Diggin? Deep For Business

Making the grade for traditional excavating companies in Northwest Arkansas means not getting buried by overhead. Although local firms are covered up with work, increased competition, regulations and climbing fuel and equipment costs are pinching margins like never before.

Lynn Kelly, president of Kelly Excavating & Trucking in Fayetteville, is one of an old guard of longtime backhoe/bulldozer operators who say competition from out-of-area firms and bigger general contractors has taken a big scoop out of their segment. There may be more work, and revenues may be increasing, Kelly said, but “the local operator hopping off of a grader at the end of the day has less and less to take home.”

“Lots of guys aren’t making it right now,” Kelly said. “There’s a lot of people doing dirt work, but all of them aren’t going to be there in years to come. It used to be about the quality of the work, but right now it’s all about who’s the fastest.”

From a developer’s perspective, Mike Charlton, manager of Charlton Development Co. in Bentonville, said the run of excavators on the area is likely to thin out. He foresees a market correction coming because “there’s a gross oversupply of building lots, both commercial and residential, under construction locally today.”

“There was a real shortage of excavation workers, and the price skyrocketed,” Charlton said. “But bigger companies from Oklahoma and Missouri have come in and in the near term I think we’ll wind up with more excavators than there is work.

“There’s something like 3,000 to 4,000 building lots under way in Bentonville, where the most they’ve ever done before is like 600. So now all of a sudden there’s going to be five or six times that number hit?”

Charlton said a real plateau for prices on land and construction will likely generate some good deals. A market correction would also strain segments such as excavation, although the stumble should be a short one.

Estimating the value of the site work preparation/excavation market in Northwest Arkansas is difficult. It’s apparently not well tracked, and the majority of privately held operators say competition prohibits them from revealing revenues.

An informal survey of small and large site work contractors determined that between 15 and 20 percent of construction costs are generally related to site work and excavating. That’s dependent on the amount of construction involved, but it’s a good rough estimate according to local experts.

The valuation of building permits for the Fayetteville-Springdale-Rogers metropolitan statistical area totaled $646.8 million for 2004, according to the U.S. Census Bureau. The MSA also includes Bentonville and McDonald County, Mo.

That figure increased 28 percent from $503.6 million in 2003 and 85 percent from $349.5 in 2002.

So assuming all of the jobs involved site work (the vast majority do), and figuring at only 15 percent, that’s an estimated local 2004 site work market of about $97 million.

Big Competition

Data on the number of site work operators was equally hard to come by.

Representatives from both the Associated Builders and Contractors, a prominent national trade organization in Arlington, Va., and the Arkansas Contractors Licensing Board said their methods of data collection make accurate head counts for specialty contractors on a by-county basis a very nebulous thing.

The best empirical data available came from the SBC Yellow Pages, which in 2004 listed 52 local firms under “excavation.” The 2001 book listed about 40 firms under the same heading, and in 1992 it was only 32. Several longtime area contractors said just a few years earlier it was a lot less than that.

Raymond Reynolds, president of Reynolds Excavating & Paving Co., said when he started his business in 1975 there were few competitors. Today he employs 11 people and operates about 50 pieces of equipment including vehicles, trucks, equipment and trailers.

“I think L&L Plumbing had a backhoe in 1975,” Reynolds said. “McClinton Anchor had one, and I had one. That was it in Springdale. My father-in-law, the late O.B. Macon, got me started in the business. I added a dump truck and dozer there pretty quick, but there just wasn’t much competition.

“Today, you’ve got to watch everything. You’ve got to operate a lot smarter with the big guys getting in on it.”

The Ozark Division of Nabholz Construction Co. in Rogers was one of the first traditional big GCs to diversify into dirt work. It formalized its Northwest Excavation business unit in 1992 to better market that division.

Quintin Hilburn, an executive vice president at Nabholz, said his firm’s excavation division has a 1.5-year backlog of work worth about $150 million. Jim Spotts, president of Northwest Excavation, said his team operates 10 crews and has another six crews that it subs out.

