...“we had a previous project that did not go well, and there is a lot of scrutiny now.” Austhof says he eventually went to his personal bank to get the loan. “It is the first time I have ever had to do that,” he adds. The fight for credit is compounded for Soibe by late payments for jobs the company already completed. “There is a 10% retainage on payments, and many are not seeing payments for eight months or more. We expect to wait at least 60 days for payments,” says Austhof. “With the retainages not being paid to subcontractors, we have practically become an arm of the bank.”
The fallout from the crisis already is apparent, as unpaid contracts are dealing knockout blows to some small firms. “We have people who are right on the edge,” says Austhof.
Even with financing secured to purchase bulk materials and meet payroll, life remains tough for subcontractors as competition on project bids ratchets up to new levels. “I can’t believe the low prices projects are going for now,” says Austhof. “There are some very low bids coming in, so low that I don’t see how they can pull it off, and this will no doubt lead to problems.”
At the ASA annual convention held the first week of March in Nashville, the art of navigating credit-weak markets with increasingly competitive bidders was a topic of concern among many. Gregory, who authored a podcast for the ASA convention called “Ten Survival Tips for Subcontractors in Lean Times,” says subs need to be aware that banks “are very cautious now, and so people are not getting the benefit of the doubt. Subcontractors should be prepared for more of this in the next six to nine months.”
ASA spokesman David Mendes says this year’s convention was dominated by panels and workshops with titles such as “Surviving Tough Economic Times” and “What To Do When or Before a Project Stops.”
“Subcontractors that built up their cash reserves are weathering the credit crunch but are worried about depleting those reserves,” says Mendes.
Liens were a key topic at the convention, Mendes reports, pointing to a dilemma many subcontractors currently face as they try to perfect liens to expedite overdue payments for their services. Once perfected, a lien makes the bank less likely to lend money and keep the project going, but a subcontractor who foregoes perfecting the lien risks losing the lien claim entirely if the bank yanks financing away, he explains.
“ASA suggests that, in the current environment, there are very serious risks for subcontractors that release their lien claims or allow them to expire for work that they have completed but for which they have not received payment,” Mendes says.
While all eyes are on the federal stimulus package, many small subcontractors hesitate to view it as short-term salvation. “When you are one of 16 bidders for a school job and things are looking pretty bleak, you do not expect much immediate relief from the stimulus,” Gregory says.
“I’m a little more optimistic,” says Austhof. “We have to take a wait-and-see attitude.”
A higher cost of credit and consolidation of available lenders have limited the buying power of contractors seeking new equipment, but the general slowdown in construction has cooled spending more.
“There’s just very little buying and selling going on,” says Ron Riecks, general manager of Tempe, Ariz.-based Wells Fargo Construction, which provides commercial financing to the construction industry. “I think that 2009 could go down in the record books as the slowest year for equipment selling.”
Still, the cost of credit for equipment loans has gone up 20% to 30% as investors have tacked on risk premiums, but the rates are still relatively low, about 100-200 basis points, equaling 1% to 2% annually, since this time last year, Riecks explains. Smaller, higher-risk contractors “are probably paying more than that,” he adds, noting that annual percentage rates are averaging 7% to 8%. “It is a long way from record highs,” Riecks says.
Sources say today’s economy also has placed extra pressure on fleet managers to extend their equipment age while others are quickly liquidating idle units, sending a glut of used equipment into the market, resulting in a drop in resale values.
With cash tight due to shrinking backlogs, contractors are looking to free up equity. “Certainly our business has been slower, but it has not been falling off a cliff because we have been doing a lot of refinancing,” says Riecks. But fewer banks are vying for the work. “We find very little competition in the marketplace today other than the local banks,” he adds.
Though Riecks reports that Wells Fargo has not changed its lending standards, he admits the company is looking closely at what lenders call “work on hand” as an indicator of a healthy cash position. “The good news is there is plenty of credit,” says Riecks. “The bad news is fewer people are qualifying.