Tools of the Trade
Builders Hone Strategic Initiatives for Weathering the DownturnThe local construction sector realistically plans for a sluggish 2011 on the heels of one of the worst years in decades. While strategies have been in place to get their businesses through this economy, many wonder how many more knocks this already-troubled industry can take. Careful oversight and rigorous planning may be a new set of tools for builders in Western Mass. and across the nation, but the recession that has brought this industry to historic lows is a redefining moment for local contractors.
When asked to describe the current state of the construction sector, Five Star Construction owner Kevin Perrier said simply, “it stinks.”
Although he went on to assess the industry in more specific terms, Perrier’s two-word assessment of this state of affairs is something everyone agrees upon. The recession has taken its toll on many industries, but with so much of the construction sector dependent on better economic footings, 2010 wasn’t a year for a solid rebound. And while Wall Street and Main Street both are feeling some measure of progressive economic activity, that doesn’t yet translate to a rosy outlook for builders in 2011.
The latest reports from industry analysts at Associated Builders and Contractors (ABC) don’t offer much in the way of better news than what contractors can see for themselves — that private construction slipped even further in the last months of 2010. The ABC’s chief economist, Anirban Basu, put a finer point on the bad news by compiling a list of no less than 10 “headwinds” he predicts will further impact the sector’s economy for the current year, including industry unemployment, increased commodities pricing, and the end of stimulus funds conspiring to bring about what he ominously called “phase two of the economic downturn.”
But while the outlook isn’t good, the builders who spoke to BusinessWest offered some hope that the techniques that have kept hammers ringing, even if the phones aren’t, will continue to be sound strategies to keep their businesses above water in 2011.
MaryBeth Bergeron, owner of Charista Construction in East Longmeadow, said that, having weathered other recessions, she has a good grip on imminent changes in the industry. “When this recession started, you intuitively knew business was slowing down and softening,” she said. “I’ve been in business 25 years, and after that much time, you recognize it.”
For some, 2010 meant a continuation of the operating strategy that they had begun using in 2009 — tightening the labor rolls to get lean and mean, and trimming as much as they could from the margins to be competitive while still keeping their trucks on site.
“I remember my dad talking about recessions, and those experiences that defined him both as a businessperson and how he would work,” he said. “I think this is going to define our generation for quite a long time.”
The construction sector faces challenges that for many are unrivaled in their history. But, while their industry’s drums beat a tune of gloom, area builders say that, with some hard work, and no small amount of hope for better times ahead, construction can make it to the other side of the recession with a new set of tools.
At Triple S Construction in Wilbra-ham, Tom Silva — one of those three S’s with his brother and father — said that his company opened shop in the midst of a recession in 1987. “We were just coming of age then,” he said. “It didn’t hit us as hard as this one.”
A residential remodeling and construction firm, Silva said that this facet of the industry has not recovered from the burst bubble of the recent past.
“Last year started out better than it ended,” he said. “I think homeowners were feeling a little bit better about the economy. But then things didn’t get better, in many people’s eyes. In November and December the phone stopped ringing. Right about now people are usually calling to get ready for springtime, to get estimates. But we’re not seeing that. I was at a homebuilders’ meeting last night, and I heard the same things.”
For third-generation Springfield builder John Vadnais, owner of the construction company that bears his name, the residential construction sector has basically turned away altogether from new building toward remodeling, making that already-competitive sector even tighter. He pronounced this era “a distressed state of affairs in an inflationary environment.”
Kitchen and bath rebuilds are the new norm, he added, as customers look for the most impact on the shortest price tag. People are still spending money, he said, “But there is a micromanagement to see the project thoroughly.
“This is one of the deepest recessions I’ve seen, or that I can remember as a kid,” he continued. “Today, it is so deep that people are having a hard time getting out of the negativity.”
Perrier echoed that sentiment, and added that, in order for him to stay competitive last year, margins became increasingly tighter.
“In 2010 it became apparent quickly that, if you wanted to be a player in getting projects, and to get a decent workload, you were going to be bidding at a much lower percentage,” he said.
The danger there, he continued, isn’t just in that one job, for that one builder. He called it the “snowball effect.”
“Because if you’re not low on the first job, the next time, you’re going to go a little lower, and then the person behind you goes a little lower,” he explained. “That trend continues, and by the end of last year you were seeing that in order to pick up jobs, your bid was incredibly competitive.
“It’s going to take a while to get away from that, also,” he added. “You’re not going to see people putting healthy margins on their bids for a while now. It slowly has to creep back up.”
