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Viewpoint: More Room For Gloom

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At the beginning of the year, I wrote that while no one liked the recession, some contractors and sureties were going to hate the recovery, too. As I said then, a new set of risks will arise as contractors price their work aggressively, profit margins lag and some companies take on too much and burn through their capital.

That was pretty gloomy, but I didn't give the complete picture about what can go wrong during the unfolding recovery. Because contractors will price their work aggressively and be hungry for the cash needed for growth, financing will be essential.

Unfortunately, the response from banks and sureties will be uncertain, labor will be in short supply, and labor skill will diminish. Material shortages, too, already have begun, and labor and materials cost inflation will increase. 

SCHLEIFER
One problem is that, for even a financially healthy company, contractors will need more bank financing to pay for the work in progress, and bond-credit demands will rise immediately. In this economy, many companies' credit lines already are stretched and assets already pledged. In addition, most banks are not particularly enamored with the construction industry, and it may take some time for them to become interested in returning to contractor lending. Banks' response to requests for more lending is uncertain at best.

Sureties also will be a problem. Similar to banks, sureties rely on the financial strength of an enterprise to extend or increase bond credit. The bond underwriters, which are profit-minded insurance companies, are confronted with an industry that has been weakened by almost four years of slumping sales at a time when construction owners increasingly are looking to protect their investments by expanding bonding requirements.

Another concern is the skill level of the construction workforce, which has been a common complaint among industry observers since I can remember. If a large percentage will be new entrants during the recovery, the skill level is unlikely to improve. Furthermore, the construction workforce is down at all levels. Some workers will return as they are needed, but some have moved on to other occupations, retired or departed for lack of work.

Playing Catch-Up

Even skilled workers who return to the industry after years of doing something else will have a lot of catching up to do with new technology. Diminishing skills at all levels makes it that much harder to profit from work captured at extremely low margins and, in some cases, unrealistic pricing.

Materials pose another challenge. In a market rebound, capacity needed to produce materials does not immediately reappear: It takes time to bring production back on line, and its costs money to do it. Manufacturers and suppliers are not likely to respond to shortages until there is a sure and certain recovery creating a sustainable demand for their products.

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