The construction industry was the first to be hit by the Great Recession, and many believe that it’s construction that will lead us through the recovery. But industry insiders fear that with federal and state projects dwindling, and with limited funding options, the construction industry has several years of recovery still ahead.
We’d like to give a special thank you to Rich Thorn, president of Associated General Contractors Utah, for moderating the discussion and to Holland & Hart for hosting the event.
Back Row: Richard Hunt, Hunt Electric;
Brad Christofferson, Rimrock Construction;
Kendall Page, Hadco Construction; Scott Parson, Staker Parson; Phil Walter, Moreton & Company;
Rob Moore, B-D Construction; Dave Hogan, Wadman Construction; Rich Thorn, AGC;
Dave Zimmerman, Holland & Hart
Middle Row: Paul Campbell, Wheeler Machinery Company; Jason Kilgore, Harper/Kilgore;
Tom Morgan, Morgan Asphalt; Rick Dutson, Dutson Builders; Alan Rindlisbacher, Layton Companies;
Bob Tempest, Tempest Enterprises; Mark Bodell, Gramoll Construction; Nate Runyan, Holland & Hart;
Brad Sweet, Granite Construction
Front Row: Dale Campbell, R&O Construction; Stephanie Nix, Claude Nix Construction;
Randy Evans, Industrial Supply;
Dave Hales, W.W. Clyde & Co.
Not Pictured: Kip Wadsworth, R.L. Wadsworth
What is the current state of Utah’s construction industry?
MOORE: To determine how the industry is doing, we have to look at what’s happened over the past four or five years. In 2006, we had a little over a billion dollars’ worth of market in front of us. In 2007, we had almost $1.5 billion of construction that was put in place in the Utah market. In 2008, we started to see a little bit of decline, to about $1.3 billion. In 2009, we went down to $825 million. In 2010, our industry is down to $565 million. If everything goes well, we’re predicted to reach $800 million in 2011. There’s opportunity, but we’ve all got to share that market share, right? We’ve all got to get our piece of the pie and that’s not easy. The competition is tough in Utah.
The other thing that’s important to note is the employment rate we have in Utah. In 2007, the [construction industry] had 101,000 employees in the Utah marketplace. In today’s market, we are down 41,000 employees. The industry is still 17 percent unemployed here in Utah. Other markets around us, like Arizona, Nevada and California, are much worse than we are. But holy smokes, when you lose 41,000 folks and our average is $19.75 an hour in salaries, it’s a big, big hit to the state.
One positive is that the federal government is providing some opportunity with the stimulus money, especially in road and heavy highways. The $2.1 billion that has been put into the Utah market has been great, and local government is also providing some opportunities.
HOGAN: You alluded to $2.1 billion. A lot of that was state-funded money. We saw a presentation at the AGC that indicated those funding sources are tapering off rapidly and it’s not a gentle curve—it’s a vertical line.
THORN: The numbers we are hearing on the highway market, particularly with the unknown status of the federal highway bill, is Utah’s market will be about half of what it’s been.
HOGAN: And the taper-off from this year to next year will be substantial. You’ve got the I-15 corridor that has been contracted, you’ve got the MountainView corridor that is going to be under contract, and those numbers are going to drop dramatically from 2011 to2012.
DUTSON: It’s been very difficult, but I’m actually getting more optimistic about 2011. It’s been a rocky road to say the least—hopefully we are at the bottom.
What do you see in the heavy highway and material supply business?
PARSON: Sobering is the best way to describe the market, and it’s been that way for several years. The outlook for next year is also pretty sobering. Something we need to remember on tracking state funding is the importance of tracking work put out to bid versus what is currently spent, and those figures are not easy to come by, even from UDOT themselves. But what really needs to be the gauge is the amount of work coming out for contract. We are basically falling off a cliff funding-wise in about two years, when most of the transportation funding sources will end.
