'Not a sustainable business model'

January 31, 2010
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The 2010 economic outlook for the nation’s construction industry is so far from positive that an industry turnaround is seen as all but impossible this year, according to one of the country’s largest associations of construction firms.

The Associated General Contractors of America, based in Arlington, Va., flatly and without hesitation proclaimed that the industry will not recover this year. The group’s more than gloomy forecast was based on survey results it received from 700 general contractors from throughout the U.S.

“Indeed, 88 percent of construction firms don’t expect overall business conditions to improve until at least 2011. They aren’t predicting a turnaround because few contractors expect privately funded construction projects, which typically count for the bulk of their new construction activity, to improve,” said Steven Sandherr, CEO of AGC, in a recent phone conference with reporters.

Survey respondents overwhelmingly agreed that demand for new manufacturing plants, warehouses, retail outlets and hotels would decline this year. Sandherr said as demand has dropped, contractors have cut margins in the bids submitted by the firms.

“While 81 percent of firms said they’ve cut profit margins for their 2009 bids, more than one in 10 firms reported that they’re now submitting bids so low, they will actually lose money on the work,” he said. “That’s not a sustainable business model.”

Eighty-seven percent of  Michigan members reported submitting smaller bids last year.

AGC members said they would be making fewer equipment purchases this year; only 46 percent said they would buy new and just a third expect to purchase used equipment. If those percentages hold, Sandherr said makers of construction equipment will have another tough sales year.

Sixty percent of contractors weren’t sure whether to add employees or lay off more this year, after nearly three-quarters let an average of 39 workers go last year. “Perhaps they can’t imagine who else to let go,” said Sandherr.

Eighty-six percent of state members laid off workers last year and 14 percent planned to let more go this year.

About the only bright spot in the AGC forecast is the federal stimulus money from the American Recovery and Reinvestment Act. Sandherr said the $135 billion Congress included for construction projects in last year’s package is starting to have a “measurable but limited” impact for the industry. He said those dollars helped some AGC members retain workers, hire a few new ones and buy equipment last year.

But 80 percent of state members reported not taking part in a stimulus-funded project last year and all said they didn’t add workers because of those dollars. Slightly more than half of the Michigan firms said they didn’t expect the industry to rebound until 2011, while more than a quarter said a turnaround wouldn’t happen until after 2012.

Still, a slim majority of survey respondents said the best hope for work in 2010 was in projects funded by public dollars, like highway and sewer work and the construction of publicly owned power plants and buildings. “All of those are areas where contractors expect more stimulus funds to flow in the new year,” said Sandherr.

AGC members also reported they could expect more work this year in higher education and medical projects, but only if stock market activity continues on an upward swing.

Sandherr said now is the right time for projects to move forward before costs rise, as prices for construction materials remain fairly low and contractors are submitting their lowest bids in years. He also said the time was right for a second stimulus package.

“We are sending a letter urging leaders in Congress and key administration officials to take advantage of the limited time sale for construction services. If they act now, they can save taxpayers millions on construction costs, while immediately boosting employment and economic activity,” said Sandherr.

“We need a second stimulus bill or jobs bill or highway reauthorization — whatever you want to call it — because there is not a lot of private investment out there right now for construction projects. The commercial lending crisis has hit us very hard on the private-sector side, and so we are in desperate need of additional federal investment.”

While most economists labeled last year the Great Recession, Sandherr said 2009 felt more like an outright depression that ripped through the field. He said the industry lost 1.6 million jobs last year and ended 2009 with a Great Depression-like unemployment rate of 22.7 percent.

“While 2009 was a difficult year for much of the U.S. economy, it was simply devastating for the construction industry. Construction spending declined last year by $137 billion and is now at its lowest level in six years,” said Sandherr.

“And while only 5 percent of the U.S. work force, construction workers shouldered 20 percent of non-farm layoffs last year.”

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