Perrier said that his firm kept enough projects on the books to make sure that his employees were busy, and that trend will continue into this year. “Yes, it is good news that we have a good book of work,” he said, “but unfortunately we’re having to meet our budget by volume. And that’s tough on everyone. The staff is working twice as hard.”
Steve Killian, executive vice president for the Springfield branch office of construction management firm Barr & Barr, said 2010 was “not a pretty year.”
The firm handles multi-million-dollar construction for higher education, health care, and other industries with the pockets to finance $30 million projects. But budget shortfalls and low returns on stock portfolios caused many of those clients to back off or postpone significant capital improvements.
However, he tempered those dim reflections with a more positive outlook. “I believe that some of these capital projects are going to have to be built — either for life-cycle concerns of buildings, or for institutions to stay competitive,” he said. “They just have to pull the trigger.”
With pre-construction times in his echelon of the industry taking anywhere from three months to upwards of a year, he hopes that an uptick in business in the third quarter of 2010 bodes well for large projects in the months to come.
But even with the forecast of high-value and overdue projects, the construction sector faces some challenges from increased materials costs (see related story, page 30). And when construction management projects need to be estimated over a period of several months of volatile pricing, that can get tricky.
“Copper costs are rising,” said Killian, “and that will affect prices in the near future. Anything starting in the next three to six months will reflect the rise in that price.” With copper for electrical and plumbing needs — two services typically responsible for 30% to 40% of a project’s cost — that will significantly impact the price of building.
Labor rates have been flat for the construction sector, he said, adding, “normally, labor is the greater portion of costs, so it is a bit of an equalizer, but in this industry, people need to be able to hold their pricing for more than one year because of your bid. When you’ve tied into a project 18 to 24 months down the road, you pray that your suppliers hold to their numbers for that duration.”
In order to get this industry moving again, he said, a holistic approach to the economy is necessary and vital to plan on better times for construction. “The housing crisis still hurts us, significantly,” he said.
“There has to be more confidence there,” he continued. “And we need to see increased commercial lending for developers. Investors are looking far more critically at all projects to see if there will be a profit. And that’s something that has held them back. They’ve said they are hanging back, waiting for the promise of a good return. Private investment, people with that volume of money to lend, they just aren’t pulling the trigger.”
Killian said that there are no secret techniques, really, in how a firm like Barr & Barr gets through an economy like this. “A lot of it is keeping your overhead costs low,” he explained, “and watching the bottom line. The margins are tighter, so there’s no excess anywhere — from the office to the field.”
For some, though, the recession has led to internal reassessment of their core strengths. Bergeron said that, when she saw the economy taking a turn for the worst, she asked herself, “where do I want my company to be during those times?
“With some work,” she continued, “I knew we could position ourselves to be where business is best. And so, over the last couple of years, what we have been doing is government-funded work, meaning housing-allowance programs — like Springfield neighborhood housing services, West Springfield community development, and a number of other nonprofit developers of real estate.
“Sure, just as before, we hustle, and we really go after the work,” she continued. “We try to be where the business is. If you don’t have your eyes open as a business owner, you’re not prepared.”
There is a strong market for a builder to take advantage of the changing demographics of building projects, she added, saying, “I do think there is a lot of opportunity right now with Baby Boomers retiring. ADA compliance, ramps, grab bars, all of those things are important.”
Dietz sees this recession redefining his operation through a series of techniques to trim excess off his costs, but also as a means to streamline his operation for the future. He said that Dietz Construction owns its own gravel pit, a number of specialized pieces of machinery, and various other core investments, all to keep his bid low in a highly competitive marketplace.
“For companies that don’t have as big a foundation as we do,” he said, “I don’t see how they can be competitive.”
But rather than continued investment in the latest big-ticket construction equipment, Dietz said, “We have learned to subcontract things more cost-effectively than it might be to do it ourselves. For instance, maybe getting someone who specializes in setting curbs, getting them for the handful of days that we would need them, and not worry about a workforce trained for it. There are times when it is more beneficial to outsource.”
Such tactics not only help him get through the current economy, but are a way to increase profitability in the future.
For Perrier, that future he sees is now. He said he’s confident in his crew to have projects for the year ahead, but he isn’t one to sit back idly. “We made some changes in being more aggressive in finding work.
“Where a lot people are laying off, we hired a director of project management,” he said. “His sole job is to go out and network, market our company, and meet with architects to get our name out there. So far, that’s been working out very well.
“We took a gamble and tried to take advantage of the downturn,” he continued. “It’s a roll of the dice, but while everyone is quieting down, we said ‘let’s get out there, tell people who we are and what we can do.’”
In an unforgiving economy, and for an industry, he said, where one is always just a job away from being out of work, it’s more important than ever for builders to have the right tools for the job.