February 24, 2012
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Things are looking up a bit for the construction industry. New construction starts have been strong in recent months, construction spending rose throughout much of 2011, the production of construction materials has been up for six months in a row, and Caterpillar, Inc. and other large companies have posted strong earnings reports for the past couple of quarters–a hopeful sign that small and mid-sized companies will also do better.
However, the industry still faces plenty of challenges in 2012. Small companies for the most part are struggling because of the sluggish economy, increased competition, rising insurance costs and a shortage of excellent workers.
The largest challenge, by far, contractors say, is the economy. Although the unemployment rate is dropping and the U.S. economy is showing other signs of recovery, economists and others say the recovery of the construction market will lag behind the overall economic recovery.
“Construction job growth remains anemic,” according to Construction Economics -- Market Conditions in Construction, a new report by Gilbane Building Company, a 139-year-old Rhode Island-based real estate development and construction company.
"We haven't seen appreciable job growth in six years,” Ed Zarenski, the report's author and a 40-year veteran of the construction industry. “In 2011, construction increased by only 50,000 jobs when we need to see job growth of 30,000 per month to get back to previous levels, which will require significant increases in construction spending and overall project volume."
Contractors say homeowners and other customers are savvier in the wake of the recession and typically get three or four estimates before they decide whom to hire. This means contractors are competing for work against two or three of their peers now, compared to one or none before the recession.
“People used to call and say, ‘Come do this job for me,’ and they’d get around to asking what it would cost,” said Eric Reynolds, owner and president of EW Reynolds Contracting, in Williamsburg, Virginia. “Now I might give out 30 estimates to get two jobs. I’m doing five times the work to get the same number of jobs.”
Reynolds, whose company does remodeling and mold remediation work, said one of his biggest challenges is finding good workers because so many of his subcontractors have downsized in order to cut their payrolls.
“They got rid of their top guys,” he said, “and now I have to babysit guys who may not know what they’re doing…I wish I knew where the other guys are.”
Yet another challenge is rising insurance costs.
Insurance market conditions for U.S. construction firms began deteriorating in the second half of 2011, and that is expected to continue this year. Large losses and reduced investment returns caused many U.S. insurers to seek rate increases in 2011, according to a report by Marsh, Inc., a leading insurance broker and risk adviser.
As a result, rates for various construction product lines, such as general liability, builders risk, excess casualty and others, rose, forcing up costs for contractors, who passed them on to their customers.
Mark Di Vincenzo is a journalist with 24 years of experience and a New York Times best-selling author. Mark blogs via Contently.com.
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Professional Pen 2 months ago
Mark, You raise some very valid points here. The Standard & Poor’s Supercomposite Homebuilding Index (S15HOME) has grown 29 percent since the end of last year, over twice the 12 percent gain in the broader S&P 500. Even though there are signs of recovery, many construction and real estate related firms are still struggling. I know many entrepreneurs who are experiencing what Eric Reynolds is going through.