January 1, 2010
PALM DESERT, Calif. - The good news: Unlike 2005 - the last time SMACNA brought its convention here - it didn’t rain.
The bad news: Even if the weather outside was at least partly sunny and warm, many of those forecasting the economy at the conference were not very optimistic about the construction industry’s storms breaking anytime soon.
The construction industry and the U.S. economy are in a much darker place than either was two years ago. Credit markets are tight; commercial and residential construction levels are anemic and unemployment is nearing 10 percent. Some say the rate for those in construction is twice as high.
So perhaps that’s why the Sheet Metal and Air-Conditioning Contractors’ National Association’s schedule for the Oct. 11-14 convention this year may have seemed more business, less pleasure. Instead of afternoons free for golfing or shopping, speakers were booked, giving attendees a chance to get tips on surviving one of the worst downturns since the Great Depression. Some sessions were standing room only.
Sit downIf you’re waiting for the construction market to come back, take a seat. You’ll probably be waiting a while.
That was the news construction business expert Thomas Schleifer, Ph.D., delivered at his Oct. 13 session.
The session was designed for graduates of SMACNA’s Business Management University programs, but his message could have been applicable to many association members.
The sheet metal industry is undergoing major changes, Schleifer said. Contractors need to be aware and plan for it.
“If we miss the industry shifting, we have a problem,” he said.
This downturn is different from past recessions, Schleifer said. In the past, small and midsize contractors were the first to fold in a recession. Larger companies, which “work for peanuts” on small margins, were able to survive.
Not this time.
This recession has been so long and so deep, even multibillion-dollar contractors are finding it difficult, Schleifer said.
“The recession is complicating everything,” he added. “Will the recession end and we go back to business as usual? We don’t know.”
A record?If this recession goes beyond 26 months, it will be the longest of the last three the United States has experienced, he said.
Schleifer said he sees the big firms that survive getting bigger and predicts another wave of consolidation may hit the construction industry.
He regretted that there is not enough information available to get more specific in his forecast. But a full recovery is likely years away. Historically, construction spending lags a year or more behind any economic recovery.
Healthy profit margins could be even slower to return - up to three years, Schleifer added.
“The marketplace continues to shrink for 12 to 18 months, so we get no relief from the pain,” he said. “The problem is the aggressive bidding will not stop,” depressing profits for even longer.
And financing will continue to be hard to get, so take advantage of any you have.
“Anyone who has a line of credit you’re not using, you need to use it,” Schleifer said. “It’s going to be very painful for us.”
You need to adjust your business now, if you haven’t already. The risk of cutting too much or too fast is much smaller than the risks from not doing anything.
He said many company officials are finding they need to adjust compensation to better reflect current business levels. Too many contractors give their workers benefits in good times that are unsustainable now.
Salaries may have to be reduced, he added.
“Having cuts in pay is fundamentally new,” Schleifer said. “But I see no problems with it as long as it goes all the way to the top.”
To stay ahead, contractors need to forecast their local market and have a good understanding of economics. He also suggested contractors look for work on larger projects to sustain volume, look outside the local market, expand the type of services your company offers and consider forming joint ventures with competitors on certain projects.
Schleifer also recommended projecting the market two years ahead and resisting aggressive bidding.
“Making a profit is good, making a profit is fun,” Schleifer said. “But you’ve got to cover your debts.”
And take heart: By 2011, construction’s recovery should be well under way.
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