No Margin for Error

The economic downturn has hit a number of sectors hard, but perhaps none more than the construction industry, which has been impacted by everything from the sharp decline on the stock market to the collapse of the auto industry to falling confidence among business owners who might otherwise be looking to build or expand. There is some optimism, though, mostly in the form of hope that an economic-stimulus package will put some projects into the pipeline.

David Fontaine has seen a lot of things in his three decades in business — but nothing quite like the current spate of challenges facing the construction sector.

“We are probably at the low point of my 30-year tenure here,” said Fontaine, president of Fontaine Brothers in Springfield, which specializes in public-sector work and built the MassMutual Center, among many other local landmarks. “On average we have about 13 or 14 projects ongoing, and right now we are at four. The public sector bottomed out a few years ago, and in times like that you will typically see the private sector jump in and say, ‘now’s a good time for us.’ It just doesn’t seem like that really happened.”

Russell Sprague, president of 100-year-old A.R. Green & Son Inc. in Holyoke, noting that his volume is down 50% from a typical year, used similar language. “It’s gloomy out there right now; Public works projects are down, in general, and the sizes of the projects you do see are smaller.”

His company recently built the new field house at Smith College, but he doesn’t expect to see much more work on that scale anytime soon. “At the colleges, you don’t see the same scope of projects; there’s maintenance work on buildings that might have been deferred, but now they’re doing that work because they have to. Public-school construction has come to a screeching halt. I haven’t seen any of those in bid for the last six months.”

Other general contractors we spoke with sounded similar notes. Overall, say players in this field, there’s less work and far more competition for what work is available. These converging trends are driving bid prices — and therefore margins — way down.

Some contractors have been affected more than others, depending on their specialties, but nearly all of them are feeling the pinch, with builders noting downturns across virtually every sector — from higher education to ski resorts — that are impacting construction volume.

“We do a lot of work up in Vermont, and that area is really slowing down,” said Gene Kurtz, president of Kurtz Construction in Westfield, referring to ski country. “All the resort areas had seen a lot of high-end work, but that was Wall Street money. It’s basically stopped.”

Steve Killian, senior vice president of Barr & Barr Inc., a New York-based construction management firm with a local office in Springfield, said similar things about the higher-education sector, noting that, while his firm handled some large-scale projects last year at Mount Holyoke, Williams, and Yale, he’s not expecting the same volume in 2009.

That’s because college endowments were hit hard by the disastrous year on Wall Street, and many schools are re-evaluating some large-scale capital improvements.

“We’ve had a few projects pulled back or taken off the table,” Killian explained, noting that Yale is still going through with several aspects of a $1 billion capital campaign, but other schools have slowed down their construction activities significantly. “Williams College put the next phase of their 100,000-square-foot Stetson/Sawyer project on hold for about a year, maybe six months, depending upon the market.”

While most all companies are struggling to some degree, some are faring better than others because they saw this slide coming and prepared accordingly — by getting leaner and meaner, and, when and where possible, diversifying their services.

Looking forward, most companies say they will try to focus on more than mere survival, and instead position their companies for when the better times arrive, possibly on the wings of an economic stimulus package that might move construction projects into the pipeline and put crews to work.

Building a Consensus

But gauging when that day will arrive is difficult, and it has become the $64,000 question.

Indeed, while most contractors have lived and worked through many economic cycles, this one has some twists and turns that make predicting the future quite difficult.

“This will be the fourth recession I’ve seen,” said Fontaine. “The other three, you had a pretty good idea of how long they would last. This one here, I don’t think anyone has a grasp of how long it’s going to go on.”

As for the present, area contractors say they are focused on making the best of a bad situation. And for many, the hope is that planning for the current downturn and effective strategic response will not only get them through, but create some potential growth opportunities.

Eric Forish, president of Westfield-based Forish Construction, noted that this family business has been operating for more than 60 years, longevity achieved through diversity and flexibility.

“Because of our conservative, Yankee values, we have tended with time to maintain that philosophy of saving for a rainy day,” he said, “and this is that rainy day.

“We’ve positioned ourselves appropriately for 2009,” Forish continued. “We’ve maintained a diverse client base — private sector, public sector, institutional work, not just construction, but design services. We have a diverse portfolio of our operation. It’s proven successful for 63 years.”