Another thing that is very concerning to me, not just from a contractor standpoint but also from a taxpayer standpoint, is the fact that 50 percent of UDOT’s built-lane miles have no maintenance funding. Once you miss the critical point to do maintenance on a roadway, you pass a point of no return to where a total reconstruct is really your only option, and we clearly do not have the funding to do that. There needs to be a rallying cry from our industry and from taxpayers that maintenance of our existing investments has to be a much bigger priority for UDOT and for all of us.
HOGAN: If you drive the rural parts of the southeastern and eastern part of the state, those roads have been neglected for 10 years. It’s been patchwork at best. I agree that this is a real crisis—we’ve got to maintain our infrastructure.
How is the surety industry faring? Are you seeing a lot of surety claims?
WALTER: The data that I’ve seen shows that the surety industry, surprisingly, is still doing very well. They have made significant profits over the last several years and those profits continue to hold up, not only nationwide, but especially here in the state of Utah. I anticipate no tightening of the surety underwriting going forward.
We are seeing the number of claims come up primarily from subcontractors, utility subs, electrical subs and drywall subcontractors. Those are starting to percolate in the number of unpaid suppliers. The number of notices that we’re receiving from suppliers that they have not been paid is going up. The supplier community is aggressively trying to make claims on bonds.
D. CAMPBELL: General contractors are also bonding their subcontractors more now than they did in the past.
WALTER: I agree. There is more subcontractor bonding, more joint controls and joint checks by generals to their subs and suppliers. Everybody is watching their backs.
What is a big electrical contractor’s perspective? You cover multiple disciplines: Commercial building, heavy highway, industrial. From a subcontractor’s point of view, what are you seeing?
HUNT: We’re starting to see some glimmers of hope in the private sector, but there are extreme pricing pressures right now from a subcontractor’s point of view. It’s super competitive. We see roadwork tapering off as well. We’re fortunate to have some longer projects going on right now, but it’s very competitive. There is no difficulty with finding manpower, which was a major issue we had a few years ago. There are a lot of great people out there right now, so it’s good that we’re able to upgrade and find good people.
P. CAMPBELL: What we’re all experiencing now is how business is going to be for the next several years, so we are adjusting to this level of business. The idea that we can all weather the storm and hope it comes back—I don’t think that’s going to happen anytime soon. Residential will come back faster than commercial, but commercial is going to be out quite a ways. There are some big commercial projects now that are really helping things, but they will end and hopefully by then private money will be flowing again. But the way we look at it is this is business for a while, and companies need to adjust.
It’s been said that construction is on sale. How do we get the message out that cost does not always equal quality?
D. CAMPBELL: I agree construction is on sale. Unfortunately, all of us are selling it too cheap. We’re fighting every day with subcontractors who are not paying their suppliers. Too many subcontractors have gone broke and have just closed their doors without finishing their jobs. We have had to call other subcontractors in to complete the work for them and it’s costing us more. We are going in with slim markups and we don’t have the excess to cover the additional costs. I think we are all kidding ourselves. We need to increase our margins, but the competition is not increasing the margins. We are fighting it every day, and it’s a bargain at the cost of the contractors.
RINDLISBACHER: I would say that we’re not just “on sale.” To a greater extent, the industry is going through a “fire sale” or “going out of business sale.” We shouldn’t be there and we can’t be there if any of us are going to survive. We’ve got to increase the margins. We’ve got to act like we want to stay in business and continue to keep those subcontractors flowing and being profitable, otherwise we continue to damage the industry more than it is.
CHRISTOFFERSON: The attractive pricing right now in construction has been better than in many years. And the demand we’re seeing from owners is there as well. One of the sticking points is the funding. The ability to get financing for projects is still very difficult. We’re seeing banks and private lenders providing money to a limited few who have a lot of resources to begin with. What were really easy resources to gain a few years ago have really dried up. Even though the banks and other institutions say they have money, the terms are much more stringent and difficult to meet. We see a demand and we see a need for buildings. But money is hard to come by.
NIX: Maybe the message shouldn’t necessarily be “on sale,” but let’s all be realistic. We can be realistic about the margin that we get, but let’s be realistic about what things cost. You cannot build something for less than the material costs, and I think some companies have been trying to and most are not in business anymore. So the message we need to get out there is to be realistic.
