The state of the local and national economy is on everybody’s
mind, but how it affects one industry or another is hard to understand. To get a full checkup on some of the industries that are
thought to have taken a beating recently, Smart Business and
Skoda Minotti conducted a survey of more than 30 local construction professionals in Northeast Ohio to gauge their view of
the industry. After reviewing the construction survey results,
we’ve compiled the following highlights.
The current state
The state of the economy in Northeast Ohio has led to an increase
in the competitiveness of the construction marketplace. The market
has seen a decrease in the number of homebuyers, which has led to
less demand for new residential construction.
According to one respondent, this may be partially caused by the
media’s portrayal of the current housing crisis: “The uncertainty of
the economy and the media’s portrayal of the housing industry,
people are seeing these things and are not willing or looking to
purchase new homes or spend money in general.”
This has made profitability difficult for many of the companies in
our survey to attain, as indicated in their comments below.
When asked, “What is the greatest challenge that your company currently faces and why?” one respondent explained, “As
the residential market dries up, competition is increasing on
public construction projects. Due to the dynamic nature of the
construction market in NE Ohio, it becomes more difficult for
contractors to both obtain work and remain profitable.”
According to Ian Frank, a construction lawyer with Frantz
Ward LLP, there is an upside for companies that keep a close
eye on their bottom line.
“This increased competition provides opportunities for success
for the disciplined construction company that has put in place
strong estimating, cost, contract risk allocation and project management controls,” he says. “On the other hand, it can prove disastrous to those that do not take these precautions.”
The work force problem
Several respondents commented that their No. 1 concern moving forward is finding talented workers in an industry that is suffering from a shortage of employees with the necessary skills to
perform the required work. Nationally, the construction industry
has seen a realignment of talent take place. According to a study performed by The Associated General Contractors of America (AGC),
nonresidential construction nationwide saw an employment
increase of approximately 23 percent between February 2006 and
December 2007, while residential construction saw a decrease of 33
percent. A majority of this gain and loss can be attributed to residential workers performing tasks such as installing wallboard,
wiring, plumbing and other components in nonresidential projects.
According to the AGC, many of the residential workers making
this switch may not have the skills needed for the high-growth construction categories of 2008, such as hospitals. These projects
require extremely talented workers skilled in high-steel erection,
heavy lifting and close coordination with a variety of crafts in confined or hazardous spaces.
Despite the gloomy outlook for many segments of the construction
industry, there will be growth opportunities in various markets. Frank
says that, “A substantial number of the industry respondents indicated that their greatest opportunities for growth in the next five years
existed in the public construction market and institutional market
(e.g., health care, hospitality, etc.). This is no doubt due in large part to
the continued growth and expansion of The Cleveland Clinic and
University Hospital Health Systems, more than four dozen projects
still planned by the Cleveland Metropolitan School District, the ongoing Euclid Corridor Project, the anticipated redevelopment of the
East Bank of The Flats by Developers Diversified/Scott Wolstein as
well as a number of notable downtown projects, such as the future
renovation of the Ameritrust Building.”
Legal issues
The survey revealed several interesting facts about the legal environment surrounding the construction industry.
“A majority of the survey respondents indicated that they
believe claims for design errors and omissions will be the largest
source of claims and change orders in the future,” Frank says.
“These responses highlight the need for adequate project management controls and risk management techniques. These controls include a clear understanding and appreciation of the contractual risks assigned by the contract documents and a focus
on timely protecting/preserving claim rights when they occur.
Many recent legal decisions interpreting typical risk-shifting
provisions are filled with cautionary tales of contractors that did
not create or implement these risk management controls.”
With the continued rising cost of materials a top concern for construction companies, fixed-price contracts are becoming a more
and more dangerous proposition. Frank believes that, “Given
that nearly 70 percent of the respondents perform most of their
work on a fixed-price or lump-sum basis, these concerns result
in an increased risk of performance. Contractors eager to take
work at little or no margins in order to keep busy often ignore contractual risk issues that will directly impact the project bottom
line.
“Add to this dynamic the prospect of widespread price fluctuations for various raw materials and one can see the possibility for
an increase in contractor defaults. Also, the recurrent concerns
regarding material price increases demonstrate the need for a
broader acceptance of shared contractual risk through the implementation of material escalation clauses.”
ROGER T. GINGERICH, CPA/ABV, CVA, is the principal-in-charge of the Real Estate & Construction Group at Skoda Minotti. Reach him at 440-449-6800 or [email protected].
Special thanks to the
professionals at Frantz Ward LLP, Parkview Federal and
Associated Builders and Contractors Inc. for their assistance
developing these surveys. Real estate survey results based on 51
companies.
