If stimulus funds can't stimulate the contruction economy, what will?
The ARRA provides stimulus funds - and plenty of hoops - for construction projects
No one would disagree that the construction industry has been hit hard by the recent economic downturn. Not only is demand down, but money is not available – and I am not just talking about for highly-leveraged, speculative deals. The so-called stimulus funds – P.L. 111-5, the American Recovery and Reinvestment Act of 2009 (ARRA) – makes funds available for construction, but not everyone will want the funds or qualify to get them.
Shovel ready
To qualify for stimulus funds, projects must be shovel ready. Few large construction projects can be started without a significant amount of up-front design and development work. Preference under the ARRA is supposed to be given to funding infrastructure improvement projects in which at least 50 percent of the funds will be spent within 120 days of enactment of the law. (§ 1602)
Types of projects
Only certain kinds of projects qualify for stimulus funds. This is a 400-page law, doling out money for dozens of different types of projects such as watershed and flood prevention operations, broadband technology opportunities and community-oriented policing, but fitting within the definitions and qualifications for construction of facilities for any one of them is not easy.
Prevailing wages
To qualify for stimulus funds, projects also must pay prevailing wages. "Prevailing wages" is a term contractors who do public work know well. It refers to minimum wage rates set by government agencies that contractors and subcontractors must pay their field workers and is generally interpreted as a means to create a level playing field for union contractors (so non-union firms can't easily underbid projects based on wage rates). Many communities typically don't use prevailing wages and have said they don't have enough money – even with ARRA funds – to cover the additional cost. These communities aren't applying for the funds.
Buy America
ARRA-funded projects must comply with Buy America requirements. Federal contractors know about this – Office Depot, Staples and OfficeMax settled claims of Buy America violations for $4.75, $7.4 and $9.8 million respectively. The feds mean business. Many shovel-ready projects were designed and priced based on lower-cost or more readily available foreign goods. The allotted time to re-design and purchase domestic products might make it impossible to meet ARRA requirements, and the extra cost might break the public's owner's budget.
So, with little federal help, what is happening to the construction economy?
• Less private work and less public work. This is not evenly spread across the country, though; Kansas and Missouri have been spared the worst of the downturn.
• More surety bonds. For public projects where the general contractor has to give bonds, its own surety is more likely to require bonds from subcontractors to spread the risk. For private projects, lenders are demanding borrowers hire only bonded contractors. This limits the pool of contractors and subcontractors who qualify for the work.
• Lower prices, lower profits, lower wages. To keep the doors open, contractors will take riskier work and work at lower prices. To reduce overhead, company owners are not taking salaries and employees are taking pay cuts. Companies are postponing equipment purchases, reducing leased spaces.
This is not the first downturn the construction industry has weathered, nor will it be the last. Some smaller contractors who don't have money saved – and some larger ones who take on high-risk work – might not make it. Experienced contractors know how to manage their costs and resources to get through it, as they always have done. 
Susan McGreevy
Stinson Morrison Hecker LLP
P | 816-842-8600
E | SMcGreevy@stinson.com