Even with Nabholz’s economies of scale, however, Spotts said it’s not about just overpowering projects with money.

“Nabholz is very big on cost management and tracking,” Spotts said. “We have about six full-time clients that keep us too busy to do much else, and we have to be efficient to keep those folks happy.”

Other titans such as Basic Construction Co., Lindsey Construction Co. and even entrepreneur J.B. Hunt have gotten into dirt work in recent years.

Big Iron

Dave Covington, president of Decco Contractors-Paving Inc. in Rogers, is another longtime excavating, paving and utility contractor. His family owned company employs 130 people in its 35th year of business including five family members.

Covington said the sheer cost of equipment, referred to in the business as “big iron,” scares some small firms off. A new DCR Caterpillar Crawler tractor, for instance, retails for $250,000. A John Deere or Caterpillar motor grader is about $275,000. Kamatzu and John Deere track hoes run in the $150,000 range, and a brand new earthmover is a $250,000 to $350,000 investment.

Overhead for equipment such as automatic laser and sonar grading systems is one of the reasons Kelly said he decided to downsize by a few employees. Reaching a more manageable scale allowed him to better control costs and reduce some equipment needs.

Kelly has eight employees and 20 pieces of “big iron.” His father, Leonard Kelly, started the firm back in the 1940s but it’s been in the last decade that it really came into local prominence.

Recent Kelly jobs have included Fayetteville’s Blair Public Library, the recent addition to Sam’s Club headquarters in Bentonville and the ongoing corporate expansion at J.B. Hunt Transport Services Inc. in Lowell.

The largest hole he ever dug was 400 feet long by 200 feet wide, a 36-foot-deep crater for the new Lowell water treatment plant. To keep his business out of a similar hole, Kelly said, he relies primarily on referrals and reputation. Covington and Reynolds do the same thing and also prospect leads out of Dunn & Bradstreet reports.

Some of Covington’s prize projects of late include the new St. Mary’s Hospital in Rogers, the coming Pinnacle Promenade, parking lots at the Northwest Arkansas Regional Airport and numerous subdivisions.

Reynolds said about 80 percent of his business is site work, and 50 percent of that is for subdivisions all over Northwest Arkansas.

Big Headaches

Excavators also have variables such as weather, topography and geology to contend with. Covington said an average local five-acre site-work project might cost $300,000 to $400,000 if the ground is relatively level. With good weather, it could get done in a month to six weeks.

“Years ago we had such bad winters, I’ve seen a load of gravel where it was frozen in chunks the size of a loader bucket,” Reynolds said. “Our weather has changed considerably in the last 10 to 12 years, but when it’s wet like it has been lately you just can’t get anything done.”

Kelly hit a solid city block of sandstone and limestone on the Fayetteville library project, and it eventually had to be blasted out. Even caught between rocks and a hard market, Kelly said dealing with local permitting is still the toughest part of his business.

Laws and required permits related to mining, storm water runoff, dumping, excavating and even building pads can bog down a small operator.

“When you have to go through a city to get a grading permit, sometimes it’ll take three months,” Kelly said. “In the meantime, you can’t line up too much other work because you don’t know when it’s going to come through.”

Reynolds said over the years he’s gotten disgusted a couple of times and quit. But he keeps coming back to dozer work because he enjoys being outside and doing quality construction that helps shape the community.

Charlton suggested the local guys might have the upper hand in the long run. The out-of-town firms who’ve crashed the market aren’t as familiar with local inspectors and the various cities’ idiosyncrasies, he said.

“That’s a problem when these cities are coming up with rules faster than even the local guys can keep up with,” Charlton said.

The key to survival is taking a sharp pencil to the yardage on every bid, Kelly said. That, plus a little skill.

“Anyone can run a backhoe,” Kelly said. “But you have to know what you’re doing with it.”