Preparation for the recession was key to keeping ahead of the current, Kurtz agreed, noting a period of streamlining that his company undertook earlier in 2008. Coupled with reorganizing the company, he mentioned some other new developments which position his company well.

“One of the things we’ve done in the last couple of years,” he said, “is to increase the number of services and products we can offer, and that is helping us a great deal. We have a line of Lester buildings (pre-engineered metal structures) for small to mid-sized manufacturing facilities. Those buildings are marketable, affordable, and very popular right now. We’ve got a few of those projects in process.”

Said Killian, “the recession has been reflected in every aspect of our market. Our response as a company has been that we saw some of this coming, and we started making some reductions in both internal costs and overhead costs early on, in the last two quarters of 2008, which really helped. We prepared ourselves for an ’09 that’s a little more lean than we would like.”

Overall, though, no amount of preparation could have readied some companies for the severity of the downturn that hit in 2008, as reflected in U.S. Labor Department statistics showing that that the non-residential construction sector lost 6,800 jobs last December, and that for the year, job losses totaled 53,400, the biggest annual decline since 1991, or during the last major recession.

The fallout resulted from slowdowns, or near halts to building in several sectors, an environment created by factors ranging from the 35% decline on Wall Street, which impacted colleges, health care facilities, and any other institution with an investment portfolio, to a precipitous decline in confidence among business owners of all sizes.

Pounding the Pavement

Despite these challenges, there is some work out there, said Carol Campbell, president of Chicopee Industrial Contractors, a firm that specializes in assisting clients, mostly manufacturers, with moving and installing equipment, work that often goes on regardless of the economic conditions.

“The companies that we’re working with might be dealing with their own layoffs,” said Campbell, “ But these are projects that have been in the pipeline for several years. So, while we are doing a multimillion dollar project, the company itself might be streamlining its own internal organization.”

CIC has done some streamlining of its own, said Campbell. “We’re a little smaller than we were two years ago — we’re down four employees — but taking that into consideration, we are strong.”

One of the biggest challenges facing builders is the mounting level of competition for existing work, a climate created by declining volume across the state and the region, which has prompted firms from Worcester, Boston, Connecticut and other points on the compass to vie for work in the 413 area code.

“Yes, there are opportunities,” said Forish, “but they are getting fewer, and they are drawing more attention — competition is extremely keen. If you look at a public bid list, a few years ago you’d see maybe a half-dozen builders, but now you are seeing two or three times that number.”

Most everyone agreed that the growing legions of bidders have led to some shocking numbers for profit margins on jobs, with some builders possibly trading a dollar to make a dollar. “I think there are guys out there who didn’t prepare well that are cutting their bids down just to get a cash flow,” said Killian.

Added Sprague, “a lot of these guys coming from Connecticut or Eastern Mass., quite frankly, I don’t know how they’re doing it, because they are coming in with numbers that I consider to be below my costs. It’s scary.”

While the current conditions are bleak, there is some optimism concerning 2009, mostly in the form of conjecture concerning the size and scope of an economic stimulus package that many analysts believe will be passed in the next few weeks.

In its 2009 economic forecast, the Associated Builders and Contractors (ABC) says that while this “looks like a challenging year for the commercial and industrial construction industry, the next federal stimulus package being discussed … may emerge as a countervailing force.”

Currently, communities across the nation are putting together wish lists for possible federal funding as part of this proposed stimulus package from President Obama. Forish mentioned that builders are watching carefully what public projects might become available from that incentive. “If local communities see some of that funding, that will enable them to go forward with construction projects that they wouldn’t be able to undertake otherwise.”

In the meantime, those managing firms must be diligent — and imaginative — in their pursuit of opportunities, said Peter Wood, president of Business Development at Associated Builders in South Hadley.

“There are always opportunities if you expand your marketing and continue to network to find the projects that are out there,” he told BusinessWest, adding that he believes Western Mass. has weathered the financial crisis better than many other parts of the country.

“Health and service industries, while they are impacted, they do need to keep up their facilities, whether it’s new construction or an upgrade of existing structures. From a construction standpoint, that work still tends to be available.”

The Real Dirt

Fontaine isn’t alone in his assessment about these being the worst of times — or the worst that most can remember.

Most general contractors have been through downturns, and they’ve weathered storms. But this one is different. A confluence of factors has made finding work and keeping crews busy increasingly difficult. This is a time to be a resourceful and creative, say the contractors we spoke with.

That’s because there is no real margin for error.