Commercial building.

PositionIndustry Outlook - Interview

The construction industry was the first to be hit by the Great Recession, and many believe that it's construction that will lead us through the recovery. But industry insiders fear that with federal and state projects dwindling, and with limited funding options, the construction industry has several years of recovery still ahead.

We'd like to give a special thank you to Rich Thorn, president of Associated General Contractors Utah, for moderating the discussion and to Holland & Hart for hosting the event.

What is the current state of Utah's construction industry?

MOORE: To determine how the industry is doing, we have to look at what's happened over the past four or five years. In 2006, we had a little over a billion dollars' worth of market in front of us. In 2007, we had almost $1.5 billion of construction that was put in place in the Utah market. In 2008, we started to see a little bit of decline, to about $1.3 billion. In 2009, we went down to $825 million. In 2010, our industry is down to $565 million. If everything goes well, we're predicted to reach $800 million in 2011. There's opportunity, but we've all got to share that market share, right? We've all got to get our piece of the pie and that's not easy. The competition is tough in Utah.

The other thing that's important to note is the employment rate we have in Utah. In 2007, the [construction industry] had 101,000 employees in the Utah marketplace. In today's market, we are down 41,000 employees. The industry is still 17 percent unemployed here in Utah. Other markets around us, like Arizona, Nevada and California, are much worse than we are. But holy smokes, when you lose 41,000 folks and our average is $19.75 an hour in salaries, it's a big, big hit to the state.

One positive is that the federal government is providing some opportunity with the stimulus money, especially in road and heavy highways. The $2.1 billion that has been put into the Utah market has been great, and local government is also providing some opportunities.

HOGAN: You alluded to $2.1 billion. A lot of that was state-funded money. We saw a presentation at the AGC that indicated those funding sources are tapering off rapidly and it's not a gentle curve--it's a vertical line.

THORN: The numbers we are hearing on the highway market, particularly with the unknown status of the federal highway bill, is Utah's market will be about half of what it's been.

HOGAN: And the taper-off from this year to next year will be substantial. You've got the I-15 corridor that has been contracted, you've got the Mountain View corridor that is going to be under contract, and those numbers are going to drop dramatically from 2011 to 2012.

DUTSON: It's been very difficult, but I'm actually getting more optimistic about 2011. It's been a rocky road to say the least--hopefully we are at the bottom.

What do you see in the heavy highway and material supply business?

PARSON: Sobering is the best way to describe the market, and it's been that way for several years. The outlook for next year is also pretty sobering. Something we need to remember on tracking state funding is the importance of tracking work put out to bid versus what is currently spent, and those figures are not easy to come by, even from UDOT themselves. But what really needs to be the gauge is the amount of work coming out for contract. We are basically falling off a cliff funding-wise in about two years, when most of the transportation funding sources will end.

Another thing that is very concerning to me, not just from a contractor standpoint but also from a taxpayer standpoint, is the fact that 50 percent of UDOT's built-lane miles have no maintenance funding. Once you miss the critical point to do maintenance on a roadway, you pass a point of no return to where a total reconstruct is really your only option, and we clearly do not have the funding to do that. There needs to be a rallying cry from our industry and from taxpayers that maintenance of our existing investments has to be a much bigger priority for UDOT and for all of us.

HOGAN: If you drive the rural parts of the southeastern and eastern part of the state, those roads have been neglected for 10 years. It's been patchwork at best. I agree that this is a real crisis--we've got to maintain our infrastructure.

How is the surety industry faring? Are you seeing a lot of surety claims?

WALTER: The data that I've seen shows that the surety industry, surprisingly, is still doing very well. They have made significant profits over the last several years and those profits continue to hold up, not only nationwide, but especially here in the state of Utah. I anticipate no tightening of the surety underwriting going forward.

We are seeing the number of claims come up primarily from subcontractors, utility subs, electrical subs and drywall subcontractors. Those are starting to percolate in the number of unpaid suppliers. The number of notices that we're receiving from suppliers that they have not been paid is going up. The supplier community is aggressively trying to make claims on bonds.

D. CAMPBELL: General contractors are also bonding their subcontractors more now than they did in the past.

WALTER: I agree. There is more subcontractor bonding, more joint controls and joint checks by generals to their subs and suppliers. Everybody is watching their backs.

What is a big electrical contractor's perspective? You cover multiple disciplines: Commercial building, heavy highway, industrial. From a subcontractor's point of view, what are you seeing?

HUNT: We're starting to see some glimmers of hope in the private sector, but there are extreme pricing pressures right now from a subcontractor's point of view. It's super competitive. We see roadwork tapering off as well. We're fortunate to have some longer projects going on right now, but it's very competitive. There is no difficulty with finding manpower, which was a major issue we had a few years ago. There are a lot of great people out there right now, so it's good that we're able to upgrade and find good people.

P. CAMPBELL: What we're all experiencing now is how business is going to be for the next several years, so we are adjusting to this level of business. The idea that we can all weather the storm and hope it comes back--I don't think that's going to happen anytime soon. Residential will come back faster than commercial, but commercial is going to be out quite a ways. There are some big commercial projects now that are really helping things, but they will end and hopefully by then private money will be flowing again. But the way we look at it is this is business for a while, and companies need to adjust.

It's been said that construction is on sale. How do we...

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