And companies also have to keep staff morale strong to avoid losing employees to rivals when a recovery begins, Di Filippo says. “You want to make sure they see the opportunities you offer, that you’ve been training them all along, that you’ve been making them feel appreciated even though there are economic challenges,” he says.
Labor Contract Showdown
Few construction industry leaders believe they’ll see a turnaround in the first half of 2011 in the New York region. But they may see one an important milestone by midyear when 30 New York City labor-contractor collective bargaining agreements are set to expire on July 1.
The current crop includes some of the biggest unions, including the steamfitters, operating engineers, carpenters, and laborers. And a standoff looms over costs, says Louis Coletti, president and CEO of the Building Trades Employers’ Association.
Coletti says contractors are getting pressure from owners’ groups, such as the Real Estate Board of New York and hospital associations, all of which want to build with union labor because of its advantages in skill, project coordination, quality, and safety. But he says they are telling his contractors that the cost differential between labor and nonunion construction is too wide. “They all want the same thing,” Coletti says. “There was a 30% cost differential between union and nonunion at the height of the market in 2007, and we have been able to reduce it to about 20% through the project labor agreements and cuts the contractors have made in their own profit margins and overhead.”
And while he says unionized construction has “not done a good enough job” at marketing its value, he says the “differential” owners are willing to pay for union expertise is lower than the current level, requiring fundamental work rule changes – and not just temporary pay adjustments – to make project sites more efficient.
“I believe we have reached a potentially transformational moment in the New York City unionized construction industry,” Coletti says. “What the industry will look like moving forward will be determined on the success or failure of changes to reduce the costs of construction that are agreed to in those collective bargaining agreements.”
But Coletti acknowledges labor has a different view. “The contracting community believes that the financial crisis has created a permanent change in the structure of real estate financing,” he says. “We’re not so sure that labor agrees with that.”
And indeed, labor unions don’t agree the market has structurally changed, says Gary LaBarbera, president of the Building and Construction Trades Council of New York City. “There’s no doubt the economy has created very difficult scenarios, and the project labor agreements were designed to mitigate those problems,” he says. “We’ve been in a very bad recession, the worst since the Great Depression. But I think where the views tend to split is that we don’t necessarily share the same long-term view the contractors do. We think the work opportunities are going to pick up at the end of next year going into 2012.”
LaBarbera says those divergent views are going to color the negotiation process. “We’re all ultimately negotiating with the market, but we think when negotiations start next spring, we’ll have a more clear view of the economic outlook for next year,” he adds. “Everyone intends to go to the bargaining table in good faith and reach agreements that work for everybody.”
Coletti says the contractors are making efforts to show this round is different, such as pushing up the negotiating timetable, possibly into January. Another is to cancel the annual Florida winter retreat that both sides have used as an informal negotiations starting point. And the last is to not plan a replacement for the “Economic Recovery” PLA that expires in March, a deal that had lowered rates for private developers during the recession. “We haven’t talked about it because what we’re really looking for is permanent change in the contracts,” Coletti says.
Subcontractors in Distress
Among the darkest clouds looming over 2011 for the New York region’s construction industry is the state of subcontractors – and how many of them may falter this year.
“The subcontractor community is starting to see the wear and tear of this recession,” says Joe Hogan, v.p. for building services at the Associated General Contractors of New York in Albany. “The risk of subs defaulting on projects is getting greater, and [general] contractors now have to look for signs of stress.”
Contractors and subcontractors generally aren’t the best judges of their own limits, says Mike Kolakowski, CEO of KBE Building, a contractor based in Farmington, Conn. “Some guys are just trying to hang on and really taking on work a whole lot cheaper than they should,” he says. “These are subs that had been profitable and had big backlogs of work in the past, but the concern in this market is will they be around to complete projects of long duration?”
Subcontractors – all across the marketplace, regardless of trade – are indeed taking jobs just to keep their crews together and funding work out of their reserves, says Ron Berger, executive director of the Subcontractors Trade Association of New York City. And the ones in the most dire shape are filing for Chapter 7 or Chapter 11 bankruptcy, with more than a half dozen at the end of the year and more to follow in 2011, he adds.
The biggest problem they all face is cash flow – and the inability to get paid on time from contractors and owners, Berger says, citing examples of projects on which subcontractors haven’t been paid for more than a year and a half. “There is so little work out there, and we’re laying out large sums of money for materials and labor but waiting unreasonable amounts of time to get reimbursed,” he says. “It’s just not fair.”
Berger says the public sector, where most of the work is today, is actually worse on payments than the private sector, noting that the N.Y.C. School Construction Authority has thousands of unresolved change orders running into the hundreds of millions of dollars.
AGC’s Hogan says anything that contactors can do to help the subcontractors on their jobs is bound to reduce project risk. He says some subcontractors have begun to not pay their own bills to suppliers and labor funds, but if they go under, the contractor in some cases could find itself on the hook for the unpaid balances. “Make sure that the money is flowing,” he adds.
But contractors should also seek transparency about finances from their subcontractors, he adds. “They have to watch for the signs,” Hogan says. “Ask the sub to be open about the books, or consider issuing joint checks or making other adjustments. It’s a time of real caution.”
