Subcontractors Find Strategies For Riding Out Tough Economy

With construction in Northwest Arkansas and the rest of the country at a near standstill the last couple of years, large numbers of subcontractors have left the battered industry.

Greg Crow, administrator of the Arkansas Contractors Licensing Board in North Little Rock, didn’t know offhand how many subs have gone out of business post-recession, but said, “My gut tells me we’ve lost more subs than contractors.”

And the state has lost a lot of general contractors. Crow said at the height of last decade’s construction boom, around 2007-’08, there were about 4,500 licensed residential builders in Arkansas.

“Now we have about 1,500,” he said.

But though their numbers are fewer, jobs are even scarcer, and subs must fight harder to land the work that’s out there. Those who remain in business say they’ve had to get creative and stay flexible.

“Any contractor today has to be prepared to go much farther to find work, and be prepared to look at other categories that may be out of their comfort zone, said Ken Simonson, chief economist of the Associated General Contractors of America in Washington, D.C.

J. Ray, manager/estimator at Morrow Plumbing Heat & Air Inc. in Farmington, said Morrow has stayed afloat by doing both residential and commercial work. While few homes are built on spec any more, the company still works on new custom homes and home renovations. They fill in any gaps with commercial work, he said.

Like most subs, Morrow also sends its workers out of town for jobs in Little Rock, Oklahoma and Missouri because of the lack of work in Northwest Arkansas.

“We’re staying really busy,” Ray said. “We’re fortunate.”

 

Tight Margins

Morrow has about 18 employees, a number that hasn’t changed in the last couple of years, Ray said.

It’s current projects include a new addition at First Christian Church (Disciples of Christ) in Bentonville, a remodel of the Metfield Clubhouse in Bella Vista and an upgrade for Springdale Dodge.

General contractors Morrow works with include C.R. Crawford, Don Peters Construction and Van Tassel-Proctor.

Ray concedes that bidding is much more competitive these days. But he said Morrow’s business largely comes from repeat customers and referrals.

“We cater to the customer, and that helps us get jobs even if we bid higher than the other guy,” he said. “You can get more jobs by doing very good quality work, and having employees that are of high standards.”

Ray declined to say what his company’s profit margin is, but offered, “If you do a $100,000 job, you’re lucky if you make $10,000 profit.”

Trey Hoskins, who was general manager at The Fleming Cos. for more than two years, said the traditional 10 percent margin on jobs is largely a thing of the past.

“If you get a 10 percent margin when you bid a job, you’re doing something right,” said Hoskins, who just started as business development manager at Graybar Electric.

Most companies have to accept a lower bid – or bring in a superintendent who can finish the job faster and under budget, he said.

“They can make a 10 percent margin if they do that, but you’ve got to have the right person on the job every time.”

In the last year, Hoskins said, he’s seen a lot of subs go out of business because there wasn’t enough profit in the jobs. Still, the bidding process is cutthroat, and he suggests subs strategically decide what projects they want to go after so they don’t waste time bidding on every job that comes along.

“You might be competing against 10 people,” he said, “where during the [building] boom, contractors were actually begging subs to bid jobs.”

 

Trust Factor

Hoskins recommends subs put more emphasis on how they market themselves, such as using business development personnel and looking for opportunities through word of mouth and networking.

“There is work out there in Northwest Arkansas,” he said, “but you have to be creative in how you go about getting it. You also have to brand yourself as a leader in your industry.”

Brentt Tumey, director of operations for family business MSI Drywall Inc. in Rogers, also stressed networking and building relationships as important strategies for subs in a competitive climate.

Tumey is active with the Northwest Arkansas Council, and serves on the state board of the Associated Builders and Contractors, an Arlington, Va.-based trade group.

“There’s that trust factor,” he said. “In times like these, you need everything you can get your hands on to prosper. Somebody you know is going to have some good ideas, some good leads, some good solutions.”

His company, which currently has about 200 employees, has always worked all over the country, he said, and Texas and Oklahoma City are especially good areas right now.

In Northwest Arkansas, MSI recently finished work on Bentonville Parks & Recreation facilities and the Promenade Pointe buildings in Rogers.

Joe Whiteside, president and CEO of RGC Glass Inc. in Fayetteville, said his company has responded to the market conditions by looking within to focus on improving quality and efficiency.

“There’s been a little bit of weeding out in the last couple of years of glass and glazing companies, but it’s certainly gotten more competitive with the small group of people we compete against,” Whiteside said.

“We can’t control that, but we can control how we go about putting our projects together and getting the best prices from our vendors. It’s important to keep quality high so you don’t have to fix mistakes or go back and redo work.”

In fact, he said RGC gets quite a bit of work servicing projects built during the boom years by companies whose work “possibly wasn’t performed in the most professional manner.”

Attention to quality, as others pointed out, carries even more weight in a down economy. Whiteside cautions subs to ensure their efforts to reduce their pricing don’t result in poorer quality.

Conversely, contractors choosing subs need to make sure they are getting good quality, he said.

 

What’s Ahead

Statewide, 30,300 people were employed in specialty trade contractor jobs – like plumbing, mechanical and electrical – in July, the U.S. Department of Labor’s latest figures show. That’s up 2,000 jobs from the previous month, and 1,100 more than in July 2010.

Simonson said construction employment has stabilized in the last year and a half, largely due to federal stimulus funding for projects like highways and schools.

“Most of those projects are wrapping up,” he said. “But now the private sector is showing signs of life.”

Simonson said that not only is the state benefiting from drilling in the Fayetteville Shale, but “the whole area of power construction is looking very positive, such as retrofitting power plants to reduce their emissions, as well as solar, wind and other forms of alternative energy.”

While some in the building industry say multifamily housing will provide the next area of opportunity, Kathy Deck, director of the University of Arkansas’ Center for Business and Economic Research, said in a news release with last week’s multifamily Skyline Report that it’s too soon to start building large apartment projects in Northwest Arkansas.

“While it is good to see multifamily vacancy rates down to near 2006 levels, we really must caution builders against adding more units to the market at present,” she said in the release.

Anirban Basu, chief economist of the Associated Builders and Contractors, wrote in a recent report that a stronger national economy earlier in the year boosted construction contracts, especially for subcontractors that work on commercial and institutional projects.

But, he wrote, “with the economy weakening in recent months, construction backlog among these smaller firms may begin to decline again.”

A bright spot in the report released Aug. 16 was Basu’s note that the South continues to report the lengthiest construction backlog of any major region, with project orders rising to 9.3 months in the second quarter compared with 7.43 months a year ago.

Locally, Tumey said he’s been hearing rumors that things are going to be picking up, “but we haven’t seen it.”

“I think anybody that wants to predict doesn’t know what they’re talking about,” he said. “I don’t think anybody knows. We need to stay on track. 

“If we got a million jobs tomorrow, we’re going to continue doing things the same way we’ve been doing them.”