These are trying times for specialty contractors. Given the limited opportunities for new work, the struggle to get paid for completed jobs and the reluctance within the lending community to extend credit to construction firms, the region’s subcontractors are fighting on all fronts to survive. Many contractors are cautiously optimistic that the economic environment could improve in 2012, but conditions could get worse before they get better.
“As a subcontractor, it’s a minefield out there,” says Allan Papp, president of Papp Iron Works in Plainville, N.J. “You’re not sure who will be in business next year and who will implode. I expect to see a number of general contractors and subs go bankrupt over the next 12 to 18 months. There’s no doubt the worst is coming.”
For now, things appear stable at Papp Iron Works in Plainfield, N.J. Papp says the company had a strong 2009 and 2010 is tracking well, however its backlog is quickly disappearing as new work is difficult to book. The 62-year-old company is trying to stay active because in addition to keeping its subcontracting work flowing, the company also has its fabrication business to operate.
Papp says that bidding in the current environment has made landing new work nearly impossible as desperate contractors low-bid jobs “just to keep the lights on.”
“It’s dog eat dog out there,” he adds. “A job on the street is like a bone thrown to a pack of hungry dogs. Once they get done with it, there’s not a lot of meat left on it.”
At the core of specialty contractors’ problems is cash flow. Ron Berger, executive director of the Subcontractors Trade Association, says he sees members struggling to get paid as owners hold on to retention for much longer than in the past. Meanwhile, the tight lending market means subs can’t tap credit sources for operating cash.
“If you’re not getting paid, you have to borrow, but they don’t even have that option in this market,” he adds.
As a result, many subs are taking desperate measures. In some cases, subs are venturing into markets that they haven’t worked in previously. With public sector work holding up while private commercial developers sit on the sidelines, many are bidding on government projects for the first time.
“They get themselves into jobs that they have no experience in and put out very low prices because they don’t understand it well enough,” Berger says. “It’s killing the market. Once things get better, if these guys are still around, they’ll still have all of this bad work to finish up and won’t be able to get the good jobs. We’re our own worst enemies.”
Henry Goldberg, managing partner of Goldberg & Connolly in Rockville, N.Y., a law firm that represents specialty contractors, says jumping into the public market can be a “dangerous undertaking for the uninitiated.” It’s a situation that could land both general contractors and their subs in a precarious position.
“You could be an excellent contractor with a great track record, but if you don’t know the rules of the road in public contracts, like the very rigorous notice requirements and documentation requirements, you could get yourself in trouble,” he adds. “Courts have largely supported public owners and the strict enforcement of these requirements. It’s not like the relationships in the private market where you just work things out.”
Wherever possible, specialty firms are making cuts. Berger says many members have already made massive cuts, including one firm that had more than 1,500 tradesmen last summer and now has less than 500. Although larger firms may find multiple areas where expenses can be trimmed, smaller firms have fewer options. As a result, Berger suggests that small shops are likely to take the biggest hit during the downturn.
“The bigger guys can survive better,” he adds. “They are better financed and have multiple tiers they can cut. The smaller are struggling with how much they can cut back and still produce jobs.”
Large firms are making cuts as well. In the past year, EMCOR has cut 20% of its skilled tradesmen, according to Tony Guzzi, president and chief operating officer of EMCOR. Still, that is better than many in the industry, which is currently facing a more than 20% unemployment rate nationwide. In addition to maintaining a strong cash position, EMCOR has not been forced to rely entirely on jobs in the $2 million to $10 million range, where Guzzi says he has seen long bid lists lead to irrational pricing. For larger jobs, roughly $20 million and higher, Guzzi says competition remains more stable and selective. Still, Guzzi concedes that a big portion of its New York pipeline has started to run dry with the significant drop in tenant fit-out work in the commercial sector.