CONSTRUCTION SPENDINGAlthough construction spending decreased in 2007 and 2008 and will again in 2009, the largest part of that has been in the residential sector. As nonresidential construction continues to slow entering 2009, it may be that residential turns the corner.  
Data Source: AGC CONSTRUCTION SPENDINGAlthough construction spending decreased in 2007 and 2008 and will again in 2009, the largest part of that has been in the residential sector. As nonresidential construction continues to slow entering 2009, it may be that residential turns the corner.  

With so many factors affecting project development, the amount of construction work available is always growing or decreasing. As a result, contractors are used to ups and downs, and forever are trying to discern future trends and see opportunities—or calamities—in the making. But sometimes that's a lot more difficult than others.

Obviously construction is seasonal. Often work is planned to take advantage of long summer days and account for the shorter daylight hours of winter. Although blistering midday heat and bone-chilling cold can bring projects to a halt, savvy contractors know to build contingencies into bids and schedules to accommodate such limitations.

The industry also goes in cycles, with boom periods followed by slowdowns, and both present significant management challenges. When work is abundant, the urge to expand and take on more is great. Then things slow down and companies have a natural resistance to contraction. Getting smaller can be difficult and unpleasant, even though it sometimes is necessary.

But when the U.S. economy changes as dramatically, and rapidly, as it has over the last few years, it is hard for the average contractor to see it coming, let alone take the steps necessary to be completely prepared. How does one prepare for the perfect storm? A good first step, at any point, is to get a grasp on the current situation.

Where we are

Every time one tries to pin down what's going on in the economy today, new data are released that can't be ignored, and the reevaluation process begins again. Regardless of the details, several things are abundantly clear.

Although construction spending decreased in 2007 and 2008 and will again in 2009, the largest part of that has been in the residential sector. As nonresidential construction continues to slow entering 2009, it may be that residential turns the corner.

The United States is in a recession that began nearly a year before it officially was declared as such. But the signs were clear that things had been slowing, and most of us already knew it in our gut.

MATERIAL AND LABOR COSTSSupply and demand factors as well as moderating fuel costs are likely to move overall material costs slightly lower in 2009. At the same time, restraint will continue to hold down labor cost increases.
Data Source: AGC MATERIAL AND LABOR COSTSSupply and demand factors as well as moderating fuel costs are likely to move overall material costs slightly lower in 2009. At the same time, restraint will continue to hold down labor cost increases.

Residential new construction dropped significantly each of the last two years and is expected to fall even further in 2009. Of course, construction in that sector will only pick up when new home sales rise again, which is not expected this year either. One good measure of this activity, monthly new home sales, peaked in mid-2005 at 1.4 million units, but likely will drop below 400,000 in 2009.

The nonresidential arena has continued to fare better and is finishing 2008 up a bit. But unless the economic stimulus package kicks in with results that are better and come sooner than expected, this industry segment is expected to decrease several percent over the course of 2009.

Supply and demand factors as well as moderating fuel costs are likely to move overall material costs slightly lower in 2009. At the same time, restraint will continue hold down labor cost increases.

Overall employment numbers are another key economic indicator. In November, U.S. unemployment reached 6.7%, up 1.7% from a year ago. Government figures released shortly before Christmas show a number of states now have unemployment exceeding 8%, and claims for unemployment benefits are at the highest level in 25 years.

Meanwhile, the Federal Reserve Bank has lowered its overnight rate to as little as 0% in an effort to bolster credit and help get the economy going again. And credit markets remain clogged and tightly closed up. That, combined with sagging tax revenues, has led to delay and deferment of many state and local projects.

What makes all this bad news difficult to swallow is that it was just a little more than two years ago, in early 2006, that homebuilding was at its peak and all seemed to be well. Clearly some basic and fundamental indicators were ignored.

What comes next?

Trying to forecast what is going to happen with the construction industry in the next year or two is a lot like shooting at a moving target, in the dark, underwater, in shifting currents. But that isn't all.

According to Ed Sullivan, chief economist for the Portland Cement Association (PCA), the economy now is moving in two different ways at once. On the one hand, the overall economy is moving in a bad way as manufacturing and construction slowdowns increase and employment losses continue to mount.

Construction in particular is forecast to be down 12% in 2008, which follows a 12% decline in 2007. Without government efforts, such as the $700 billion “Wall Street Bailout,” it could have been down as much as 20%.

