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The Great Unknown

The Central Challenge Confronting Wall and Ceiling Estimators in 2023


It almost goes without saying that an estimator’s vocation is filled with a plethora of professional challenges. Inflated material costs, labor shortages, unrealistic time constraints, ambiguous bid docs and shifting scopes of work head a list of work-related woes as long as King Kong’s arm. But there is an overarching matter that summarizes all these underlying headaches and then some. Without question, the greatest, most daunting dilemma facing commercial and residential drywall estimators today is uncertainty. Clearly, fear and loathing of the great unknown can reduce the most stout-hearted quantifier to a quivering stack of Jell-O squares—and for good reason.

    

Of course, the dread evoked by mystery is not exclusively peculiar to estimators. Most of us tend to become anxious when confronted with the unfamiliar. But consider the nature of a quantifier’s vocation, and it quickly becomes clear why estimators seem more deeply affected by the unknown than the average man on the street: Their professional success or failure is directly dependent on their ability to predict the future. In fact, the term “prognosticator” might well be an appropriate synonym for “estimator.” Clearly, these calculating visionaries are judged by their precision in predicting the value of a project, the scope of which may not actually be performed for several months—a feat worthy of a latter-day, mouse-clicking, hardhat-wearing Nostradamus.

    

Considering this dependency on accurate forecasting, it follows that an ongoing surge of the great unknown has brought the fear and loathing from estimators to a pinnacle. And it comes as no surprise that the source and driver of this flood of mystery lies with the current state of the economy, which in turn will determine the degree that a number of items critical to an estimator’s work—i.e., material costs and availability, labor costs and availability, growth or shrinkage of particular segments (health care, hospitality, infrastructure, manufacturing, etc.)—will be affected.

    

Now, according to the time-sensitive scribblings of many wise and withered economists (self-declared prophets in their own right), current conditions can lead in one of three directions: 1) a very slight, almost unperceivable recession (with continued inflation), 2) a moderate recession, affectionately dubbed “a soft landing,” or 3) that economic bugbear that everyone dreads, a severe recession (recession is defined as a severe downturn in economic activity spanning two fiscal quarters). These fiscal forecasters are merely presenting a three-pronged version of “anything could happen.” Once again, the word of the day is “uncertainty.”

    

Inquiring minds will entreat us to probe a little deeper. And while conceding that we too are speculating in the realm of the great unknown, our aim here is to construct some likely scenarios that may befall construction estimators over the coming months, based on the three possible directions that economists predict will develop.



Scenario #1: Slight Recession with Inflation

In the first scenario, a bullet is dodged regarding recession, but inflation continues to plague the marketplace. Commercial and residential drywall estimators everywhere have already been affected by skyrocketing costs over the past two years. Although the Fed continues to raise interest rates in an attempt to ease soaring prices, the original drivers of this condition may persist well into the first half of 2023, and perhaps beyond. Now, many factors have contributed to the unacceptably high cost increases we currently experience, but consensus has it that the prime culprit is a downturn in energy supply, due chiefly to the war in Eastern Europe. As of this writing, the inflation rate is hovering at around 7%, down from a June 2022 peak of 9% but still high enough to wreak havoc on material and labor rates. Darkening the picture further, the proxy war in Ukraine shows no sign of abating any time soon, and while gasoline prices have eased somewhat, diesel (you know, that stuff that delivers all our goods) was still flirting with the $5-per-gallon mark during the first quarter of 2023.

    

Couple this with the surge of building activity—an extended rebound from the 2020 stagnation during the pandemic, and we continue to experience a huge demand for construction material and labor. Certainly, as demand exceeds supply, the result is inflation and lack of availability in both categories.

    

And while construction material prices remain at an all-time high, the extended activity in the construction sector seems to have taken the spike in stride, as observed by Rigo Mendez, CEO of RCM Drywall in Tolleson, Ariz. “Material prices are still way high for commercial components,” he remarks, “but they seem to be leveling off. And since they’ve stayed so high for so long,” he adds with a grin, “the GCs and owners have more or less gotten over the sticker shock they experienced a year or so ago.”

    

Although material cost issues may have abated somewhat, availability of certain materials remains a hurdle. And since estimators are loath to make promises they can’t keep, they are compelled to cite components that will constitute long lead items as a part of their proposals—an admission that may well cost them an award. But even this obstacle may be falling, according to Mendez. “Engineers and architects have felt the scheduling effects that availability has had on their projects over the past couple of years, and they are now willing to compromise on certain provisions like single-source requirements for assemblies and specifying special order structural components,” he observed.

    

And so inflated material prices may not have stifled the upswing in construction activity over the preceding months, but estimators around the country are currently stymied by the lack of skilled manpower in the inflated labor market. Again, they are required on bid forms to accept a proposed baseline schedule—durations that may or may not be achievable with current (or near future) levels of participation.

    

According to Brian Exl, general manager for OCP Contractors in Cleveland, difficulty in providing adequate manpower has become critical. “Our biggest issue by far is manpower—in finding qualified workers. We are able to get ‘bodies,’ but there aren’t enough experienced journeymen to train the new employees.” And to add to their in-house difficulties with recruiting, other predecessor trades are feeling the pinch as well, and these shortfalls are having a domino effect ultimately damaging schedules on a number of projects, says Exl. “Our area lost a lot of quality installers, and it is causing chaos because trade contractors are having difficulty with schedules. A delay on one job can mean a deficit on others in the area.”

