[note: this article was first published on August 8, 2011]
Today we have a guest post by Joel H. Miles, President of Miles Consulting, Inc., a management consulting firm specializing in the construction industry. Joel has 40 years’ experience in the industry, working in the areas of finance, strategy, operational management, ownership transfer, mergers and acquisitions, valuation, and litigation support.
The construction industry has been one of the hardest hit by the economic turmoil of the last several years. Generally, non-residential construction is experiencing volume levels roughly half of those of 2007. According to Engineering News Record, the level of unemployment in the industry is 16.3% (in May 2011, compared to 7.4% in 2007).
While there have been a number of bankruptcies already among construction firms, as well as suppliers to the industry, in the last two years, there is reason to believe that there could be a significant number of new failures in the next year. One reason is that for a long time after the onset of the recession, contractors were working off the backlogs of uncompleted work acquired during the strong years of 2005-2007. This has merely postponed the day of reckoning. In an industry traditionally known to have overcapacity, the downturn in the overall amount of work will exacerbate this problem, and inevitably lead to a number of firms “leaving” the market, either voluntarily (strategic decision making) or, more likely, involuntarily (bankruptcy or insolvency). There appear to be a number of general building, specialty trade, and civil contractors who are in financial trouble.
A telling statistical indication of trouble for the immediate future is the Carolinas AGC Construction Activity report for the first quarter of 2011. The dollar amount of construction awards for the first quarter, by category of work, with the percentage change from the same quarter of 2010, are as follows:
This means that already-depleted backlogs are getting worse, not better. There will be further financial “dislocations”, bonding companies will probably be taking over work where their surety bond customers are unable to complete on-going projects, and construction litigation will almost certainly increase. This is not a pretty picture, and those who have long predicted that the overcapacity problem will be corrected by a reduction in the number of contractors may finally prove their case.
Those with a vested interest the financial health of the contractors and construction industry suppliers (i.e., owners of on-going projects, banks with outstanding construction loans or other loans to contractors, surety companies, and employees of affected contractors) may be in for a period of uncertainty and those with the ability to mitigate the ensuing damage should make every effort to do so.
As with all periods of major change, opportunities are presented. For the strongest in the industry, the time is right for strategic acquisitions (when valuations certainly are favorable to buyers). For banks and bonding companies, active participation may mitigate losses, as opposed to a reactionary stance after the damage has become unavoidable and large. An industry specialist can help.
Joel and I welcome your thoughts and opinions in the comments section, below.
In case you can’t see the sign clearly, it reads:
