Bandwagon's Filling Up

By Rod Sutton, Editor in Chief | September 28, 2010

 

Illustration - 2006 Contractor Business Report
The forecast map for 2006 showed only Rhode Island expecting anything less than "good" business for the year. Yet just as the national number was slightly lower than expected, so were the actuals for five states. On the other hand, nine states predicted 2006 would be "excellent," and 14 reported that it was.
Illustration - 2007 Contractor Business Report
Optimism continues for 2007, with 13 states forecasting that business will be "excellent." Add to that the 24 "very good" states, and the year is shaping up strongly. Minnesota and Michigan, however, remain in the doldrums, predicting that this year will bring only "average" business in their direction.
Illustration - Contractor Business Year Ratings
Contractors had a "good" year in 2006, just slightly off the forecast. Nonetheless, business continues solid, and this year is forecast to be similarly "good."
Illustration - Contractor Business Year Ratings, by Vocation
Building contractors notched a slightly better year than others, citing 2006 as "very good." Highway/heavy and diversified contractors didn't fare badly, though, with a strong "good" year.
Illustration - Contract Volume Trends, All Contractors
Volume grew for fewer contractors than anticipated last year, but the balance still fell on the side of increases. But after three years of overreaching, contractors have pulled back a bit for 2007 expectations.
Illustration - Contractor Fleet Expansions
Fleets continued to grow in 2006, not surprising considering the recent amount of work done. But not as many contractors are expecting to expand fleet size this year.
Illustration - Contractor Fleet Replacement Rates
The percentage of fleets replaced continues to remain solidly above 9 percent, although this was a bit lower than expected. For the third consecutive year, though, contractors would like to replace at a rate near 10 percent.


 

More contractors jumped aboard last year. Although conservative, cautious and patient, contractors seem to believe that business will continue to build through 2007. That's in spite of the fact that 2006 fell slightly below expectations.

Nonetheless, the rebound from the recession of 2003 has been solid and steady. Federal highway money is working its way into real asphalt, concrete and bridgework; nonresidential is easily offsetting slowing new-housing work. Contractors look to this year as a strong continuation of 2006, anticipating another "good" year.

Diversified contractors, those who do both highway/heavy and building work, reported the best 2006, but they have pulled back a bit in their expectations for this year. Building contractors, on the other hand, anticipate a slightly better 2007 than they experienced in 2006. Much of this, of course, will be fueled by continued strong nonresidential projects. Highway/heavy contractors expect 2007 to be consistent with last year.

As our economist, Jim Haughey, reported in his general economic overview, highway spending continues to ride the surge of the tremendous amount of starts released by the federal transportation legislation. Nonresidential projects are the engine for 2007, however. Nonresidential spending grew 13.4 percent last year; Haughey forecasts another 12.6 percent growth this year. Lodging and hotels fuel the fire, with nearly 25-percent growth in spending forecast for 2007; hospital spending growth comes in at almost 18 percent.

Contract volumes surged in 2005, and they fell below expectations in 2006. This year, volume growth is anticipated to be on par with 2006, though. Four of 10 contractors grew contract volume in 2006, and 23 percent said volume decreased; this net of 18 percent shows strength, but it is about half the number predicted by contractors as they headed into the year. For 2007, the anticipated net remains positive at 22 percent.

Diversified contractors expect far greater volume increases than either highway/heavy or building contractors. Nearly half, 45 percent, expect volume to increase relative to 2006. After subtracting the 15 percent who expect volume to taper off, the net of 30 percent surpasses the net of 22 percent predicted by building contractors and the net of 18 percent reported by highway/heavy contractors.

Similar differences occur across regions. Mid-South contractors report a net of 40 percent expecting contract volume to increase in 2007, with Kentucky reporting 68 percent expecting growth and 8 percent expecting decreases for a net of 60 percent. Mountain, Pacific and Southern Plains are other strong-growth regions for 2007.

The highway/heavy market is competitive, according to those contractors. Eight of 10 contractors specializing in this type of work describe competition as "intensely" or "very" competitive. Among building contractors, that percentage was 68 percent; general contractors, 79 percent.

Fleet Trends

Contractors continue to grow their fleets, measured by the number of machines added. Last year, more fleets expanded than were anticipated. The net for fleet expansions was expected to be 27 percent for 2006. Instead, contractors reported net expansion of 33 percent; 40 percent increased fleet size minus 7 percent that decreased. Contractors anticipate slightly slower expansion for 2007. About 27 percent report they expect to add machines this year; subtract the 5 percent who will actually decrease fleet size and the net is 22 percent.

Replacement rate, the measure of how many machines are taken out of the fleet and replaced, fell short of expectations for 2006. The rate of 9.4 percent was consistent with what was replaced in 2005 (9.5 percent), but a full percentage point below what contractors expected to do in 2006. For 2007, the replacement rate is forecast to be 10.3 percent. Higher replacement is anticipated in the following regions: Mid-South (13.6 percent), Pacific and Mountain (12.4 percent), and South Atlantic (12.2 percent).

Fleet condition was rated "excellent" or "very good" by 41 percent of contractors, in line with reports from the previous couple of years. On the other side of the spectrum, 12 percent of contractors say their fleets are either in "fair" or "poor" condition. Looking at expansion, replacement and condition together, fleet managers continue to balance the need to replace older, less productive machines with the demands to expand fleet size to accommodate project growth.

Purchase remains the primary strategy for fleet managers who are acquiring major machines, those with a sticker price higher than $25,000. More than half of contractors (53 percent) purchase outright, and 48 percent purchase through financing. These percentages change dramatically among the largest fleets, with 88 percent acquiring through outright purchase and 33 percent financing.

Short-term rental (defined as less than one year) of major machines remains a viable acquisition strategy among contractors, with 17 percent of respondents using it. For all machines, 65 percent of contractors reported using short-term rental in 2006. The net increase in the use of short-term rental was 9 percent, with 24 percent reporting an increase minus 15 percent decreasing usage.

The most popular short-term rental machines remain the light earthmovers, with 62 percent of contractors responding. Other machines reported by contractors were light equipment (44 percent), air compressors and gen sets (39 percent), compaction equipment (38 percent), and work platforms (28 percent).

On the new-equipment front, we asked contractors to describe competition in terms of pricing, model selection and number of quality brands available. About half, 52 percent, described the equipment market as "intensely" or "very" competitive. Only 4 percent said the market was "not very" or "not" competitive.

In their own markets, contractors noted greater competition. About 73 percent described their own construction markets as "intensely" or "very" competitive.

When describing their company's overall health, 25 percent of contractors say their firm is in "very good" health. Another 50 percent say it is "good." On the other hand, 5 percent report that their company is in "weak" or "very weak" shape.

Contractor workforces grew in 2006, netting out at 12 percent (32 percent increasing minus 20 percent decreasing). Service and maintenance personnel levels grew a net of 5 percent; the number of operators grew a net of 8 percent; and other hourly labor grew a net of 11 percent.

Contractor Acquisition Trends
(% using for major equipment)
Source: Construction Equipment/Case Annual Report & Forecast Survey
Fleet managers use all options to acquire machines, with purchasing the favored strategy by far across all fleet sizes. Among the largest fleets, with estimated replacement values greater than $25 million, rental/purchase and lease/purchase increase in their popularity as acquisition options.
Purchase Outright 53%
Purchase by Financing 48%
Short-term Rental 17%
Rental/Purchase 16%
Lease/Purchase 14%
Lease 7%
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