MOORE: How do we get the word out in the marketplace that the cost of the construction is what it is? That message is not new to our customers. Our customers, because they understand the situation our market is in right now, have changed their delivery methods from more of a design-build and construction management partnership to “let’s get the design from an architect and let’s go put this out to the contractors and see if we can get it even better than what it is,” which is putting pressure on the subcontractors that have no business, really, bidding the project in the first place because they are underfunded, understaffed and may not have the qualifications.
So because our customers understand that, they are changing their delivery system. The delivery system then puts us into a really hard bind to take the lowest sub, and you cannot tell if the sub has even got the right number anymore because the subcontractors sometimes are all too low. So the low guy is way too low. And then that low bidder, two or three months into the job, runs out of money. We are all seeing it, aren’t we? And it’s because our owners know that we are a distressed market, and they know there are so many great contractors in the Utah marketplace. Quite frankly, I think our owners are taking advantage of us.
RINDLISBACHER: I agree. This is a great study in macroeconomics. Four or five years ago, when we were at the $1.5 billion mark, it was a seller’s market. We were in demand because there was so much work out there. It was negotiated work and it was a guaranteed maximum price. And the owners, the builders, they are in trouble just like everybody else. They are facing tough times in the economy, so they want the most for their dollar, but I think we have carried it too far down the way. The pendulum has swung too far and now we are back to that low bid and it is not good for our industry. Some say we’ve seen the bottom. McGrawHill did a pretty big economic forecast projecting a 7 percent market increase for Utah, which is better than most. So we are trending in what I hope is the right direction.
When the market does turn positive, are we going to see any workforce problems or challenges?
HOGAN: In the ‘70s, if you worked construction, it was an honorable trade and you could make a really good living at it. In the ‘80s, the money went out of construction for labor and we lost a generation. We are facing the same situation right now. If you go to the schools to recruit, their enrollments are down 30 percent in construction management. Civil engineering is not quite that bad, but they are down. We are already seeing people leaving this industry because it’s no longer viewed as a glamorous industry. The tradesperson is looked down upon by high school counselors and others. You are going to see a migration out of construction—we’re already seeing it. And when this market does turn around, we are going to see a shortage of people again. Downstream, the industry is going to see a real shortage of skilled, talented people that want to work in the business.
BODELL: I agree. I serve on the education committee for the AGC, and we recently had a survey that showed that the number of applicants for our scholarships was down drastically, which is inexplicable to me. Here we are offering free money, and people were not there to pick it up.
THORN: Four or five years ago, we gave almost 40 scholarships; this year we gave three.
DUTSON: As we’ve seen economic contractions in the past, even if it’s just within our industry, people see an opportunity to shed the talent that is not top notch. Most, if not all, companies in our industry have gone through that, but we’re now cutting the meat out of our companies. And it’s also put a higher pressure on the A players. If you take an individual who has just been the go-to guy in years past, the pressure is now put on that person to perform better with less support. And that is creating a difficult psychology. I go out to the field and see these guys working their guts out trying to make a job work, and they’ve got less support from the office, less support from fellow workers. That is a hard dynamic for that individual to work with.
PARSON: Several years ago, as an industry, we banded together and we and did a good job recruiting people into our industry. I hope in austere times that we don’t look at keeping our pipeline full of talent as a discretionary cost, because it isn’t. And if we don’t continue to foster those programs, to foster a good image for our industry, to do the things that will shore up the foundation of our industry, it will take us a long time after things recover to rebuild that. And then we’ll really be hard pressed to have the manpower we need to build through the recovery.
MORGAN: In the long term, there is a real dark cloud that is hanging out there. I think everybody in this room has excess capacity that is under-utilized. There are a lot of tradesmen and others who are not getting the hours that they are accustomed to getting. And so a lot of these guys might only begetting 30 hours a week where they used to be getting 50. There’s a lot of excess capacity that still exists that could absorb an increase in construction activity in the short-term, but in the long-term, that becomes a real problem.
