What political issues will most impact your business in 2020? Please rank 1-9, with 1 the most impact and 9 the least impact. Healthcare reform & insurance rates (health, liability, etc.) 1st Material price volatility 2nd Availability of credit 3rd Income tax rates 4th Minority Business Enterprise (MBE), Women Business Enterprise (WBE) contract requirements 5th

14% 33%

More than $20 million

4| Please indicate the number of employees at your company. Less than 10 30% 11 to 50 33% 51 to 100 11% More than 100 26%

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24| What actions are you taking to prepare for a potential recession? (Select all that apply) Planning 59% Managing cash flow 63% Managing capital 45% Attending to clients 44% Attending to staff 30% Focusing on sales and marketing 55% Utilizing a dashboard to track early warning indicators 13% We are not preparing 14% Other 0%

21| Do you feel that over the past year the ability to obtain financing has: Increased 17% Decreased 6% Stayed about the same 77% 22| Now that new tax laws are in effect, did you realize tax savings over the past year? Yes (positive) 38% No (negative) 6% No impact 20% I don’t know 36% 23| In your opinion, what is the probability of a recession occurring in the next year? Average percentage 44%

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Visit marcumllp.com/construction to learn more about how Marcum’s Construction Industry Group can help your business grow.

DISCLAIMER We produce this guide for our clients and others in an effort to inform them of planning opportunities and tax laws. Since each individual’s financial situation is unique, the material in this guide is not intended to constitute specific accounting, tax, investment, or legal advice. This guide is not intended to be a substitute for specific advice. Accordingly, please consult with a competent professional advisor as appropriate.