    

Certainly, manpower scheduling may sound like more of a management issue, but estimators are negatively affected by labor shortages in less direct ways. Instability of wage rates is a starter. Bidmeisters everywhere are guesstimating what rates to use to satisfy demand six months or more down the road, when actual mobilization occurs. Some firms’ estimators are already using rates above prevailing wage to ensure the ability to perform. Then too, it is part of an estimator’s job to sit in GCs’ scope meetings and convince them with promises to hold to the proposed schedule, and the only way to project a sense of sincerity is to be sincere. That brings us to the question: Will the Fed’s attempts to squelch inflation temper the current unmet demand for labor? Will skyrocketing rates abate? Will durations become more manageable? Here we meet with the great unknown again.



Scenario #2: Moderate Recession

Of the three likely economic scenarios cited above, most economists favor the “soft landing” model—that is, the Fed’s ongoing rate hikes will mute inflation without sending the economy into a tailspin. And current indicators seem to agree with this consensus. According to the latest statistics as of this writing, inflation is tapering off with regard to materials, and even labor shortages show signs of abating. And growth, though modest, seems to be holding. Clearly, a “soft landing” scenario is the preferred development among economists (and within the construction industry). In fact, one might wonder if some wishful thinking is driving the consensus to some degree. There are just too many contributing possibilities to factor into the equation for any premature rosy predictions. American economic activity does not operate in a vacuum, and global economic outlook is gloomy at best. Also, consumer spending, which has been healthy since after the pandemic, may fall off as savings accounts dwindle and credit card limits reach the maximum. Then too, energy costs are still nearly double what they were two years ago. And so we must devote some attention to the still very real possibility of a full-blown recession.



Scenario #3: Severe Recession

As stated above, a recession is defined as a severe downturn in economic activity spanning two fiscal quarters, or more. And while even the mention of recession is repugnant to construction contractors, many longtime firms have experienced these trough periods before—and have developed strategies to withstand any existential assaults.

    

For construction subs and subs’ estimators, a downturn in activity translates into fewer projects being funded, and therefore fewer opportunities in the form of bid invitations. In turn, this triggers a reduction in operating volume. In order to compensate, many (if not most) firms respond first by cutting overhead costs.

    

However, a great number of drywall subs’ executives are hard pressed to determine exactly what their overhead consists of, as Charles Mahaffey, business consultant at Charles Mahaffey Consulting of Sunset Beach, N.C., observes: “When we know a recession is looming, knowing the true cost of performing your scope of work is one of the most important considerations.” He further asserts: “You may be required to reduce some of your bid prices in order to be awarded projects. You can lower your markup to some extent, but if you don’t know your true cost, there’s no way to be comfortable with cutting your bid amount.”

    

In fact, many commercial drywall outfits are already grasping for ways to reduce overhead as a proactive measure. Business development expenditures—lunches, golf outings and sports events with potential clients—may be the first trivial costs to go, as will in-house team-building activities and staff celebrations (birthday lunches, etc.). Cutbacks in facility costs offer another less extreme (and less effective) avenue for overhead reduction. Thermostat adjustments, lights-out directives for unoccupied rooms, and in-house self-cleanup in lieu of after-hours cleaning crews are well-intended but feeble attempts to cut costs. One outfit closed off an entire wing of their building and shut off utilities to that area during the extended downturn of 2007–2009. But of course, that measure was made possible through a more drastic tactic: staff reduction.



What to Do?

No one wants to think about it, much less give it a voice, but as any major slowdown in construction extends into several months, layoffs become an effective remedy and thereby a necessary evil. And while subcontractor executives are reluctant to terminate any productive members of a hand-picked staff, at a certain point, lack of revenue can make the exercise unavoidable. Fortunately for estimators, sales can mean survival for a drywall business, so quantifiers are often the last to go. That does not mean they are invulnerable to cuts. A productive project manager who has the skill to double as an estimator may be kept in exchange for a quantifier with a poor sales record.

    

Another tactic that drywall execs entertain during a recession is to modify their type of work to fit the current market. Consider, for example, a sub who specializes in small tenant buildouts—a facet of our industry that frequently hibernates during recessions. He may be seduced into pursuing markets that remain strong, such as health care or hospitality—industry divisions that require specific skills and knowledge that come only with experience. Consequently, an excursion into uncharted waters during a downturn is likely to hit an iceberg.

    

Many wall and ceiling subs are beginning to recognize the wisdom in modifying their approach to bid selection, as Jeff Jaeger, president of Intermountain Wall Systems of Durango, Colo., points out: “Let’s face it, we have all been spoiled over the past several years. Times are changing, and unless we modify our approach, we could find ourselves without the healthy backlog we’ve been taking for granted.” He further suggests that it might be wise to tighten up the nets that we cast, and concentrate on friendly clients. “The need for better communication with our preferred GCs’ preconstruction teams prior to bid day will play an important role in maintaining a dependable backlog. As one of our estimators put it, ‘It may be time to lick the hand that feeds you.’”

    

As we have seen, there are a number of possible challenges that may confront wall and ceiling estimators in their efforts to secure sales over the coming months. But given their precarious positions as prophets of the industry, the single dilemma that plagues them all is economic uncertainty. And that’s for certain.



Vince Bailey, an estimator/project manager in the Phoenix area, also writes the Estimator’s Edge column for AWCI’s Construction Dimensions.

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