Residentials at the Gate
July 2008Privately owned housing-starts in March were at a seasonally adjusted annual rate of 947,000. This is 11.9 percent (±11.6%) below the revised February estimate of 1,075,000 and is 36.5 percent (±5.2%) below the revised March 2007 rate of 1,491,000.
Given these numbers, the expectation is that residential contractors will soon—if they have not already—begin to look elsewhere for work.
As a California contractor puts it, "If I built 800 homes last year and it looks like I’ll build 80 this year, I would definitely look elsewhere for jobs, too.”
And that elsewhere, more often than not, seems to be the commercial arena.
GOOD NEWS/BAD NEWS
The bad news first: Residential contractors, out of survival necessity, have indeed begun to bid commercial jobs and will continue to do so until the housing starts pick up again.
The good news: This will not necessarily affect the commercial wall and ceiling contractor adversely. In fact, by our informal and unscientific survey of AWCI member wall and ceiling contractors, the impact varies not only from state to state, but by union affiliation or not, by GC relationship and by individual approaches to weathering the storm.
Let’s see who is affected, and who’s not.
WHAT ARE YOU TALKING ABOUT?
In Vermont, Jeff McFarren of Green Mountain Drywall says he hasn’t seen many residential contractors knocking on his region’s commercial gates.
"The people we are bidding against are the same people we are always bidding against,” he says. "Up here, we deal with the same builders all the time and they don’t shop us much. They know our work, they know our quality, and they stick with us. That keeps us going.”
But he is aware of the growing trend and offers this solution: "You have to be selective. We’ve seen some new GCs recently that only look at numbers. I won’t bid them. It’s a waste of my time. I know I’ll never work that job.”
"I choose my contractors. They know what to expect from us, that’s what we rely on: our quality and our service.”
Then he goes on to say, "Recently, some GCs have asked us to be bonded for the job. Now, this is good for us because we are bondable.”
"Once an owner or a GC has been burned a couple of times by residential contractors walking off the job because they underbid it and now can’t afford to complete it, they will require the drywall contractor to be bonded. "If the owners and GCs want to protect themselves, bonding is the way to go. Then the residential contractor will have to put up his house as collateral for the bond, and if he doesn’t perform he’ll lose his house. He has to complete the project. That’s where I see it going.”
"Of course, not all residential subs are bondable, so they can’t bid the commercial job that requires one. "Also, when it comes to commercial projects, most residential contractors wouldn’t even know where to start to bid them.”
In New York, Greg Vangellow of R.W. Drake & Co. tells us, "No, I haven’t seen that phenomenon at all yet. Oddly enough, the first quarter of this year was our biggest quarter ever. Everybody here seems to be busy from what I hear from other subs. They’re all having decent first quarters.”
"So, at this point I’m not seeing any residential contractors switching to commercial, although it doesn’t surprise me that it’s happening in other areas.”
It’s not happening in Massachusetts either, where William McPherson III of Central Ceilings, Inc. tells us, "We haven’t seen it here. I’m a union contractor, and most of the residential contractors are non-union. So, unless they unionize, we will not see them as competitors.”
He goes on to say, "I’m sure this is an open-shop phenomenon. I doubt we’ll see this in a union environment.”
THEY’RE NOT BOTHERING THE BROTHERHOOD
Glenn Sieber of Easley & Rivers, Inc. in Pennsylvania reports, "We have not seen it happen here, nor do I anticipate that we will.”
Why is that?
"We’re fortunate to have a very strong union presence here: Competition is fierce enough without opening up another segment,” Sieber says. "There’s really no way for the residentials to compete here because all sizeable GCs are signed with the unions and are bound to work with union subcontractors. Most, if not all residentials, are non-union.”
Being part of a union is protecting Rhode Island’s Stephen Angell of Cape Cod Plastering, Inc., who tells us, "I don’t see it as a problem, but only because we’re a union shop and the residentials are non-union. They really can’t enter my neck of the woods.”
"What I see, though, is when placing an ad in the paper for an estimator, 10 residential plastering people respond though it’s not their line of work. They are all looking for some sort of work.”
Union contractors in Southern California, like Dave DeHorn of Brady Company/Los Angeles, Inc., say the commercial market is not affected by prying residential contractors. "No, we don’t see the residential contractor at all,” he says. "We’re a large union shop, and most of the residential contractors are non-union, so we just don’t run up against them.”
At another Brady Company, this one in Northern California, Gregg Brady of Brady Company/Central California, Inc. reports, "I hear it’s begun to happen in the Bay area, but I have not experienced it firsthand. Also, we’re a union shop.”
In New Jersey, Andrew Bassista of A.B.I. Construction says, "I have not run up against residential contractors bidding commercial jobs, but that is probably because we’re union.”