HOGAN: The industry has a real bad image. I was down at the AGC convention about six years ago in Las Vegas, and there was one individual who said, “My mother was so thankful for the construction industry because nowhere else would have me. I couldn’t survive anywhere else.” But then he said, “I could come into this business and be a business project manager and thrive in it.” I think our industry really has a bad image right now. Because you talk to high school counselors and they are not encouraging people to go into trades or construction.
BODELL: Several times the AGC has tried to put deals together working with educators, trying to get them interested at a high school level to come out, and get a first-hand glimpse of what construction is all about. And it’s hard to even get the counselors to come and take advantage of what we are trying to do, in my opinion, in a very structured, very comfortable format for them. The educators are steering their kids away from the industry.
We hear about constant challenges from the banking and finance industries. What does the future look like to you in lending for projects, both large and small, company lines of credit, equipment, financing, etc. How is the banking industry impacting construction?
MOORE: Nothing is happening. It’s not the construction industry that will take us out of the recession. It’s the ability for our customers, especially manufacturers and distribution and retail, to be able to have a banker be their partner. And right now, while the bankers say they have money, the constraints on that money are significant. I’ve had subcontractors come to my office and say, “Rob, if we could just get a job, we’d be so successful, and yet we are running out of our cash flow, and we go to the bank and they won’t give us cash flow, even when we’ve got a project.” The banks are being so careful right now in any kind of lending that they do. The capital that our customers have to put into a project is so significant. And for housing projects or condominiums or retail, you’ve got to have the backend pre-sold. And until product is carved off—meaning lots are evaporated that are sitting on their books—we have a significant issue.
In my mind, it’s two or three years out—we are not at the bottom. Here’s what’s going to happen. The federal government is going to run out of money and banks are not lending. It’s not the construction industry that is going to lead us out of this recession. It’s the money stream from banks and from lending institutions that finally have enough products off their books and can start to rebuild. And when they start to rebuild, we start to rebuild.
D. CAMPBELL: Rob, I think if it is at the bottom, it’s like an earthquake. Everything got shook up, it finally stopped, and now you have the mess to clean up, and it’s going to take us a long time to clean it up.
MORGAN: One of the reasons that banks are so tight in lending is that all of their problems stemmed primarily from construction and development loans or real estate loans. Their concentrations in that category are causing so many problems, and it has to continue to be reduced to the level that regulators will feel more comfortable in allowing them to increase that level of concentration. They’ve still probably got a couple more years’ worth of that.
How soon will the toxic loans be cleared up or the excess residential inventories be absorbed?
PAGE: Some information we received recently was that there were only about 750 prepared, improved lots available in the valley. But there’s thousands and thousands of recorded lots ready to be constructed. But that doesn’t take into account the amount of distressed home properties. There’s not a count, that I’m aware of, of how much inventory is available of the distressed homes. There is some residential construction, but we don’t really see it breaking loose like the commercial for a couple of years. Like was previously said, without the funding, there is no construction.
KILGORE: We all got accustomed to having the market so good, but this is what business is going to be like going forward—especially in the highway division. The highway division is all volume driven—we all want so many tons and so many dollars. We need to start looking at what our percentage of the market share is and stay at it. If we all continue to try to be volume driven, to keep our volumes where they were, we are going to just keep seeing this spiral effect of pricing. It’s just going to keep getting worse.
HOGAN: The banks were saved by the government and they are covered now, and they are not going to risk their capitalization ratios to go out and make bad loans. The government will not let them do it, and until the government starts letting banks lend money to private investors and private entities, you are not going to see this market come back. The government is not going to take us out of this—it’s the private sector. And the banks have got to start loaning to the private sector so that they can start building projects.
BODELL: I’m still shaking my head about how society has been so disturbed by these huge financial institutions; they cannot even foreclose on a house right. And it’s not one—it’s hundreds of thousands of them, and now we are going to have to wait for them to unravel that ball of string. And that portion of the residential market share has also got to be absorbed or accommodated before people are going to break loose on sizable new construction projects in the residential segment, of which we follow with support commercial facilities.
MOORE: The key to that, though, is they cannot take it off too quickly because if they write their foreclosures down too quickly, then they lose their capital and the government will shut them down like they did large banks.
