Financial crisis: A Multi Level impact on construction

posted by AbdelRahman @ 2:27pm, Tuesday 21 April 2009.

The financial crisis, is expected to have a Multi-level impact on construction and manufacturing, probably on other sectors as well with varying degree. This impact will require a long time in order to be overcome, if ever it is to be overcome. Considering the financial crisis as a processing unit, the output from it will be quite different from the input, that is to say the shape of the economy will not be the same, even if the overall size could be retained.

Let us first look at the Levels of impact, which are summarized below

Level 1: Scarcity of funds: Scarcity or shortage of funds will lead the construction industry, represented by contractors and Employers, to reduce the work force, in an attempt to minimize the loss. The resulting unemployment means less purchasing abilities and more recession in all markets.

Level 2: Slowing down of the industry: Slowing down of the industry resulting from less work force, and less funds, will take the construction industry to a situation of less profits -if any at all- and consequently less funds for the future projects.

Level3: Fragmentation of big companies If a company will survive the first two levels of the crisis, it will have to spend more in recruiting back workforce that will be in need then of training and will after the crisis seek more secure employment conditions. This level is not quite obvious where it will lead to, though fragmentation of big companies is quite possible as an alternative to previous trend of acquisition by big companies to smaller ones. The bigger the company is the greater the profit is, and the greater the loss is, also. Companies, having no other choice, will continue to reduce their sizes during the recession time, and the final size can be dramatically a fraction of what it was a few years ago.

It is expected that companies will  retain the smaller size it would reach to through Levels 1 and 2 for some time, or at least not too far from that size up or down. Fragmentation would be a safer way to allow for risk sharing of probable future losses. Other smaller companies will have to be formulated or derived from existing big companies, to accommodate the workforce and the after crisis development needs. Fragmentation will not necessarily mean loss of full power but definitely of some of the probable profits such that at times of recession bigger losses are avoided. High rise buildings are more exposes to the force of the wind than smaller buildings.

Anti-globalization current seems to have found its way through the financial crisis channels. That is not to say this would be an end shape of the economy, but for now, it is the foreseen outcome of the financial crisis in the near future. The currents of acquisition and fragmentation will probably have many rounds before a long lasting shape of the economy would be formulated.

Anyway, coming back to the impact on the construction industry, somewhere between Levels 1 and 2 briefed above, disputes are foreseen to increase between Employers and Contractors, and with the extremely high costs associated with arbitration, and the time to be taken in such process, it can be seen that an additional financial burden shall be borne by either party, thus making the the crisis of exponential effect on Contractors and Employers.

Employers, are not able to pay to the Contractors their periodical payments at the specified times, leaving Contractors unable to finance the job, and delays become inevitable.

Contractors seeking to reduce their costs would reduce the workforce, and slow performance by the Contractor- let aside scarcity of funds discussed above- would be another delaying factor for the project.

In a unique strategic vision of the financial crisis and its impact on Contractors and Employers, misronet has Launched CM-Reporter version 4 Software, to help settlement of construction disputes arising out of delays. This software is cheap in price, but is quite high in its value to both Contractors and Employers. The share of responsibility for the delay is calculated for both Contractor and Employer thus eliminating probable disputes electronically. This, definitely, will not solve the financial crisis but will help reduce one of its foreseen side effects.

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