2006 Top Specialty Contractors
Contractors Scoring with Market, But Commodities
Exacting Penalty
by Craig Barner
Midwest specialty contractors might feel a little like American players in
Europe for the World Cup soccer tournament.
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The outlook this year for specialty contractors is for more
opportunities and continued scoring, but commodity price increases could penalize
some firms.
"From a commercial side, this has been a really good year,"
said Jeffrey Beiriger, executive director of the Milwaukee-based American Subcontractors
Association of Wisconsin Inc., the organization formerly known as the ASA of Greater
Milwaukee.
Construction starts were up in first-quarter 2006-significantly,
in two cases-in the major metropolitan areas that Midwest Construction covers.
Milwaukee
experienced a huge leap in the first quarter-an eye-opening 158 percent to more
than $1.3 billion, according to data from McGraw-Hill Construction, publisher
of Midwest Construction. The jolt is attributable in part to the $2.3 billion
Oak Creek Generating Station project south of Milwaukee and the $417 million Columbia
St. Mary's Hospital project downtown.
St. Louis also had a noteworthy first
quarter, going up 34 percent to almost $1.5 billion, according to the data. The
increase can be partly traced to activity that includes the $900 million Holcim
(US) Inc. cement plant in St. Genevieve County, the $400 million Pinnacle Hotel
& Casino in the city center and the $200 million Pfizer Inc. research laboratory
in suburban Chesterfield.
Chicago and Indianapolis experienced modest increases,
2 percent and 4 percent, respectively.
Other than for Wisconsin, the starts
increases represent an ongoing trend in the Midwest. In 2005, Missouri topped
the four states with an 18.1 percent increase, while Illinois went up 14 percent
and Indiana 7.4 percent.
Indices Show Gains A
broad look shows that the bubbling market is general nationwide and likely to
sustain the market for the near-term.
For example, the Washington, D.C.-based
American Institute of Architects announced that billings for U.S. architecture
firms were positive every month in 2005 for the first time since 2000.
In
May, the AIA announced that the Architecture Billings Index for April, the most
recent data available, was positive for the 19th consecutive month with a rating
of 54.2. A score above 50 indicates an increase.
"The protracted
period of positive billings at architecture firms is more positive news for the
nonresidential construction industry that should amount to sustained activity
well into 2007," said Kermit Baker, the AIA chief economist who released
the data.
Similarly, small contractors, which are heavily concentrated
in the specialty segment, are optimistic about their prospects, according to the
Northbrook-based International Profit Associates Small Business Research Board.
The
IPA Small Business Confidence Index, which measures expectations about revenue
growth, the general economy and hiring looking forward 12 months, stands at 49.3
in construction. In comparison, the index is 44.6 among nonconstruction small
businesses.
Specialty contractors say that backlogs are up compared to
the same period in 2005.
Backlogs are reported to be up 10 to 15 percent.
Specialty
contractors are also hiring.
"We're looking for more project managers,"
said Tom McLinden, vice president of business development of Libertyville-based
Aldridge Electric Inc., an electrical contractor. "There seems to be heavy
demand for them."
And, contractors are trying to grab their share
of the market by networking.
Sharon Topel, executive director of the Rosemont-based
Association of Subcontractors & Affiliates/ASA Chicago, said the group has
80 new members this year alone.
"That, to me, is saying that the market
is good, and we're optimistic it will continue," she added. A
Commodity Scrum The nearly sweeping and occasionally sharp price increases for
construction commodities could trip up Midwest contractors.
Data from the
Alexandria, Va.-based Associated General Contractors of America show the producer
price index for construction materials and components in June was up 7.8 percent
compared with the comparable month in 2005, according to Ken Simonson, AGC chief
economist. In comparison, the overall PPI had only a 1.5 percent increase, excluding
food and energy, during the same period.
Price increases appear to be broad
based by commodity type, according to the AGC data:
Copper and brass
mill shapes, 87 percent.
Asphalt, 48 percent.
Diesel fuel,
40 percent.
Gypsum products, 26 percent.
Plastic products,
18 percent.
Cement, 15 percent.
The increases are being blamed
on the domestic demand and also from other sources. Flexing its muscles on the
world stage, China is experiencing a building boom and is also preparing for the
Beijing 2008 Summer Olympics. Also affecting prices are the rebuilding of the
American Gulf Coast in the wake of last year's hurricanes and copper mine strikes
in Zambia, Africa.
The Midwest is not immune to these reverberations.
In
mid-June, 500 mcm copper wire-the standard feeder for building electrical service-cost
about $8.75 to $9 a ft., said John Gaylor, chief executive officer of Carmel,
Ind.-based Gaylor Group Inc., an electrical contractor. Sixteen months ago, the
price was approximately $1.65 a ft.
"We're contractors, not commodities
brokers, but we have to be commodities brokers just to live," he added.
Indeed,
some vendors are quoting prices that are good for only one day, said Aldridge's
McLinden.
Specialty contractors are caught between vendors and owners and
have to be careful on their bids if they want to get the contracts essential for
business success. They risk losing a project if a quote is too high or risk losing
money if a quote is accepted but too low.
The situation can be especially
precarious for those contractors bidding on public works projects.
"You
have to keep your bid good for 90 days, 140 days or whatever they ask for because
it is good from the day of the bid to the day of the notice of award," Gaylor
said. "You can lose 20 percent of your contract value due to just commodity
pricing."
Some specialty contractors are attempting to reduce the
risk of volatile price swings by including price escalator clauses that spread
payment responsibilities in contracts, provided an owner is amenable to the concept.
"I
think contractors would like to see it become more the norm because it reduces
risk and becomes an issue of fairness," added Beiriger of the ASA of Wisconsin.Looking
Ahead Looking forward, contractors are expecting some market retrenchment
as the Federal Reserve's raises interest rates to keep a rein on inflation.
Selected
building markets continue to drive construction.
These include transportation
because money from the federal transportation bill signed in fall 2005 is flowing;
health care because baby boomers are aging; and high-rise residential because
empty-nesters and singles are choosing downtown for living.
In downtown
Chicago alone, 3,041 condominium units were delivered in 2005, and 4,446 are projected
to be delivered in 2006, nearly a 50 percent increase, according to Chicago-based
Appraisal Research Counselors.
"For the last three years, we've heard
the high-rise residential market is going to collapse in the next half-hour,"
said Warren Hill. "It just keeps going."
| Midwest City Starts
(First quarter starts; in millions) | |
YTD 2005 | YTD 2006 |
% Ch. 06/05 | | Chicago |
$4,583 | $4,691 |
+2% | | Indianapolis |
$986 | $1,022 |
+4% | | Milwaukee |
$523 | $1,348 |
+158% | | St. Louis |
$1,106 | $1,481 |
+34% | | Source: McGraw-Hill
Construction | Milwaukee and St. Louis saw major increases
in starts in first quarter 2006.
| Midwest State Starts (in billions) |
| 2004 |
2005 | % Ch., 05/04 |
| Illinois |
$21.6 | $24.6 |
+14.0% | | Indiana |
$13.2 | $14.2 |
+7.4% | | Missouri |
$10.2 | $12.0 |
+18.1% | | Wisconsin |
$12.4 | $11.0 |
-11.1% | Total | $57.3 | $61.8
| +7.8% |
| Source: McGraw-Hill Construction | The
Midwest experienced a vigorous construction market in 2005 over 2004.
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