The Great Divergence--Construction Style!

ENR’s survey of the fortunes of the top 400 Contractors in 2011 is out.  It reflects a seemingly healthy 8.8% percent growth in revenue in 2011 over 2010.  But it's a mixed bag and the wealth is not evenly spread. Some sectors have recovered strongly:  manufacturing (up 82.7% in 2011), telecommunications  (up 28.7%), power (up 15.5%), petroleum (up 14.4%) and industrial process (up 13.8%).  Some have been lackluster:  transportation market rose 7.0%, hazardous-waste contracting rose 4.1%, and water supply work was up 3.6%.  And the domestic building market remains horrible.

Here’s the bad news:

The largest market for U.S. contractors is also the most problematic: Revenue for the Top 400 in the domestic general building market rose only 0.25% in 2011, to $109.4 billion. This uptick is a far cry—by 33%—from the $165.0 billion the Top 400 booked in 2008. Public buildings work is declining as revenue shortfalls and deficits widen among municipalities. Contractors wonder if the private sector will take up the slack.

Many contractors in the buildings sector are skeptical of any major turnaround soon. "The buildings market still is pretty flat, and that is down nearly 40% from its peak in 2007," says Nick Makes, senior vice president for Turner Construction. While there is some indication that architectural billing rates are up, Makes says he has not seen any significant pickup in hiring among architects. "That may be because they have been forced to be more productive, but I am not convinced there is any spurt in building construction."

The private developer market also remains tough amid tighter credit for project finance. "The commercial sector continues to be challenged except in build-to-suit cases," says Shaun Yancey, executive vice president of PCL. However, he does see some stirring in the entertainment market.

In addition, much of the growth that the top 400 ENR contractors enjoyed happened elsewhere.  Although revenue among the top 400 rose from $259 billion in 2010 to $289 billion in 2011, the majority of this growth (20%) was from overseas opertions.  Growth on the domestic side was realtively much more anemic (only 6% growth).

Continued public-sector spending constraints means continued interest in public-private partnerships.  Here's an interesting observation from Shaun Yancey of PCL about the U.S. P3 market:

"Canada adopted a standardized approach to P3s, where risks are shared by the various stakeholders. But in the U.S., every jurisdiction wants to reinvent the wheel and push risks down," he says. This problem has caused confusion and resistance among investors and contractors to engage in P3s in the U.S., he says."

Finally, more bad news . . . but is there a silver lining for construction litigators? 

Major contractors are increasingly worried about the financial health of their subcontractors. "I am afraid there is an oncoming wave of subcontractor defaults coming," says Van Cleave. While he has not seen many defaults over the past few years, "in the last four to five months there have been several major ones."

Van Cleave notes that, earlier this year, his firm had worked with Trainor Glass on several projects but then Trainor shut down. "When the market begins to turn around, that is the most fragile time for subcontractors [because] there is more work. But they do not always have the cash flow to support the work," he says.

For both subcontractors and general contractors, bid practices of the past couple of years are beginning to take their toll. "It's not just subs but some GCs that are beginning to struggle," says Yancey. He points out that many contractors survived well for a few years on backlog bid at higher margins during boom times. "But now contractors are beginning to burn off work that had been aggressively bid, and that has caused the stress you see with many contractors," he says.