Sections Supplements

The Competition is Building

As the Market Slows, More Firms Are Bidding for Less Work
Kerry Dietz

Architect Kerry Dietz says she seeing and hearing some “hunger” in the construction market.

Many in the construction sector are starting to see more signs that the market is tightening up. There are more companies bidding on projects — no less than 16 firms vied for rights to build the new clubhouse at the Ledges Golf Club in South Hadley, a comparatively small project — and more companies from outside the region are joining the fray. These indicators point toward continuation of a relatively flat period for most builders, but there is considerable optimism that there will be enough work to go around in 2008.

Joe Marois has noticed some bigger crowds lately at the so-called ‘walk-throughs,’ at which construction companies can get a feel for a specific project before deciding whether, and how much, to bid on it.

“At some of them, there’s enough people at the walk-through to do the job,” joked Marois, president of the South Hadley-based construction company that bears his name, noting quickly that this is not a laughing matter for most of the players in this sector.

The big turnouts mean that many companies are looking for work, at least in part because there’s less of it to find, and some of those outfits are coming from outside of this area code. The heightened competition brings the bid prices down, he continued, which is good for the customers, but not necessarily for the company winning the bid, which is ultimately looking at a smaller profit margin or, in some cases, just breaking even.

“We’re working hard to keep the lights on … we’ve had to work twice as hard for about half as much, it seems,” said Marois, exaggerating to make a point — that his firm has been successful in finding plenty of work, although many of the projects are smaller in size than what it usually pursues. He sees an abundance of projects for the balance of ’07 and the looming spring building season, but admits there is some apprehension in the industry about what lies ahead.

‘Flat’ is the term he and others used to describe the current state of the local construction market, and there are concerns for the year ahead about everything from the prices of steel and other building materials to the subprime lending mess and perceptions of same.

“The subprime housing situation hasn’t had an impact on the commercial market,” said Peter Wood, vice president of Sales and Marketing for Associated Builders in Southampton. “But what may impact the commercial segment is the lack of discretionary income after we get through a winter of continually rising commodities prices.”

Wood agreed that there is heightened competition touching many segments of the market, some more than others. There has been less overall impact in Associated’s specialty, design-build work, he noted, adding that the company has remained busy, has a number of projects on the books for next spring, and hasn’t seen a pronounced decline in margins.

“We’re still seeing opportunities to sell our product and without having to discount it,” he said. “That’s because we’re not really in a bid market, we’re in a service market.”

Kerry Dietz, owner of Dietz & Co. Architects, said her sector has also seen a surge in the number of companies bidding on projects, and also some firms from well outside this region vying for work in the 413 area code. There are several factors contributing to this, she said, including some general uncertainty about the economy, which may be prompting some business owners to err on the side of caution when it comes to building projects.

But also, some public initiatives have been slower in developing than many in this sector had expected, she said, noting that state funding of school projects — renewed after several years when the pipeline was closed off — has been slower than anticipated (the new Putnam High School in Springfield is the first project). This has no doubt forced companies specializing in school work to continue looking elsewhere, she continued, adding that funds for another state initiative involving public housing have started to trickle in.

In this issue, BusinessWest examines the state of the construction sector, and what looms ahead for an industry that is often a good predictor of the economy as a whole.

Board Feat

As he talked with BusinessWest about the general state of the building sector, Wood clicked his way to a story in the local paper about the bidding for the contract to erect a new clubhouse at the Ledges Golf Club in South Hadley.

“It says that 16 contractors — that’s a lot, that’s huge — had taken out documents to bid on what will be about a $700,000 project,” he said, noting that the clubhouse work accurately reflects what is happening within the local market, especially the publicly funded projects “Clearly some of those companies are not from around here — that’s what happens when the economy goes south for builders; that’s good for the club because it will get a good price, but it’s not good for the people trying to do business in this area.

“What happens when the market gets tight is that prices get lower in the bid process,” he said. “But you can’t swap a dollar for a dollar to stay in business; you still have to be allowed to make a profit in the business sector.”

The Ledges bidding war provides an effective backdrop for Q4, and may be a harbinger of what’s ahead, said Wood, noting that as 2007 winds down, many in this sector are still doing well, but all players are watching the landscape closely in search of clues for what might happen in the short and long term.

People like Tim Pelletier. “I’m just lying in the weeds watching to see what happens,” said Pelletier, president of Ludlow-based Houle Construction. Like others, he sees the heightened competition for jobs as a clear sign that companies are hungry for work, sometimes just to keep crews busy so they don’t lose valued employees.

“When you see people that you haven’t seen before, and when you see people start to come up from Connecticut, that tells you that things are getting tighter,” he said.

There are several theories as to why. First, the residential market has slowed down (although not as much here as elsewhere), forcing some companies that specialize in that work to veer toward commercial projects until the housing skies brighten, said Pelletier.

Meanwhile, there are more concerns about the economy — again, more nationally than regionally — and other factors that are contributing to some hesitancy in the building market.

“I’m hearing some hunger, and seeing it,” said Dietz, noting that the architectural community is often among the first sectors to note turns or trends in the economy. “Some of the sub-trades haven’t quite felt the pinch yet because they’re still working, so they think there’s plenty of work coming afterwards. They’re not at the beginning of the food chain, they’re more toward the end, so they’re not seeing it as much, but I suspect they will.”

Overall, Dietz expects more flat times ahead before the picture improves.

“I think the beginning of 2008 will be on the slow side for everybody,” she said, “but by the end of the year we’ll see some action as the housing controversy will settle down and people will get over it.”

Dietz said that at the moment, her firm is ‘slammingly’ busy — there were four proposals submitted during one recent week — but, as is typical is this business, she can’t really project more than a few months out.

Like others we spoke with, she said the perception that the economy may be slowing down may be a bigger factor in what happens across this sector than reality. Overall, she said, the problems with the housing market, and the economy in general, are not as bad as many of the headlines make it appear.

“Housing goes up like 80,000%, and then goes down a tiny fraction of that and everyone talks about the burst bubble,” she said. “I think we’ve lost our perspective on the economy in a lot of ways.”

Marois said his firm is also busy, albeit with projects it might not have pursued if times were better.

“We’ve had a lot of small jobs, and we’re going after things we normally wouldn’t go after,” he said. “But I’m noticing that there’s a lot out there to bid on … things are ramping up a little bit, and that’s unusual for this time of year.”

Finishing Work

Summing up the state of the market, Marois said that few if any companies are in panic mode. But these are times when firms must focus on the bottom line, be alert to opportunities, and do what’s necessary to ride out the storm.

“You have to really pay attention to survive right now,” he explained. “You have to watch what you’re doing, stay lean, and just be careful.”

And also expect those large crowds at the bid walk-throughs — at least for the time being.

George O’Brien can be reached at[email protected]