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The New, Lean Normal

Experts agree that once the United States emerges from its current economic slump, it will not return to the freewheeling lending practices and resulting construction glut that these very same experts point to as the cause of the slump in the first place.





This stands to reason. The boom we saw prior to the downturn was by all accounts unsustainable, and it simply—at the hands of spectacular greed—self-destructed. Returning there, and expecting a different outcome next time, would be the very definition of folly.




But once we do emerge from this downturn and markets stabilize, once the new normal arrives, what will it look like? Or, heaven forbid, is the new normal already here?





“No, I don’t think it’s here yet,” says Dennis Jarvis, president of D.J.’s Drywall, Inc. in Florida. “But I believe that the downturn has flattened out. It’s not getting any worse. We are putting up some new houses now; things are beginning to come back.”





Gabriel Castillo, estimator at Pillar Construction, Inc. in Virginia, cautiously agrees. “It’s hard to say,” he says. “I see conflicting signals. I think, though, that we’ve stopped falling, although I’m not sure we’re heading back toward recovery yet.”





David St. Hilaire, president of Central Connecticut Acoustics, Inc. in Wallingford, Conn., is more emphatic: “We’re still in the downturn. It’s going to be a cold winter.”





“I think we bottomed out a month or two ago,” offers Lee Zaretzky, president of Ronsco, Inc. in New York City. “I now see a lot of increased bidding, so I am cautiously optimistic. That said, I believe the new normal is not going to look much different from what we’re seeing right now. There will not be a drastic upturn, more like an uphill crawl.”





Karl Pearson, chief estimator at Mader Southeast, Inc. in Florida, does not believe this is the new normal, “but I think we have bottomed out,” he says.





Tom Russo, CEO of Division Nine Contracting, Inc. in Arizona, agrees: “I certainly hope this is not the new normal. I believe we’re now at the bottom of the curve, and that it will take a year or two to get back up.”





Michael Weber, president of Island Acoustics LLC in New York, has a slightly different take, “I actually think this might be the new normal. Of course, depending on where in the country you live and what sector you serve, it might look a little different. But from where I stand, I think this might be it.”





Michael Hoffarth, project manager at Canyon Plastering and Drywall in Arizona, has a different opinion about his part of the country: “We’re still in the slump. Phoenix was overbuilt, both in commercial and retail, and we’re still feeling that. What work we see nowadays is mainly renovations and tenant improvements.”





Leo Sheehan, vice president of Dan J. Sheehan Company in Georgia, concurs, “We’re still in a slump. At this point we’re only doing a fraction of our former business. I think we’re at the bottom, though. It’s not getting worse, but it’s not improving yet.”





Brentt Tumey, director of operations at Managed Subcontractors International, Inc. in Arkansas, puts it more philosophically, “Who really knows? You have the government telling you this and the press telling you that. All backed up with ‘facts.’ From where I stand, things are still pretty slow, and our local economy feels it. We’re still in a downturn.”





While it will obviously vary by geography and industry sector, the prevalent view is that our industry has indeed bottomed out and is now showing signs of life. It will, however, not be a fast recovery, and the market will not recover all the way to where it was—on that all are agreed.





But how far will the market recover? How will the new normal look?






The New Normal
By most accounts and predictions the new normal is still a year or two away, and it will only be a fraction of the latest boom we saw just 10 years ago.





“We are going to see leaner times even when out this,” says Steve Birkeland, owner of Artcraft Wall & Ceiling Contractors in Minnesota. “I don’t think we’ll ever return to the late 1990s and early 2000s when there was plenty of work, and good margins in those jobs. We’re simply going to have to learn how to deal with that.”





St. Hilaire agrees: “My guess is that once we’re out of this recession, we will see perhaps 50 to 75 percent of the boom activity. It will never return to 100 percent.”





Zaretzky agrees, saying, “That market was 120 percent and unsustainable. There’s no returning to it.”





Pearson’s suggests, “We might see 50 percent of the market activity we had prior to the bust. I think the new normal is going to look like the 1980s with smaller ups and downs in the market, not the kind of boom and bust we just went through. It will settle down a little, in other words.”





Sheehan concurs: “The new normal will probably see 50 percent of former business, which will then inch its way up to 75 percent over the following five years.”





Lean Times. If there is one thing on which those we interviewed agree, it is that the new normal will require a paradigm shift from the boom times.





We will not see the pre-bust amount of work—some say not even close to it—while the competition will remain high.





In other words, the new normal will spell lean times.





“Gone for good are the days of being an order-taker,” Jarvis says. “We will have to go out there and fight for and earn the jobs. We cannot stay greedy in the new normal.





“And,” he adds, “We will have to service our GCs well and earn our profits.”





Says Castillo, “In the new normal, owners, general contractors and specialty contractors must be more efficient. We have all put internal processes in place to survive the downturn. I don’t see them going away once it’s over. The new normal will be a lean one. There will be less fat in projects. We can no longer do the same wall twice; it has to be right the first time, or we will lose money.





“Everybody will need to be more conscious of their role in the whole process,” Castillo continues. “Everybody needs to know what they’re doing, and coordinate very well. All of us, general and specialty contractor alike, will have to produce better products with less overhead, more efficiently.





“Also, as a GC, you can no longer go with lowest bidder and cover yourself with bond money. It’s not going to work. Everyone has to become more efficient.”





