General Contractors Don’t Expect Construction Improvements Until 2011, AGC Reports
January 20, 2010

Nearly nine-in-ten contractors say there will be no recovery in 2010 as part of a new national construction hiring and business outlook forecast released today by the Associated General Contractors of America (AGC).

“While 2009 was a difficult year for much of the U.S. economy,” said Stephen Sandherr, AGC chief executive officer (CEO), during a conference call this afternoon, “it was simply devastating for the construction industry.

The industry isn’t expecting that trend to reverse itself in the next year, according to a survey issued by AGC, which found that 88 percent of construction firms don’t expect overall business conditions to improve until at least 2011. The outlook, which is based in part on survey responses from nearly 700 construction firms submitted in late December and earlier this month, shows that privately-funded construction activity is likely to decline even further this year.

“They aren’t predicting a turn-around because few contractors expect privately funded construction projects, which typically account for the bulk of annual construction activity, to improve,” Sandherr said.

As a result, 81 percent of firms report already having to cut profit margins in their bids just to stay competitive and another ten percent say they are now submitting bids so low they will actually lose money on the projects.

Sandherr added that many construction firms are uncertain that they'll be able to add staff following a year of record layoffs. In 2009, 73 percent of firms said they laid off employees, averaging 39 layoffs per firm. For 2010, however, 60 percent of firms say they are unsure whether they will be able to add new staff, or be forced to make further cuts. “Perhaps they can't imagine who else to let go,” Sandherr noted.

Several contractors on this afternoon’s call expressed concern about their subcontractors as well. Jack Parker, president and CEO of Reed and Reed in Woolwich, Maine, noted that his company has had to provide financial assistance to subcontractors to keep them on the job. “That’s the cost of doing business right now,” Parker said.

Maryanne Guido, CEO of San Antonio, Texas-based Guido Brothers Construction, added, “We’re doing the same thing, just helping subcontractors getting the money so they can make payroll and just keep their businesses going. I think the concern here is the margins are so low and there’s so many competitors out there that there’s not any room for error.”

One of the relatively few bright spots Sandherr cited for the industry was the federal stimulus.

“The approximately $135 billion in construction funds included in last year’s package are now beginning to have a measurable, but limited, impact on the construction industry,” he said.

The survey found that 31 percent of contractors were awarded stimulus funded projects. Of these, 46 percent say the stimulus helped them retain an average of 24 employees each. Another 15 percent say the stimulus helped them to add an average of 10 new employees per company while 12 percent cite the stimulus as driving new equipment purchases.

As that seemed to be a sole bright spot, the speakers noted they’re urging Congress to pass a follow-up to this bill. As Sandherr commented, “We’ve lost 1.6 million jobs in the construction industry, the unemployment rate is 22.7 percent, which is similar to what the unemployment rate was during the Great Depression – we need a second stimulus bill.”

However, he also was quick to point out, “You have to remember that 70 percent of all construction work is financed in the private sector and so the stimulus only provides a partial relief from the economic conditions that we have.”

And yet, Sandherr noted that 55 percent of contractors say work on public buildings will improve or remain stable in 2010.

“And as the stock market, hopefully, continues to improve in 2010, 57 percent of contractors expect institutions like hospitals and universities, that rely on the strength of their endowments, to invest as much, or more, in construction projects than they did last year,” he added.

Overall, the outlook points to another difficult year for contractors, Sandherr said. He tried to offer some good news by noting that construction costs remain at multi-year lows—providing good deals for anyone willing to begin a construction project.

Source: Bureau of Labor Statistics

“As new federal producer price index (ppi) figures released today make clear, construction material costs are at multi-year lows, which is why places like Maryland’s Montgomery County are moving forward with aggressive capital plans despite tight budgets. They know they’re getting good deals for construction now and that if they wait, these projects will only cost more.” CLICK HERE to see the Bureau of Labor Statistics’ latest ppi.

AGC chief economist Kenneth Simonson wasn’t quite so positive regarding the ppi figures as, he pointed out, “The ppi figures that came out this morning show a split between what contractors are able to collect and what they’re having to pay for materials … What this means is that the cost of materials that goes into projects and of diesel fuel and other items the contractors consume while doing the construction have begun to rise.”

He noted that the ppi tracking the cost of finished buildings—which takes into account materials, consumables, labor costs, overhead and profit, if any—has fallen continuously over the course of 2009. “So contractors are running into more and more of a profit squeeze as material costs begin to rise, and yet the overall price of construction keeps dropping because more contractors are bidding on fewer projects,” Simonson said.

He added, “This is not a sustainable condition and I’m quite concerned that later this year we’ll see more contractors dropping out of business altogether.”

Just how many, most of this afternoon’s speakers were reluctant to predict.

“Contractors are starting to take work at or below cost, which is not a sustainable way to stay in business. There’s a tremendous amount of downsizing, reduction of workforce and management, for a lot of our member companies … I hate to make a guess about how many will end up out of business at the end of this recession but it will be a good number, I imagine in the 5- to 10-percent range,” said Doug Davidson, president of Atlanta-based New South Construction..

In an effort to preclude just that, Sandherr said that the association was contacting Congressional and administration leaders to urge them to invest in new construction activity. “If they act now, they can save taxpayers millions on construction costs while immediately boosting employment and economic activity,” Sandherr said.

CLICK HERE to view the AGC National Forecast.

CLICK HERE to view state by state comparisons of construction hiring and business forecasts.

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