Let's Try Again

Sept. 28, 2010

Contractors anticipated the slowing residential market last year, but nobody expected the scope of 2007's decline. Perhaps because of the history contractors have for being conservative in their forecasts, the business rating was right on forecast last year. Contractors reported a “good” year in 2007.

This year's forecast may reflect a degree of uncertainty as to how the sub-prime mess in residential housing will affect overall construction markets, as well as the economy as a whole. Although still forecasting a “good” business year for 2008, contractors are rating it slightly lower than 2007.

We ask contractors to identify themselves by vocation, whether highway/heavy, building or both (diversified). Each rated the 2007 business year about the same, with building contractors coming in slightly lower. Although we don't split building contractors into residential and nonresidential, there can be little doubt that the housing market had an impact. For 2008, diversified contractors forecast an “average” year, compared with their counterparts' forecast for a “good” year.

Reed Business Information economist Jim Haughey estimates that heavy and nonresidential construction will more than make up for the residential slide, with both contributing double-digit growth on the way to overall construction spending growth of 7 percent. Haughey expresses concern that highway spending will languish behind needs, as lack of initiative at both Federal and state levels will result in increases barely covering increases in project costs. In fact, 2007 spending growth was half of what we saw in 2006. Private spending, particularly on hotels, will show strong growth this year.

Going into 2007, contractors projected contract volume to grow similar to what was seen in 2006. Again, whether a direct result of the housing situation or not, actual reports fell short to a level not seen in five years. Subtracting the percentage of contractors reporting decreased volume (29 percent) from those saying volume grew (36 percent), provides a net of 8, off from the 2006 net of 18 and well below the projected net of 22. Contractors anticipate a rebound, however, with 37 percent expecting contract volume to grow and 18 percent expecting it to shrink, for a net of 19.

Again, diversified contractors lag in their projections, scoring a net of 13. About 36 percent of diversified contractors expect growth; 23 expect volume declines. Highway/heavy contractors report a net of 20 (38 percent forecasting increased volume minus 18 percent decreased), and building contractors forecast a net of 22 (39 percent forecasting increased volume minus 17 percent decreased).

More pronounced differences are evident across regions. Great Lakes and New England regions split between those increasing and those decreasing for nets of 1 and 2, respectively. On the other side, Southern Plains and Mid-South contractors scored nets of 26 and 20, respectively. This year's forecasts range from a net of 8 in New England (Great Lakes reports 15) to 41 and 40 in Mid-South and Southern Plains regions. Some 56 percent of Mid-South contractors expect contract volume to grow; 47 percent of Southern Plains contractors expect growth.

Highway/heavy contractors say competition within their markets is intense, with 19 percent reporting markets that are “intensely competitive,” and 61 percent saying they are “very competitive” markets. Other contractors face slightly lower levels, although 70 percent of building contractors and 68 percent of diversified contractors report competition in the “intense” or “very competitive” range.

Reports on company health vary, too. Highway/heavy contractors again rank themselves higher than their counterparts in the other vocations. Among these contractors, 77 percent say the overall health of their firm is “very good” or “good.” With the other vocations, 69 percent of building contractors and 70 percent of diversified contractors report similar health ratings. About one in five contractors report their company is “okay”: 21 percent highway/heavy, 19 percent building, 20 percent diversified.

Fleet trends

Perhaps taking advantage of continuing strength in various markets, contractors grew their fleets at a rate higher than anticipated last year. At the end of 2006, contractors projected a net (difference between those projecting increases and those projecting decreases in fleet size) of 22. Actual 2007 reports provided a net of 29, with 37 percent of contractors increasing the number of machines in their fleets and only 8 percent decreasing that number. For 2008, contractors will pare back a bit. About 26 percent of contractors expect to increase fleet size and 6 percent expect to decrease size, leaving a net of 20. This is just slightly lower than what they projected for 2007.

Machine replacement rates will be cut back this year, too. Contractors expect to replace only 8.9 percent of their fleet in 2008. Last year, contractors replaced 9.7 percent of their fleet, below the 10.3 percent projected at the end of 2006. Again, Southern Plains and Mid-South contractors forecasts are higher than other regions, reporting a machine-replacement rate of 12.5 and 13.3, respectively. Mid-Atlantic contractors report a replacement rate of 12.0 percent. Great Lakes contractors again mark the low end, expecting to replace 7.3 percent of their machines this year.

Replacement rate is one indicator of fleet condition, as managers dispose of older machines and bring in more productive replacements. About four in 10 contractors reported that their fleets are in “excellent” or “very good” condition (6 percent and 36 percent, respectively). On the other end, 11 percent reported fleets in “fair” condition, and 1 percent said fleets are in “poor” shape.

Acquisition strategies remain historically constant, with purchasing being the preferred strategy for major machines, defined as those priced at $25,000 or more. About 16 percent use short-term rental to meet needs for major machines.

Short-term rental overall continues to be a strong equipment-acquisition strategy, with 64 percent of contractors reporting its use. When asked to list the machines rented for a short period, contractors most often chose light-earthmoving equipment such as skid-steer loaders and backhoe-loaders. Heavy earthmoving machines were mentioned by 27 percent of contractors. Other machines were light equipment (42 percent), compaction equipment (37 percent), air compressors and generators (36 percent), work platforms (29 percent), and cranes (27 percent).

Of course, a contractor's fleet of machines is worthless without the staffing to support it. Thirty-one percent of contractors reported an increase in their total workforce, and 22 percent reported decreases for a net of 9. About half reported no change in workforce numbers. For one in five, though, the availability of skilled labor (operators, technicians, and other hourly workers) was a “major” problem in 2007.

Business was "good" last year, in line with forecasts made late in 2006. Hot spots in South Atlantic, Southern Plains and Mountain regions were offset by average reports in New England and Great Lakes regions.

Contractors expect this year to be "good" again, although the variances across regions are less noticeable. Southern Plains predicts a better year than other regions, and Great Lakes region expects 2008 to be worse than 2007, predicting an "off" business year.

Business followed expectations in 2007, with contractors reporting a "good" business year. This year should be comparable, although the forecast for 2008 dips slightly.

Building contractors rated 2007 just slightly lower than their highway/heavy and generalist counterparts. Generalists, though, have the least-favorable outlook for this year.

The trends for contract volume fell far short of expectations last year, with the net increase of 8 percent the lowest since 2003. The forecast for 2008 is also off from historical estimates, although still fairly positive in nature.

Contractors continued to expand fleet size in 2007, beating their forecast for the fourth consecutive year. They plan to continue to expand this year, although the net is lower.

Last year, contractors replaced the highest percentage of their fleets since 2000, yet still fell a bit shy of projections. That trend to hang onto machines a bit longer will stretch into 2008, with the rate forecast to be even lower than this year.
In this story:
Contractor Acquisition Trends(% using for major equipment)
Source: Construction Equipment/Case Annual Report & Forecast Survey
Regardless of fleet size, nearly all contractors purchase equipment, either financed or outright. Rental and lease options also provide contractors with acquisition choices. The use of short-term rental doesn't vary much by fleet size, but lease-purchase options are used often as the fleet-replacement value increases.
Purchase Outright 52%
Purchase by Financing 44%
Rental/Purchase 17%
Short-term Rental 16%
Lease/Purchase 13%
Lease 7%