Says St. Hilaire, “I think it is going to be very competitive. And I don’t think we’ll ever return to where it was, where banks lent money almost indiscriminately and insurers and bonding companies would insure and bond anyone. It’s never going to get back to that, not in my lifetime anyway.”





Zaretzky’s take is that “the new normal will be lean and will require a better understanding of both productivity and bidding. Contractors will have to monitor productivity closer and ensure that they bid correctly, and that they bring these projects in on or under budget.”





“Efficiency and coordination will be at a premium in the new economy,” Pearson suggests. “I already see more and more BIM (building information modeling) being used, which will help both efficiency and coordination between the trades. In fact, it looks to me like BIM will become the new LEED—it will soon be everywhere.





“Even though we don’t have a BIM-trained employee on staff yet, I know some of our GCs that now do.”





Russo says, “I think that the new normal is going to be a more tightly run machine, with more scrutiny of both dollars and efficiency. Also, working relationships are going to prove important.





“Of course, we have another problem here in Arizona: With the new immigration law, half the work force has left the state. People who have lived and worked here the last 20 years know that if they lose their jobs they will not be able to re-verify, and so they’d rather leave.





“This is a southwest problem, and it’s going to prove a mess when the market comes back.”





Weber suggests, “You will need to be very cognizant of your overhead, very lean, and very focused on the fundamentals of running your business. Also, the GCs are screening their subs a lot more these days. They no longer suck up the low numbers as they did in the past. They are more selective; they have to be, they have been burned too often.”
Renovation versus New Construction. One trend, already much in evidence—and that might characterize the new normal—is that renovation projects are on the rise, in some areas even outnumbering new construction.





Banks, many now operating with regulators scrutinizing their activities, welcome renovation projects since the owner, as a rule, brings higher equity to the table—often already owning the land, and a substantial portion of the structure as well. Also, renovations turn around faster than new construction, which also lowers the bank’s risk and exposure.





It would appear that if you are not already equipped to work renovations, it’s time to gear up.





Or, as Jarvis puts it, “We will have to accept that there is going to be a lot more renovation and remodeling going forward as everyone is looking at money twice, being more frugal.”





Castillo sees the same trend, “Renovations used to be 5 or 6 percent of our business. Now it’s already 15 percent, and we’re seeing more and more of it.”





As do St. Hilaire and Hoffrath. St. Hilaire says that 60 percent of his company’s current workload is renovation, and Hoffarth says 60 percent of his company’s new commercial bids are renovations and tenant improvements.





Zaretzky considers himself fortunate, “We are renovation specialists, and that part of the market never slowed as much as new construction.”
Increased Efficiency—aka More with Less. If the order of the day will be “more with less,” how would you go about it? With expenses cut to the bone and crews down to skeletons in some cases, where do you go for productivity and efficiency improvements?





Perhaps technology can lend a hand.





Russo suggests looking to materials technology, materials requiring less labor to install.





“However,” he says, “I believe it is going to come down to a lower profit margin for the contractor. If he’s been used to 5 percent, he will probably not see more than 2.5 percent in the new normal. And that means he simply has to work more efficiently to stay in business.”
Another approach may be to manage both bidding and project execution more closely in order to avert costly bidding mistakes and unpleasant financial surprises at the end of the project.





“I recently attended a very good seminar on a new software module from [an estimating software manufacturer],” says Lee Zaretzky. “It allows you to track project progress very closely. It could become a survival tool for the new normal.”






Questionable GC Ethics


Birkeland, whose La Crescent company is located about 150 miles southeast of Minneapolis, reports what may or may not be a unique GC trend.





“Many of our local GCs are now self-performing all of the metal framing, drywall and EIFS, leaving the subcontractor—who in fact helped build the GC’s business—out in the cold with no work. It seems like the slump and the lack of work bring out the worst in people. I see this as an extremely unethical practice.”





Other areas of the country seem to be free of this questionable practice.





In fact, Pearson in Florida sees the opposite, “If anything GCs do less self-performance than ever. Subs are now so cheap that they cannot afford to do it themselves.”





And Hoffarth sees some of it in Arizona: “There are GCs who self-perform the concrete, and a handful do metal studs, drywall and paint as well. But they add up to no more than 5 to10 percent of the local generals. They don’t want to take on the additional liability. In fact, we saw more of this in the past.”






Plan Ahead
How do you prepare for this new, leaner normal?





Says Jarvis, “You need to stick with the people you know, help them survive and they’ll help you survive. Relationships work.”





St. Hilaire believes “we have to stay lean and mean. That is the new normal. We also need to be selective about GCs. Many of them are now in financial trouble and are stealing from the last project to pay an earlier one. Check him out with other contractors. Demand progress payments, and if no progress payment, quit the project there and then.”
Sheehan thinks you need to “prepare to do more with less. We are doing more with less right now, and that is the way this business will continue, I’m convinced about that.”






Survival


However, this new, leaner normal has yet to show. Hopefully, it will make an appearance by mid-2011. How do you survive until then?
“At this time,” Jarvis says, “50 percent of my business is condo mediation in Chinese drywall cases. I had to reinvent myself to stay afloat.”





“We are very selective with what jobs we accept,” says Castillo. “We’re not taking on jobs just to keep busy. Also, we make sure that the GCs we work with are well managed. We’ve seen jobs that should have been very straightforward and profitable ruined by bad GC management and coordination. We cannot afford those jobs.”





“A day at a time,” Tumey suggests.





Coeur d’Alene, Idaho–based Ulf Wolf writes for the construction industry as Words & Images.

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