Mitch Hoefer, principal at Hoefer Wysocki Architects, told an indicative story of a court building project for which numerous competitors had already spent hundreds of thousands on initial design. When more stimulus money came available, however, the competition was started from scratch on a now-expanded project. “So everybody spent another $100,000 a team to go after it and supposedly stimulate the economy,” said Hoefer.

There is frustration on other fronts as well. Joe Mabin, executive director of the Minority Contractors Association, observed that some benefit had accrued to the small contractors who do projects such as weatherization and lead-based paint abatement, but the larger, more established women and minority contractors need larger projects—and these projects have not been forthcoming, he said.

Connections

The question was raised as to whether the awarding of bids on such highly competitive projects was driven by recognition of quality or by acknowledgment of good connections.

Mike Johnson, president of Excel Constructors, believes that awards are generally qualification-based “as long as the numbers are low.”

Mitch Hoefer was not quite so sure. “Relationships absolutely do matter,” he noted. “You have huge companies fighting to keep their doors open, and they’ve obviously backed one party or the other or one candidate or the other and they’re pushing hard to get that selection process made in their favor.”

“If you really look at where the stimulus money went,” said Dan Euston, “it was very strong on the coast and in certain geographical areas, but we got a very small piece of that pie.” He cited politics as one likely explanation.

Bid Spreads

Carl Privitera posed the question to his fellows as to whether there should be concern among owners as well as among general contractors regarding the recent trend towards the large spreads in costs by bidders on construction projects.

There was a good deal of concern. Dan Euston anticipates a “blood bath” when certain owners, who thought they were getting a really good buy, discover too late that their lowball contractors and subs start failing. “People have taken jobs too cheaply,” said Euston. “Subs have taken risk, and I think it’s going to translate into more failure.” Euston believes that the smarter owners are taking a collaborative team approach to come up with the best project, not necessarily the lowest bid.

“It’s a pyramid effect,” said Ernie Straub. When the owners stop paying enough to cover a project, the cost squeeze works its way down to the subcontractors. “I would be real concerned,” said Straub to both owners and general contractors, “that whoever you hire is financially strong and can handle some pressure.”

“Ultimately, it’s the people who are able to keep their overhead down, manage their cash, and survive the storm who come out on the other end,” said Susan McGreevy. She worried that weaker competitors would take projects and not be able to finish them.

As Patrick Pribyl explained, 2009 was a great year for the surety business, because whenever one subcontractor went down, there were three or four other subs willing to take over the work at the same or lower price. But 2010 may be different. In fact, Pribyl anticipates a “perfect storm.”

“How hard will it be? What will be your recovery once it leaves? That is kind of what we are bracing for,” Pribyl added.

“The risks are tremendously more broad than they have been in other times,” agreed Augie Huber. He explained that with normal margins, contractors can stand a small loss on a particular job. “But everyone is working so thin,” he noted, “a major loss digs deeper back into their pockets and could perhaps take them down.”

Dan Euston gave as example one subcontractor who, when asked to cut his price, said, “I went in at zero, where do I cut? Should I pay you to do the job?” Euston compared the current environment to a game of Russian roulette.

 

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