Giants fight through another tough year

May 1, 2010
Last year may have been one to forget for many contractors and this year isn’t going to be much better. The commercial, industrial and institutional markets that large mechanicals depend on will be down drastically this year.

Last year may have been one to forget for many contractors and this year isn't going to be much better. The commercial, industrial and institutional markets that large mechanicals depend on will be down drastically this year. A big change this year is that state and local governments are broke. Contractors used to be able to find work in K-12 schools, state university systems and prisons. These days, water and wastewater projects, which can be funded with revenue bonds, are among the few local projects left.

According to construction consulting firm FMI Corp., commercial will be down 29% this year, and down another 6% next year. The lodging category will be down 35% this year and office buildings will be down 25%. Industrial will be down 35% this year and 17% next year.

Single family residential will be up 15% this year, but that's from a small base of around 650,000. It will increase by double digits each year. Maybe that will get some of the residential market refugees out of the commercial market. FMI is forecasting multi-family to remain slightly down for the next two years and not take off until 2012.

At least costs are under control, with the exception of puzzling copper prices.

"Copper makes no sense," says EMCOR Group President/COO Tony Guzzi. "I don't know why it’s so high. Demand is off so significantly, how could it possibly be over $3.36/lb, up from $1.60 in March '09?" The price may be a combination of speculators and demand from China, Guzzi surmised.

"We're wondering if it's a flight from equity," Paul Jordan, CEO of the CorVal Group Inc., St. Paul, Minn., says of copper. If money goes back to the stock market, then commodity prices could drop.

"Material pricing is down from where it was two to three years ago, although we're seeing it inch back up," says Donald Yerks, director of manufacturing, Dunbar Mechanical Inc., Toledo, Ohio. "We use a lot of stainless steel and that's going back up."

Equipment prices are holding. "On the materials side, OEMs are exercising a decent amount of discipline," Guzzi says.

Unions, depending on the area, have been willing to deal. In some locales, the plumbers are willing to make concessions but the pipefitters are busy and they won't. Some unions have been willing to split wage increases over two years or change crew ratios.

"We're a self-performing union contractor and it’s been an 'all hands on deck' attitude,” says Jordan. Some locals have delayed wage increases and some have split increases over two years, he says. Jordan says the cooperation is broad-based; Cor-Val Group has agreements with 150 locals, from the United Association to cement masons, and most of them have been willing to help out.

2011 can't come soon enough for a lot of contractors and, fortunately, market predictions for next year are a lot better, both from FMI and word on the street.

In 2011, FMI is projecting seven CII categories to be up, albeit modestly: healthcare, educational, religious, public safety, amusement and recreation, transportation and communication, along with three relevant non-building categories of power, sewage and waste disposal, and water supply. FMI is forecasting all categories of residential, non-residential and non-building construction to be up in 2012.

Lonnie Coleman, president of Coleman-Spohn Corp., Cleveland, can recite a laundry list of large projects set to break in 2011, including a $1 billion research facility at Ohio State University, along with four casinos in Ohio and several hundred million in medical construction in Cleveland.

Robert Krier, president of Hill Mechanical Group, Franklin Park, Ill., is teaming up with U.S. Engineering in Kansas City, Mo., to be part of a joint venture that's trying to win a billion and half dollar data center in Utah for the National Security Agency.

In the meantime, Guzzi's tactic for 2010 is one that other mechanicals would do well to emulate: "We'll get in front of customers with good energy-saving ideas on how to take cost out of their businesses. On the construction side, we'll be very careful and right size our operations to live and fight another day, take the best work that we can and not get a belly full of bad work."

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