On the other hand, the economic stimulus plan being talked about by President-elect Barack Obama has the potential to move the economy in a good way. Not only will it infuse as much as $1 trillion into the U.S. economy, much of that is likely to go toward infrastructure. A good portion of that will involve concrete construction.

Sullivan, who followed the auto and steel industries for years before coming to PCA, says that without government intervention, this would be the worst recession since WWII. “But if you a accept the idea of a very significant infrastructure bill as part of the stimulus package, it could be completely different,” he says.

The proposed overall stimulus package consists of four parts—entitlement spending, which would include unemployment extensions; a tax rebate program; aid to states for various programs; and an infrastructure bill. Assuming that the infrastructure package materializes relatively quickly, it still will be another six months—under the best of circumstances—before the construction industry can begin leading the economy out of this recession.

Sullivan and others are now poring over the U.S. Conference of Mayors' list of “shovel-ready” projects, updated in December in response to Obama's call for a massive economic stimulus package that includes significant infrastructure investments. The organization's 1500 plus-page “Ready To Go” Report, was released on Dec. 19 and can be downloaded at www.usmayors.org/mainstreeteconomicrecovery. The report includes 11,400 projects in 427 cities that could start quickly and be completed by the end of 2010. The largest categories in the $180 billion package are “City Streets/Metro Roads Infrastructure” at $64 billion and “Water and Wastewater Infrastructure” at $37.5 billion. PCA's analysis of what portion is likely to be concrete-related should be available early in 2009.

The good news, for both the construction industry and the country, is that this portion of the stimulus package is expected to be implemented very soon, with money beginning to flow perhaps as early as May 2009.

That eventually could add as many as 2 million jobs, Sullivan says, noting that the job multiplier for construction can be as high as 2.7. That means that every construction job created leads to the creation of another 1.7 jobs in other areas. This job creation could begin as early as 2010, Sullivan says, and “the recovery will begin to happen when you start to create jobs.”

Stand by, and be ready

Chances are that if you came into this down period as a successful concrete contractor you have assembled a talented and trustworthy crew. In times like these, holding on to such a resource can be challenging. But when the work begins to flow, companies who can put forward teams of experienced professionals will be much in demand. Try to hold onto your team.

Industry experts presented an online forum Dec. 4 providing both insight into the current economic situation and advice for contractors planning to weather the storm. The one-hour Webcast was sponsored by the Construction Financial Management Association and can be viewed at www.cfma.org.

Michael Ellis, of accounting and consulting firm Moss Adams, reviewed the various factors that have changed dramatically in the last six months. These include a decrease in demand for construction, the reduced availablity of credit, shrunken backlogs, and lowered expected margins.

Ken Simonson, chief economist for the Associated General Contractors of America, explained changes in construction spending, contrasting the large declines in the residential sector with the declining advances in nonresidential construction, which in 2009 is expected to be down from 2008 levels. Still, he notes, growth categories remain, including the power and energy industries as well as activity resulting from the anticipated federal infrastructure stimulus package.

In today's environment, contractors should realistically reexamine their company fundamentals. Ellis and FMI's Lee Smither provide several specific suggestions for what to do now and going forward. Examine external data, Smither says, looking past your backlog report and take a hard look at your business planning assumptions and strategies.

He also suggests developing contingency plans for the next 6 to 12 months, focusing on the incremental economics of running your business. The accuracy of that type of information becomes more important to good decision-making in a difficult economic environment.

Also, develop a long-range plan with options to pursue if the recession drags on. Smither notes that gathering information from both inside the company and outside sources can provide the necessary “reality check.” Then develop realistic plans for various scenarios—best-case, expected-case, and worst-case.

Ellis says information and communication are critical parts of an operational strategy in today's environment. Ensure that communications stay open with creditors, with the goal of avoiding any surprises. Be sure you're clear about the contract owners' financing situation as well as your contractual rights and obligations. He also notes the importance of carefully qualifying subcontractors, maintaining tight internal controls, and managing overhead and equity.

Summary

Looking around as the dust has begun to settle, it is clear that we are at anextraordinary point in time. Far beyond the limits of the construction industry, long-accepted business assumptions and strategies now are being held up to critical examination, which in some cases is long overdue. It clearly is a time of sorting out, and shaking out. For some, it has marked the end of running marginal businesses. But for those not operating too close to the edge, the situation provides an opportunity to recommit to the good, solid foundations upon which they were established, namely, providing quality work at a fair price. With all the advances in knowledge, methods, and materials that have occurred in recent years, golden opportunities await contractors who are up to the challenge as we emerge from this recession in the coming months.