State of the Construction Industry 2011

Construction experts discuss the challenges of 2010 and offer advice for the road ahead.

If the No. 1 concern of contractors in 2010 had to be summed up by one phrase, it would certainly be “lack of work.” Here at Construction Business Owner, we have heard this concern echoed in countless encounters with contractors and in meetings with our editorial advisory board. This notion is confirmed by industry insiders like Mel Burges, chairman of CFMA and CFO for Harcon Forming of Alpharetta, Ga. “Regardless of the market sector, there just wasn’t enough work to go around in 2010.”  Burgess says this lack of volume created an ultra-competitive environment-some contractors attacked new markets and others reduced bid prices to break-even margins and below cost in some cases just to keep core personnel busy.

Construction companies were lean coming into 2010, but 2011 presents a glimmer of hope as construction activity will most likely begin a gradual climb. Hank Harris, president and CEO of FMI, management consultants to the construction industry, explains that ” We think the industry’s put-in-place construction will be up about 4 or 5 percent for 2011. … It will probably be 2014 before put-in-place construction is anywhere close to what it was before the financial markets melted down.”

Even more encouraging is that many contractors are still succeeding despite the market challenges. Chief among this group are contractors who resisted the urge to overextend themselves when the industry was booming. Mike Trammel, Member-in-Charge of the Dixon Hughes Construction and Real Estate Group explains that in 2010, most contractors noticed, or “renoticed,” that cash is king. “If a contractor went into the recession undercapitalized, overextended or without a specific niche in the market, 2010 began to exert unwelcomed pressure.”

We also learned an important lesson from a highly successful contractor on our editorial board who prefers to remain anonymous. He says it’s just as important to determine what you won’t do as it is to determine what you will.  He attributes a large part of his success to carefully selecting who he should work with and maintaining the discipline to turn down a project if necessary. 

Most importantly, the consensus is that contractors willing to read and research to stay ahead of the curve will have the advantage. In the spirit of working smarter in 2011, we sought out industry experts to explain how last year’s challenges affected the construction business, what to watch in the coming year and how to implement strategies for successful growth.

How Challenges Reshaped the Landscape

Securing jobs has never been as competitive as it was in 2010 when small- and mid-size contractors suddenly found themselves competing with much larger companies. As Brian Barksdale, CPA with Carr, Riggs and Ingram, a regional accounting firm , puts it, “Taking jobs at low profits or even losses has been a consideration for many contractors in an attempt to pay some overhead or keep valuable employees on the payroll.” While desperate times may call for desperate measures, many in the industry are urging contractors to stop the bidding war, cautioning that it only harms the industry’s health. CFMA Chairman Burges says, “Contractors will have to raise their bid prices in order to start climbing out of their low-margin backlogs, and the low- to no-margin bidding strategy will have to stop.”

Another “sore spot” in 2010 was succinctly summed up by Ray Frobosilo, the president of Super Stud Building Products. “The banks are not acting like banks,” he observes. Industry insiders are calling for banks to loosen the stranglehold they currently have on credit. “Until owners or developers can acquire the financing necessary to start or restart projects, the industry will continue to be in stagnation,” says Burges.

Barksdale offers this solution to the problem: “Construction companies need to be working routinely with their bankers and surety companies to maintain strong relationships in order to be in the best position to obtain financing and bonding. Accurate financial information is a must-and open communication with lending sources is critical. Many companies will consider bringing in new equity investors, although they may be hard to find at this time.” As for bonding companies, they are examining working capital and liquidity closer than ever before. To put this in perspective, Don Murphy, CPA and founding shareholder of Barfield, Murphy, Shank & Smith, sums it up this way: “If a contractor can pass the test of the bonding companies, then banks are easy.”

Safety is another subject on everyone’s mind. “Operating on these low margins will cause contractors to reduce cost to bare-bones levels, which could cause problems with safety, quality and productivity,” says Burges. Denice Brandon, CMA and vice president of accounting for Monteith Construction cautions that a bare-bones approach almost always ends poorly. “Safety is still a hard hitter on the bottom line if a good program is not in place,” she says.

As safe as you strive to be, risks are an inherent part of the business. Steven Davis, senior vice president and director of Construction Risk Services with McGriff, Seibels & Williams, gave us his perspective on risk management: “One of the most critical risk issues facing contractors, particularly those who engage with subcontractors, is the condition of the subcontract documents and how they manage the risks associated with additional insured provisions, many of which are limited in scope,” he says. He also describes the current insurance market as “relatively soft.” This allows contractors to negotiate better terms and conditions from the underwriting community, whether that is a change in retention levels or procuring additional coverage once thought unavailable, Davis explains.

Construction Equipment Matters

Construction business owners are keeping a close eye on the recently implemented Interim Tier 4 (IT4) regulations. Equipment manufacturers spent much of 2010 preparing their engines and equipment so that customers would comply.  Domenic G. Ruccolo, senior vice president of sales and marketing for John Deere’s Worldwide Construction & Forestry Division, explains how Deere has chosen to launch units that feature a cooled exhaust gas recirculation (EGR) with exhaust filters as a solution to IT4. “We believe it’s the right technology right now because it is simple, fuel-efficient, field-proven, fully-integrated and fully-supported,” he says.

Ruccolo says that Deere’s worldwide construction equipment sales are forecast to rise by 25 to 30 percent for the full-year 2011. “The increase reflects market conditions that are somewhat improved in relation to the relatively low level of the prior year. In addition, we feel sales to rental companies are expected to see further growth.”

