There’s no question that in the construction business, it really feels like “when it rains, it pours.” This is an industry that has seen the meanest kind of droughts, gang-buster spurts and the leanest profit margins. At the same time, though, when the industry turns around, as it started to do in 2014, it can suddenly seem like the industry is nothing but sunshine and daisies.
According to Sageworks (a financial firm), sales for privately held construction companies grew at an average rate of 17% in 2014, making it the second fastest growing industry, behind real estate brokers and agents, an industry that grew 23%. It was followed by four other construction-oriented businesses: wood products, foundations and building exteriors, utility systems contractors and lumber and other construction materials; all of which grew by at least 15%. Following them was the computer design industry which grew by 14%, and then six other construction-oriented industries–all within the top 20 industries on the list.
For privately held construction companies, that 17% growth rate even exceeded the previous year’s growth rate (14%).
Even more encouraging, “residential companies are growing sales at an extraordinary rate and earning pre-recession profit margins. In other words, they are not only increasing revenue, they are also squeezing more profit out of each revenue dollar,” said Sageworks analyst Libby Beierman, in an interview for Inc.
How did this happen? It looks like pent up demand from the very prolonged recession, when combined with the return of jobs and financing created the perfect 1-2 punch that bolstered the market.
Even so, at the same time, public works projects continued to slip. But government cutbacks put the squeeze on revenue in the public sector. (This doesn’t have a direct impact on growth among privately held firms, which can also bid on public projects.)
After a 1.7% drop in January, construction spending continued to fall for the second consecutive month in February, with most of the negative impact coming from the public sector. Construction slipped 0.1% to an annual rate of $967 billion, the Department of Commerce said.
In both months, brutal winter weather was partly to blame. Economists had already estimated that spending would be flat for the month but then spending on private construction rose 0.2% with a 1.4% gain in single-family housing and 4.1% growth in multi-family buildings. Spending on public projects – which largely consists of education projects, highways, and bridges – dropped 0.2% that month.
Simply put, private construction projects are carrying their weight, but that doesn’t make a great difference for the firms and companies gearing up for massive projects, like roads and bridges.
A company designed to pave roads or to construct a 2 million square foot school building is not necessarily geared towards hiring only small crews of four to 24 men who are used to hammering up frames and putting down flooring in a new subdivision. Projects that occupy a small footprint on a third of an acre rarely require cranes (or the people who know how to operate them). Hence, the sudden fight-for-scraps feeling among the largest firms in the country, the few who are geared for $2 million to $20 million projects.
It is among these firms that the profit margins are slim to none. In fact, when the boom is not booming, the profit margins that sound so lavish today are actually among the slightest in the country.
Prior to the recent growth spurt, where did residential building stand in the world of profit margins? Among U.S. industries, according to the online magazine Chron, residential building was in last place, ranking 97th on the list with profit margins of 0.78%, a sharp drop from 2006, before the recession, when profit margins stood at 4.84%.
Not far ahead of that, in the 96th position, was highway, street and bridge construction with margins of 0.83%. And, moving up the ladder, third from last, was utility construction with profit margins of 0.88 %. In fact, out of the 10 lowest profit margins, only one – printing and related services – had nothing to do with construction.
By comparison, the top five included accounting (above 18%), dentists at 17.04%, legal services at 16.75%, healthcare professionals at 16.14% and “other” financial investment services at 16.11%.
It follows, then, that many are now calling on states to use pre-qualifying tests to judge whether or not a company can bid on public projects. But the imagined migration of small firms with roofers and carpenters, like Precision Roofing Inc, chasing the “big boys” for public works projects is a myth. You can’t bid on a road project with construction license and a hammer. Furthermore, why would you when life and work in the suburban subdivision is good and that’s where the money is anyway? These smaller companies are not bidding on multi-year contracts that will force them to compete against industrial-sized earthworks firms and construction companies with 20 cement trucks and 10 cranes in their arsenal.
This makes it all the more imperatives, some say, to make sure what is left for the big companies is not usurped by cheap under-bidding firms who are aiming for contracts as the cheapest company that can get the job done.
Pre-qualifying tests run through a wide spectrum of screening questions from finances to safety records and making sure that a business has the proper bonding and contractors insurance. In California, pre-qualifying questions include current average lost workday incident rates, professional licensing and credentials, financial security, pending legal issues and questions pertaining to why the company may have been denied permission to bid on public projects in the past.
In other words, you are either in the club or you are not in the club. This is just a question of the big boys protecting their turf.