On the other side of the country, Washington’s Kelly Harris of Anning-Johnson Company tells us, "Not to my knowledge, haven’t seen this happening. Of course, the non-union guys are doing the multifamily apartments, but that’s been happening forever.”
He goes on to say, "We’re a union shop and the GCs for the high-rise constructions—which is what we mainly do—are all signatories with the Carpenters, and therefore can only hire union outfits.”
"Also, Seattle is still very busy commercially.”
Rocky Henricksen of D.L. Henricksen Company, Inc., also in Washington, agrees with Harris. He reports, "No, we haven’t seen any of that our way. But then we’re union, and so are most of our GCs.”
Dave Stark of the Harver Company in Oregon reports very little from residential in the commercial market … so far. "But I’m afraid it’s going to happen,” he says. "Although we are a union shop, there are sizeable non-union GCs that would take non-union contractors.”
"The point is that the housing market hasn’t really slowed here yet. Oregon kind of lags behind the rest of the nation. But once it slows, I’m sure we’ll see the residential competition.”
HAVEN’T SEEN ’EM … YET
California’s Craig Daley of Daley’s Drywall & Taping tells us, "I have not observed that phenomenon. It seems a foregone conclusion that because the housing market is slow, the guys who now build single-family homes out in the Central Valley of California will move into the city centers and start bidding commercial work.”
"What I have observed, however, is that more and more residential crews come to us—willing to join the union—looking for work.”
"Now, we do a fair amount of multi-family residential inner-city work, which quite often is built with redevelopment money, or on prevailing wage, and the residential contractor is not set up to handle that.”
In New York City, Brian Anikstein of Cord Contracting reports, "The housing slowdown is just starting to hit New York now, so we haven’t seen residentials as yet—my guess is we will soon.”
He adds, with a laugh, "New York is a little behind everybody else with the housing market. I’m very busy with commercial jobs right now and will be for the rest of the year. Not so sure about next year, though.”
Charles Beatty III of Beatty Drywall Systems, Inc. in Delaware reports, "The residential contractor does not understand about commercial work, so we don’t see them bidding against us. They are very skilled at hanging drywall, but they’re not skilled at metal stud framing, insulation or the other skills you need as a commercial contractor. They don’t have the office staff either, nor do they have the communication skills to handle a commercial job.”
He goes on to say, "Now, I’ve heard that residential contractors have begun to bid commercial work in the Southern part of Delaware, which is more rural. But not up here in the Northern parts. As far as commercial work, we’re still busy in this area,” he says.
Things aren’t yet bad in Virginia either, where Daniel Corker Jr. and his DACO Interiors, Inc. conduct business. Corker reports, "We’ve seen it a little bit. I haven’t had many residentials compete with me directly, but I’ve heard of some who have tried to do some commercial work.”
"In fact, we’ve only run into one residential bidder, and in that case he wasn’t going to provide the material, only the labor. The GC would provide the material.”
Did he win that bid? "Oh, yes. He blew us out of the water,” Corker says.
YES, THEY’RE HERE!
Several merit shop wall and ceiling contractors from around the United States are reporting seeing the residential contractors move in on their territory.
In New Hampshire, Gabriel Castillo of Pillar Construction tells us, "We started seeing this issue about six months ago and already residential contractors are bidding every small to medium commercial job we bid. The mid-size jobs, particularly, are flooded with residential contractors.”
When asked how often the residential contractor wins those bids, he replies that they win 50 percent of the time, or better. "They are bringing a different price structure to the table,” he says. "It will take the residential contractors getting burned on a job or two to realize that the commercial job requires a different cost structure.”
"And they are being burned. In fact, we’ve now, on a couple of occasions, been contracted to come in and finish jobs that residentials walked off.”
He goes on to say, "I’m not saying that the small contractor is not doing a good job—they do. But they lack business-management skills. They cannot handle the paperwork, which can make up 50 percent of any large commercial job, making sure everything is documented. They also cannot handle the technical communications with other contractors, providing the right information to the right people at the right time. This is especially true with LEED certification.”
What’s the solution? "The owner and GC should require the [EIFS installer’s employees be certified through AWCI’s EIFS—Doing It Right program, or better yet, make sure the EIFS sub is an EIFSmart contractor], and bonded. That will screen out the small guys. Then they will have to stand behind their numbers; then they can’t just throw them out there and hope for the best.”
Sadly, one Wisconsin contractor has run so head-on into the residential contractor phenomenon that he is now, as a result, out of business. He tells us, "We’ve seen it a lot over the last year and a half. Whenever housing starts slow, this ‘invasion’ happens, but this time around it’s a lot worse than before.”
He goes on to explain, "We’re a union shop and all the residential guys are non-union, so when they bid commercial jobs, they win them hands down.”
"The union GCs still come to us, of course, but the problem is that we have a lot of non-union generals in this area.”