They have to foreclose their projects in an organized sequence, and if they don’t the feds will close them off. But if they show too much, the feds will close them off. The banks are bright enough to say, we cannot have too many short sales or do too many foreclosures. That is why even short sales are not going through—because the banks can’t afford to take the capital off their books because the government makes them write them off.
WALTER: The only lender that we see right now is HUD. It appears to be the only entity coming up with money to help with any kind of apartment complex in this entire valley.
CHRISTOFFERSON: The HUD lending process is not really HUD lending, it’s HUD insured lending. So it’s still financial institutions that are providing the funding, but HUD requires a significant amount of due diligence prior to work starting in the way of feasibility. That process takes upwards of a year. So it’s a great product if you can get it, if you can live through the headache and the paperwork to get the funding. But once the funding is in place, it’s a great option. And really in that market, it’s the only thing we’re seeing.
A lot of you have done work for the state Division of Facilities Construction and Management on the vertical building side. What does that market look like?
BODELL: It looks like everything else. They’re a relatively sophisticated, bright owner that understands that they are getting some great deals right now. They would like to continue as quickly as they can to develop some of these higher education projects out as the marketplace warrants. But they’ve only got a limited amount of money, too, and they are affected by the political scenario. All these things that we are talking about are all coming into play, and then you overlay that with the fact that the fees that these contractors are putting on are insane. So everything we’ve touched on so far just comes back to the focus: Great client with limited money.
MOORE: Well, on the building side, there’s some significant projects coming out. We’ve been working with our state legislators and the governor to lobby a bit for more building projects, especially education infrastructure. There’s money there that is available to a certain point. There are some very significant projects coming out in the next year—well over $400 million throughout the state. So there’s a lot of momentum. I’ve talked with many state legislators, some on the building board, who will say, “Maybe now is the time to go bond for some of these projects because we cannot buy this in the future.” The other caution we gave them is to be careful not to create budgets at these rates forever. And that is a caution, because they’ll go through and budget certain projects of significance, and they think that the market where it is today is going to be achievable in the future and, simply, it’s going to rise. I think there is opportunity there, but on the other hand, it’s opportunity for a select few.
RINDLISBACHER: We’ve got some conservative legislators that are stepping into place and I think they have the mandate from their citizens that we’re not going to spend money and we’re going to be fiscally conservative. We’ve got to educate a new breed of legislator that actually gets to vote on those things.
PARSON: We need to make the case that investment in infrastructure is a conservative issue, that it’s a government role—it makes sense for both the federal and the state government to do.
Construction and the environment can and do work together in harmony. Some are concerned with the new California-type air quality emissions, the CARB standards. Do we anticipate similar rules coming to Utah, and how can contractors and owners gear up for what many believe will be much higher costs for equipment replacement, servicing of equipment and ultimately higher costs to owners?
P. CAMPBELL: With emissions regulation and what is coming down the pike starting in 2011 as we move to Tier 4 emissions control, all the manufacturers are producing new equipment to meet those new standards. But the price of that equipment is going up anywhere from 6 to 12 percent. It looks like 2011 and the next three years, as we go through the Tier 4 interim and the Tier 4 final, is when this stuff gets really onerous, and it may be accelerated by non-attainment areas and local provisions of air quality. It will be more expensive and it will be much more regulated. The ability to work on this equipment is highly sophisticated. There are a lot of electronics involved with it. The mechanics that have worked on equipment in the past won’t be able to work on this stuff without extensive training. So the equipment itself is going to get more expensive, the cost to maintain the equipment is going to be more expensive, and the expertise to maintain that equipment is going to be more expensive.
It’s easy to be green when you don’t have to pay for it, but that road is ending. It’s rolling through our industry at a very fast pace. Owners who pay for the construction projects are going to have to bear the cost. Our industry cannot keep getting squeezed in the middle and bearing all the risk and cost of construction. One thing that makes us nervous is policy. Those with agendas are going to go through the regulatory industries rather than Congress to get done what they want done. So we think it’s going to get more difficult.
