On Oct. 29, the U.S. Commerce Dept. reported the U.S. economy grew by an unexpectedly high 3.5% during the third quarter of 2009, ending a string of four consecutive quarters of a shrinking economy. For many, this is a sign the recession may be abating. For others, this is just a sign the various government stimulus moves did their job for the time being, but more time and effort will be needed before a true recovery begins.
For many in the construction industry, it is not yet time to gear up for a resurgent market. As a trailing economic indicator, the construction sector still will have a long wait until the market rebounds. While federal stimulus money is being distributed and generating some work, state and local tax revenues are being strained. For the largest private-sector owners of projects in the U.S., many are waiting for employment to pick up and consumer sentiment to recover some of its enthusiasm before committing to major new capital projects. And with the U.S. Commerce Dept. reporting on Oct. 30 that consumer spending fell 0.5% in September, there is little enthusiasm to go around.
As part of its overview of owners, ENR once again is presenting its Top 425 Owners list. This list ranks publicly held companies based on the 2008 construction-in-progress figures they supplied to the U.S. Securities and Exchange Commission, as compiled by Capital IQ, a unit of Standard & Poor’s, which, like ENR, is owned by The McGraw-Hill Cos.
Because many publicly held firms do not separate their construction spending from other elements of their capital spending, ENR also is publishing a ranking of the Top 200 public companies ranked on their overall capital expenditures reported to the SEC, as compiled by Capital IQ .
Some evidence of the upheaval in the economy can be seen by looking at the ENR Top 425 Owners list. The company that was No. 1 on last year’s Top 425, General Motors Corp., is missing from this year’s list, replaced by Motors Liquidation Co. at No. 8. That firm was the interim entity created to handle GM’s Chapter 11 filing and the sale, in July, of the company assets to a new and independent General Motors Corp.
It’s the Economy, Stupid
For corporate owners in general, the economic recession is the big concern. “The No. 1 concern among owners is the economy,” says Wayne Crew, director of the Construction Industry Institute, an industry research organization based at the University of Texas, Austin. At the beginning of 2008, owners were worried about where they would find the resources to do all the work that needed to be done, he says, adding, “Now, they are concerned about whether anything will be built.”
Even the recent surge in GDP and the stock market has made little impression on construction-market prognosticators. “There have been some positive economic statistics coming out lately, but I don’t see any economists that are jubilant,” says Egon Larsen, global construction manager for Air Products and Chemicals Inc. “I personally think it is going to be a long, slow climb out of recession for construction.”
In the meantime, owners are being very cautious with their capital dollars. “Owners are reevaluating their capital projects very carefully because of budget cuts,” says Gregory L. Sizemore, executive vice president of the Construction Users Roundtable, a Cincinnati-based organization of large owners and construction firms. He says many owners also are reevaluating existing contracts in light of the changed market conditions and falling labor and materials prices.
However, Crew says he is seeing the first signs of interest by owners in turning the market around. “There has been an increase in the planning and conceptual stages of project development among owners,” he says. But Crew does not expect a quick turnaround. “It will be a long, slow journey from the planning and conceptual stage to the welding stage,” he says.
Buyer Beware
The cut-throat competition among contractors and designers because of the recession has many large owners concerned. “In any downturn, we see what already is a low-margin business get squeezed,” says Crew. He says this cycle is reaching worrisome levels in the current recession.
Larsen says the recessionary bidding wars in the industry are less prevalent in the big-ticket industrial-process market. “On the buildings side, there are so many more vendors, and many of them are smaller firms, so the competition is bound to be more intense,” he says. He also notes that, during the construction boom, contractors were unwilling to assume a lot of risk, but this has changed as the market soured.
Many large owners are taking steps to protect themselves against unrealistic or irresponsible bids. “We prequalify every contractor, not just based on their safety records and their experience but on their financial strength,” says Bob Wilson, manager of global project services for General Electric. However, he notes the company has...