Also in Wisconsin, Brian Jahn of Jahn & Sons, Inc. agrees that the residentials infiltrating the commercial construction market is a major problem. "The non-union residential guys are coming in, and they are awarded the jobs,” he says. "We have many non-union GCs in our area, and many developers who act as their own GCs—non-union, too—and they all sub out the drywall to the lowest bidder, almost never a union shop.”
It’s a problem in Michigan, too, where Matt Van Hekken of the Bouma Corporation has definitely seen the change. "Some of the contractors who primarily work residential are now bidding commercial jobs,” he says. "It depends on the size of the project. We’re seeing competition from residential more and more in the $150,000-to-$250,000–range jobs; anything above that we still have to ourselves.”
How often? "Oh, every job in that range has residential bidders now, and they’re winning 50 to 60 percent of those jobs.”
Underbidding? "Sure. We had one last week,” he says. "Our bid was $160,000, and it went for $120,000 to some residential guys.”
Strategy? "We concentrate on bigger projects where we don’t see this competition. But it’s difficult with the smaller jobs, where they’re below our cost sometimes. I don’t know how they manage it; I think they’re just working for wages. It would help if the GCs required bonding.”
Pat Arrington of Commercial Enterprises, Inc. in New Mexico tells us: "The residentials are bidding commercial jobs daily now because there is no housing work out there for them. However, when this happens—and it does whenever housing slows, we look at it as clearing out the deadwood. There are a lot of people in construction who should not be here, and they’re only there because it’s been so busy.
"A lot of residential builders do not realize the implications of building commercially. They are not used to prevailing wages, or lien releases on all materials. They step on their own tails a lot. They don’t realize that material still costs and people do not work for free.”
"More often than you’d care to believe, they’ll underbid and then walk off the job when they cannot afford to complete it.”
Florida seems to be a hotbed of residential infiltration. Florida’s Eric Boulanger of Boulanger Drywall Corp. tells us, "Yes, we do see that, perhaps 20 percent of the time, but most of our work is with repeat clients, so it hasn’t affected us that much. We have great relationships with our GCs. I’ve also heard from our clients that they’ve thrown a lot of residential bids out because they’ve not been able to price them correctly.”
Also in Florida, Karl Pearson of Mader Southeast, Inc. says he runs into residential at the gate "at least 25 percent of the time. More often even on the smaller jobs, and they win most of those bids.”
Will it become worse?
"I don’t think so,” Pearson says. "I think those residentials who will try commercial are already here. But I do think that the residential guy will eventually go out of business. He’s not equipped to handle commercial. Also, we typically go after bonded work, which more or less screens out the residential contractor.”
Gerald Roach of Forks Lath & Plaster, Inc. in North Dakota tells us he has seen it very often, but it is not because of the housing slump.
"We’re still in good shape here,” he says. "That’s one nice thing about North Dakota: It seems we’re almost recession-proof. We don’t have a housing slump—not yet anyway. The housing has slowed down some, but it’s not like the rest of the country. We’re not having foreclosures and all that stuff.”
"What I have seen, however, is the smaller housing people sneaking up on smaller commercial jobs. But when it comes to the larger drywall packages, they’re basically lost.”
NOT SURE YET, BUT PLANNING AHEAD ANYWAY
In Washington state, Jon Bryant of Innovative Interiors, Inc. says, "I believe we’re seeing that, but I’m not sure. We see some new companies bidding against us commercially, but I couldn’t tell you if they’re from residential. We assume they are. We don’t really track that very closely—we probably should.”
He goes on to say, "They come in lower than we think they ought to, and we seem to lose more sales to new players—that much I can tell you. I’d say about 20 percent of jobs we normally would win, now go to new players.”
Remember the old adage that the worst competitor is the company that underbids because they do not know their own costs. The residential bidder is a prime example of precisely that. Keeping that in mind, here are some approaches to weather the storm and keep the gates closed:
Educate your GC. Warn him of the very real dangers of accepting low bids from contractors who truly do not bid the actual cost, because they don’t know them—they may very well walk off the job, leaving the GC high and dry.
Initiate or strengthen union affiliation. It is evident that areas of strong union presence do not experience a large influx of residential competition because their GCs are contractually obliged not to hire them.
Suggest bonding. Most, if not all, commercial subcontractors are bondable; hardly any of the residential contractors are. If the general contractor sees the wisdom of requiring bonds, you will have won a large part of this battle.
Service, service, service. Nurture your GC relationships by over-performing any chance you can. Many contractors weather the residential-contractor storm simply on good, long-term relationships. Quality of work and dependability will see you through. The residential contractor is knocking at the commercial gate. There is no doubt about it. He has mouths to feed, too. But commercial and residential are quite different, and they do not mix well: when attempted, both sides usually end up the worse for wear.
The true solution, therefore—as one contractor put it—is to fix the housing slump. Many able people are working on exactly that and will eventually succeed.
Until then, the storm is quite weatherable.