THORN: This is going to be a challenge—but I can remember not that many years ago when we had a lot of issues with gravel production and pits and reclamation and fugitive dust, and it seems like those have tempered a little bit, in large part because our industry has really made an effort to be environmentally friendly and reach out to communities and be sensitive.
PARSON: About every four years that issue will crop up with the legislature. The legislature will study it and hopefully come to the same conclusions that they did before. I think our industry is much more responsible and we’re operating it in a better way than we have historically, but it’s still an industry that has significant impact on communities.
ZIMMERMAN: Folks have looked at the fact that Congress was not going to make it through cap and trade and said, “OK, that issue of regulation of greenhouse gases is pretty much going to sit by the wayside.” But, in fact, the EPA now has regulations designed to go into effect the beginning of next year, which has the EPA regulating construction over every building over 25,000 square feet. So basically the EPA has taken the Clean Air Act, which was designed to regulate power plants and industrial facilities, and they are applying it to construction. If you look at additional ways to slow down construction, if those things go into effect, they have a serious impact in terms of going through an additional layer of permitting for building.
HOGAN: Couple that with the hiring freeze that the federal government just put on, and you’ve got to process 10 times the permits.
Do you see LEED and green building becoming the norm?
HALES: It’s here to stay, whether it be LEED or just sustainable building principles. Is there some of it that costs more? Yes. Is there some of it that actually saves costs? Yes. So it will continue to mature and be filtered out. But is it going away? Heavens, no. It will continue to increase. It raises the question: Are the owners listening to the promotion and willing to pay the additional costs? The answer to me is some are, some aren’t. Federal projects are willing to pay the additional costs in a lot of instances. But in the private sector, are they willing to pay those costs? I would say no.
MOORE: Because it’s become the norm, almost every state and federal project we are working on are all somehow a LEED project. And not only that, our employees are trained and accredited, and many of us in the room here have probably numbers in the hundreds of folks that are trained in leading that process. Most architectural firms we’re working with agree that it’s the norm. And I think Utah leads the nation in LEED projects. Overall, green building is here to stay. It’s no different than ADA was 15 years ago.
BODELL: It will expand and filter down to the private sector eventually when they have the money to spend.
MOORE: This is a good thing. This is not something that someone is pushing us for. We should be stewards of the environment. And it’s also the economic engine of whether we can bring new businesses here or not. The construction industry has done an exceptional job of embracing this and taking it to our owners and saying this is the right thing to do for Utah.
It seems like we have a number of contractor and subcontractor failures happening. How is this impacting the industry and what can we do about it?
HUNT: We are definitely seeing failures and being asked to come in and clean up messes. There’s no state regulation of bid limits—it’s supposed to be self-policed by general contractors. On bid day, companies get a lot of unsolicited bids and that is a huge problem. I think we’ll continue to see more failures. People had a fair amount of momentum at the end of 2008 and that carried them through, but we are getting to a point now where there are going to be more failures. I think bankruptcy laws need to be tightened up as well. We were just asked to come in and clean up a mess where we warned the general contractor that the electrical sub had been bankrupt two times before. So it’s buyer beware. But it’s too easy for people to go bankrupt and open up under a different name and be right back in the marketplace.
MORGAN: It comes back to pricing. For the most part everybody in the industry would agree that we are pricing our products and services at a level that does not sustain life. And when we do that, the weakest ones go out of business, and that is what we are seeing. I’ve seen a lot of bids go out that might cover material and labor, but no equipment or fuel. Well, you can do that, depending on how much working capital you have, but sooner or later you eat into that working capital and then you are out of business. Until enough people go out of business that we can return to a level of pricing that sustains life, we are going to continue to see failures.
HUNT: The things that make you a good subcontractor are things like your safety program, your in-house training programs and those sorts of things. And those are all things that have a price tag attached to them. The partnering that we talked about that has taken place in the past with design-build projects— bringing in qualified subcontractors makes general contractors’ jobs easier. It’s going to be much more difficult for general contractors to build projects. And I don’t see the quality going up right now. We go in and clean up messes right now of work that is unacceptable.