Construction tries to adjust to an uncertain local economy

Like a middle-aged reveler left too long on the party circuit, Southern Nevada is suffering a bad hangover from two decades of unabated growth. Rapid development transformed the region's construction industry into an economic heavyweight. Boom times have since turned bust.

Construction was the state's second-largest and fastest-growing employer in 2006, trailing only the resort industry, Las Vegas-based business advisory firm Applied Analysis reports. Construction once contributed $27 billion to Nevada's annual coffers, making up 21 percent of its gross domestic product, public records show.

What a difference a few years makes.

"Our revenue in 2010 will be slightly less than half of what it was in 2008," said Penta Building Group President Jeff Ehret, whose company is building the Metropolitan Police Department headquarters at Martin Luther King Boulevard and Alta Drive in Las Vegas. "The way the market was accelerating, we knew it wasn't going to last. Those were atypical years. We were stashing away our acorns because we knew winter was coming."

Construction unemployment hovers around 30 percent statewide; the industry has lost 81,900 jobs or 55 percent of its work force during the last four years, Nevada's Department of Employment Training and Rehabilitation reports. More builders are quitting the business or filing for bankruptcy. The Nevada Contractors Board reports that new license applications decreased 22 percent last year, while complaints for unpaid bills increased.

Several longtime contractors shuttered their doors amid the downturn. Chaparral Contracting was one. Others, such as United Construction and Kitchell Contractors, have closed Las Vegas Valley offices to save costs. Construction is a cash-intensive business. Contractors must be well capitalized to pay upfront project costs such as equipment rental and job trailers, raw building materials and payroll.

"Cash flow is the king during a recession," Perini Building Co. Vice Chairman Dick Rizzo said. "As the economy shrinks, prompt payment is important. In some cases, it's the only source of income to subcontractors and vendors."

The recession has more contractors scaling back by trimming overhead, reducing staff and consolidating resources. Remaining employees must shoulder additional duties for the same pay; others are being asked to accept voluntary pay cuts or face long unemployment lines. Doing more with less is the new mantra in today's economy.

"We have done a little bit of everything to reduce our overhead," Sacon Construction President Paula Bell-Saxton said. "We prepaid for all of our insurance for 2010 in anticipation that we won't have a lot of work. We renegotiated contracts for our office postage and copy machines, and cut back to four days a week instead of five."

Contractors, meanwhile, are revamping business strategies to stay afloat. That means marketing aggressively, tapping into established business contacts, bidding out-of-state work and venturing into different contracting markets.

"We are seeing more local contractors who used to work exclusively in the private sector now bid on public works," Henderson Public Works Director Robert Murnane said. "I believe this is because there was plenty of private work to do and the management of public works project can be more complex. Now, private work is scarce and the public works projects are helping to fill the void of work."

The number of companies vying for projects has quintupled, in some cases, driving profit margins down. Public owners have benefited from increased competition with lower-than-expected prices.

"We're seeing bids come in about 40 percent less than estimates for almost a year," North Las Vegas Public Works Director Liu Qiong said. "We are seeing increased bid lists, with 15 to 20 bids for large projects. In the past years, we would be very happy if we got more than seven to eight bids for a large project.

Competitors are pouring in from nearby states such as California and Utah, and as far away as Texas and Florida. Construction is a high-risk, low-profit-margin business. Contractors typically make between 3 percent to 6 percent of the project value, industry observers say, which leaves little room for error. Most construction contracts contain schedule milestones that assess fines for late completion. One mishap can place projects in the red.

"We have seen public works projects with as many as 30 bidders," TWC Construction CEO Matthew Ryba said. "More startling is the gap between the high and low bidder. We have seen up to a 40 percent difference between high and low bid. We call it a 'they who missed the most' contest.

"Throw in the fact that more companies are desperate for cash flow and are willing to do project at no fee," he added, "and you end up with companies paying to do the work or potentially unable to complete projects."

Successful public works bidders must submit the cheapest figure possible to win the work. It's a "catch-22" since they also risk not making anything in the process. Some contractors accept jobs at or below cost to create temporary revenue until the next check.

"They will wash money long enough to stay afloat. It's not uncommon," Affordable Concepts Inc. Chairman Robert Potter said. "But when you borrow from Peter to pay Paul, it catches up with you. The people who are giving away those really low numbers may not be in business when it comes time to perform that work."

General contractors rely upon a network of subcontractors to help perform specialty work. If those companies become insolvent during the course of a construction project, the contractor is still liable for finishing the job at the same price and within the same time frame.

"It cost our company in the mid- to high six figures replacing subs last year," United Construction President Craig Willcut said. "When you start taking work cheap, it's going to catch up with you. It's not benefiting anyone, including the owner or the contractor."

Some companies wisely saved money from the boom years, creating a rainy-day fund that helping them to weather this recession. A scarcity of work still has contractors looking everywhere for jobs, though. Las Vegas-based Martin-Harris Construction is pursuing projects outside of Nevada as are many companies these days, said company President Frank Martin, who declined to provide too many details for fear of "being copied" in today's competitive market.

Affordable Concepts' Potter said: "We are going to start looking at engineering work, which is where the stimulus money is going. We are chasing a few jobs out of state.

"I'm losing money every month. But we didn't piss our money away during those good times -- we saved it. So we can ride it out. A lot of people didn't."

Contact Tony Illia at tonyillia@aol.com or 702-303-5699.