What to Watch

All eyes will be on Washington, D.C., this year as the new Congress is seated. FMI reports that the watchword is “uncertainty” regarding the tax code and healthcare legislation. “Most business owners feel that better answers from the government as to what the playing field will look like would help them craft reasonable responses,” says Harris.

As of the time this issue of Construction Business Owner went to press,, a compromise on important issues had not yet been reached. “No one really knows what’s going to happen with the Republicans now controlling the House and having to work with the Obama administration,” he says. The big tax issues that everyone will be watching include capital gain and estate taxes.” Though 2010 marks the sunset of the estate tax, it’s set to renew at old levels at the beginning of 2011, unless Congress takes action. Capital gains rates are at historically low levels and, as Harris explains, “have nowhere to go but up.”

Where to Find Construction Work

It’s no revelation that contractors who are prepared to work on government-funded projects are faring better than others. “Some road and bridge contractors have been able to obtain significant contracts through the DOT that have helped carry them to this point,” says Barksdale. More specifically, contractors with a unique specialty in their marketplace found the most success. “Examples of these (specialties) include military base construction, government parks and department of the interior projects, wastewater and sewer treatment plants and rapid transit projects,” says George Hedley, business coach and founder of Hard Hat Presentations. Outside of federal work, experts report that there is also growth in the healthcare and transportation markets, followed by commercial building and schools. “

Still, as Hedley points out, others have grown their businesses by offering ongoing service and maintenance work to major retail operations, office building owners, apartment developers and government entities. “Contractors who are unwilling to enter these difficult service and value-added arenas will continue to scramble finding private work that is profitable,” he says.

How to Survive and Prosper

Contractors will either adapt or be left behind. As stimulus-funded projects wind down, private projects will gain importance again. Many contractors will have to reach into new geographies and research markets more closely. 

Others will have to respond more swiftly to economic challenges, adds Barksdale. “Many have sold off their idle assets in order to raise cash or reduce their debt loads. Some have looked into other industry niches to utilize equipment and labor force while waiting on their core business to recover.”

However, expanding into other niches alone will not be sufficient. You must formulate a strategic plan and understand how to execute it. “Successful contractors will have a plan that encompasses assessing their current position in the market financially and operationally and charting a course to achieve benchmarks over time. Contractors who have defined their market in the faster emerging areas will win. While this seems intuitive, contractors need to be reminded that not all of the market will emerge equally. They need to know their local market and have a plan to respond to it,” says Trammel. He explains that the contractor “with the leadership talent to have a well-crafted plan and the operational talent to get it done will have the emerging opportunities.”

What Lies Ahead

With the stimulus winding down, contractors are gearing up for fierce competition in an already lean market. FMI reports in the Nonresidential Construction Index for the fourth quarter of 2010 that as we begin the new year, “nonresidential contractors will focus less on chasing stimulus projects and more on finding private work to fill their backlogs.” Some companies may begin consolidating to be more competitive. CFMA Chairman Burges explains, “A well-capitalized company can acquire sales volume, market share or enter new markets by acquiring a good company that may be challenged from a working capital or bonding capacity point of view.”

One thing is certain: Design-build firms will continue to wield a competitive advantage. “We continue to see the convergence of design and construction functions within the marketplace. This is particularly true with engineering and construction. We think that all of this will put more momentum behind design-build, other forms of alternative delivery, turnkey services, IPD (integrated product delivery), etc.” says Harris.

Finally, be prepared for industry globalization. “We will continue to see the entrance into the U.S. market of large, well-capitalized foreign firms,” Harris says. “Additionally, we will see more contractors looking at opportunities outside of U.S. borders, creating a larger number of firms with a global footprint.”

Some not-so-obvious bright spots about the challenging economy also exist. The competitive marketplace has forced industries that serve contractors to be particularly inventive. “It has spurred new product development in the steel reinforcement industry as companies compete to gain the edge,” says Frobosilo. Tony Pappas, CEO of Exaktime, a company that provides time tracking solutions to the construction industry, explains that “Exaktime and its competitors are delivering exciting new solutions and technologies that are expanding the market.” He further explains, “There’s been a dramatic shift to mobile applications during the past year-and this is finally being supported by some excellent devices. … Broadly speaking, mobile devices will become cheaper, more powerful, faster and easier to use.”

As one expert pointed out, difficult times can be like a crucible, burning off inefficient processed and out-dated methods. “The common wisdom is that when the business environment is tough, you need to circle the wagons and wait it out. Our contention and what we see from our clients, is that now is the time to invest in growth.” says John Chaney, CPA, president and cofounder of Dexter + Chaney.

The current climate must be kept in perspective. Harris explains this best:  “Most people in design, construction, etc., enjoyed 17 years of relatively uninterrupted good times prior to this downturn. We’ve always known this was a cyclical industry, and the down cycle is here. The corollary is that we also know that cycles come and go, which means that this, too, is going to pass.”  He points out that now is the best time to take the long view. “Firms need to be making preparations now for how they will capitalize on the opportunities as they return.”

Construction Software/Technology Talk

Progressive companies understand that now is a great time to position their businesses for growth-this often means evaluating software packages and technological tools. Here are some thoughts on software industry topics from leading experts.

Construction Business Owner, January 2011