By Jack E. Kehl
The sustained downturn in the economy, tightened credit from bankers and suppliers, an increase in contractor defaults, and sweeping changes in delivery methods for public contracts made 2012 a year to remember. But, how will these factors be reflected in 2013?
I believe the following four trends will continue to gain in momentum through 2013:
Contractors Are Lean, Mean & Hungry for Work
Since 2009 brought the worst contracting economy in the past 20 years, many contractors were faced with belt-tightening measures never before seen within their organizations. Staff reductions and cost- cutting was a part of almost every contractor’s business. This trend continued into 2010 – and, for some, into 2011 – before reaching the bare essentials of running the business. In 2012, many contractors saw that they could do more with less, and for some, profits began to return due to reduced overhead and resulting efficiencies.
In 2013, contractors are streamlined operationally and are ready to find good work, but the work is not quite there for many. As a result, heavy competition and low margins remain.
Cash Is King – Again!
The lack of credit in the financial world has forced many contractors to return to the basics of cash management. Many have been forced to pay down or eliminate debt by their bankers, and have lost operating lines of credit with both banks and suppliers causing them to survive on cash flow. The result has been significant improvements in collection practices and job selection.
Both GCs and subcontractors have learned that a job is only as good as the owner’s ability and willingness to pay; those that hold out on payments for weeks or sometimes months are paying the price, as better quality contractors either won’t bid or will price for the added delays. I was told by one contractor how he interrupted a client’s Christmas celebration and refused to leave without his long-overdue payment; he was paid.
As credit remains tight in 2013, the practice of protecting cash flow and demanding payment per the contract terms will continue. Both GCs and subcontractors will not only protect their cash, but are willing to fight for it with liens, payment bonds, etc.
Second-Rate Subcontractors Don’t Measure Up
The lack of work, credit, and good business sense on the part of both GCs and subcontractors has resulted in a significant rise in subcontractor defaults. Almost all of my GC clients have experienced subcontractor default in some form, and many have had to provide credit to subcontractors to keep them on the job and the project on schedule. Payrolls are often being met by the GC to keep the labor on the job, and suppliers are being paid directly or via joint check to prevent the GC from having to pay for the materials twice. Subcontractors from further and further away have rolled into town looking for work, only to find they can’t perform for the bid price. GCs on public jobs felt compelled to use the lowest number on bid day without properly vetting the subcontractor – and how could they when the numbers are received by estimating five minutes before the bid is due?
Fatigue and several bad experiences should change this. GCs have learned that you are only as good as your weakest subcontractor, and have concluded unfamiliar and low bids equate to high drama and no profits. In addition, changes to delivery methods not only allow for prequalification of subcontractors, but demand it.
Much has been said and printed about the importance of subcontractor prequalification over the past few years; however, some GCs have yet to formalize their prequalification process. Now is the time to put a dynamic formal process in place that continues beyond a single job. On the other side, subcontractors need to step up their business practices in order to survive and thrive in 2013.
Invasion by the Giants
Although innovation in technology, financing, and delivery methods has brought many good things into the construction industry, it has also brought a few surprises. As universities and public agencies continue to package work with the idea that bigger is better, small and mid-size contractors are being left out in the cold as more and more of the larger contractors are given control of larger and increasingly complex projects. Many of our local contractors have taken the position, “If we can’t beat them, let’s join them!” and joint ventures, teaming, and associations are on the rise as smaller contractors seek to gain work with larger out-of town firms. Unfortunately, this type of partnering is usually short-lived, and many will find themselves having helped the competition to gain a foothold in their backyards by sharing their relationships and local insights with them.
I expect project size to continue to grow in 2013, as well as the number of large national and regional contracting firms working in your local area as they seek to increase their market share.
I believe that 2013 will be a year of change for all participants in the construction industry, and it is important to thoroughly review your business plans and strategy for moving forward.
Jack E. Kehl, AFSB, Surety Manager, is a professional surety bonding agent at Overmyer Hall Associates. His career in surety spans more than 20 years. Beginning as a surety underwriter for a major regional insurance company, Jack has worked for both locally owned insurance agencies and large national brokers. Jack can be reached at email@example.com.
About Overmyer Hall Associates
Overmyer Hall Associates is one of the fastest growing agencies in the country, quickly becoming one of the largest property and casualty insurance agencies in Central Ohio. Recently awarded Columbus Business First "Fast 50" and "Best Places to Work" awards and Columbus CEO Magazine recognized it as the “Best Insurance Broker” in Columbus, Ohio. Overmyer Hall Associates provides clients with insurance and risk management, specializing in Commercial Insurance, Surety Bonds, and Home & Auto Insurance. www.oh-ins.com