We’ll slog along the bottom for a while.  That was as good as an assessment as any about the local construction economy given by a panel of experts at today’s BUILDEX Express event in Seattle.  Moderated by Tom Zamzow of Granite Construction (and President of AGC of Washington), the panel included Gus Gottschalk of Lydig Construction, Greg Porter of Berntson Porter & Co., Gregory Steinhauer of American Life Inc./SODO Builders, and Brian Vance of Heritage Financial Corp & Heritage Bank.

None of the panelists were at all bullish about the local scene for the near future but they did offer some reasons for medium and long-term optimism (more on that in a minute).

Each had their own favorite indicator that they follow to let them know the tide is turning.  Gottschalk cited architecture and engineer activity.  “Are architects and engineers getting busy? I’m not seeing it,” he said.  The recent AIA Billings Index report bares this out:  although the national index in September reached positive territory for the first time since early 2008, the index for the Western US was still negative.

Vance follows the unemployment rate and home values. “When they show sustained improvements, then we will have turned around,” he said. “But I don’t see improvements in them until the second quarter of next year at best.”  Seattle home values recently backslid after rising for a bit, and they are expected to fall some more, according to Standard & Poor’s/Case-Shiller.  And, added Steinhauer, dealing with troubled properties is a prerequisite for improving the real estate market.

Now the silver lining:  Location, location, location. The panelists were unanimous that the Puget Sound region is well positioned for future growth.  As evidence of the confidence that the rest of the world has in the region, Vance noted that his local Heritage Financial Corp attracts big investors like Goldman Sachs not just because of the bank itself, but also because the investors believe in the Puget Sound region and its long-term opportunities.  Likewise, Steinhauer said his firm attracts many foreign investors for the same reason.  Porter noted that many out-of-state businesses of all types are looking to open local offices or to buy or merge their way into the region.

(Note:  panelists warned that the area could lose one of its business-climate advantages if the income tax initiative, I-1098, passes.)

When the topic of the environment came up, the panelists considered it a double-edge sword for the construction economy.  On the plus side, the general green building ethos was considered a positive thing for society, and an opportunity for contractors. “We believe it’s vital to our business,” said Gottschalk. “If contractors don’t embrace green building, they will be on the outside looking in, as most buildings will be LEED.”

Porter noted that there are lots of tax credits and deductions for green building.  He gave an anecdote of a business that left $2 million on the table because it had missed these deductions.  “You have to make sure to take advantage of the things that are out there,” he advised.

The panelists generally agreed that green building has matured, and that any extra costs associated with it are now negligible, aside from the LEED Platinum designation (think grass-covered roofs).

On the other hand, environmental regulations – or more specifically, the expensive, uncertain and time-consuming processes that they invariably and needlessly engender – are a definite drag on the state’s construction economy.  “Projects don’t happen because of it,” Gottschalk said flatly.   Zamzow cited the vast number of agencies involved in the permitting process, and the ability of individuals to use the process to delay or stop projects for political, not environmental, reasons.  “We once spent $15,000 to prove water runs downhill,” he said.

Streamline the permitting process, and you will have provided a big stimulus to the local construction economy.

Film producer Jane Turville is working to complete her film Conserving Our Future in order to document the historic preservation-sustainability linkage for thousands of television viewers. Supported by the National Trust for Historic Preservation and the Kinsman Foundation, the film features several historic rehabilitation projects to demonstrate that recycling buildings is similar in concept to recycling bottles and plastic bags but much more effective in meeting saving energy and attaining sustainability goals.

Visit YouTube or the project website www.conservingourfuture.org to learn more about the film and view a trailer.

Turville is working through Portland based Natural Step Network to raise money to complete the film for a PBS broadcast.

As we slog through continued tough times, new challenges related to our times keep arising. Back in the day, providers of construction or professional services were able to take comfort in the fact that a mechanic’s lien could be relied upon as security against non-payment. However, with property values having fallen so dramatically, liens don’t seem to be the security they once were.

I was with a group of lawyers and Limited Practice Officers the other day, and we discussed just this phenomenon. Let’s say a lien claimant does everything right in regard to perfecting its lien. It provides the requisite pre-lien notices, records on time, provides the recorded lien to the property owner within 14 days of recording, and then forecloses the lien by lawsuit within 8 months. Even having done all that, the question becomes whether there will be enough equity in the property to satisfy the lien amount. When times were good, and real estate was an investor’s dream, we hardly ever worried about that. Today, we have to.

The significant risks of non-payment and lack of protection offered by today’s liens have given rise to trend heretofore not often used: the pre-contract title report. When a contractor, architect or engineer has concerns about a client’s ability to pay, in addition to demanding evidence of the Owner’s financing, some are now taking the additional precaution of ordering a title report on the project property, just to see how long the line might be to get paid in the event of a lien foreclosure. In determining the priority of payment in a lien foreclosure case, the lien’s priority date is the date on which the provision of services, materials or equipment began. However, if the Owner’s lender had recorded a deed of trust before the work began, that deed of trust will be paid first out of any sale proceeds following the foreclosure. And, given falling property values, the project could be worth far less today than at the time of lending, or maybe even be upside down. So, after the lender is paid off (if it even can be), the remaining equity to distribute to lien claimants may be small, or non-existent.

In my contracting days I never once considered pulling title on the project property before agreeing to a contract. And, back in the high times we regularly agreed to subordinate to primary bank financing, all the while simply assuming that in the event of a catastrophe, the property’s equity would be a virtually fail-safe (if somewhat expensive to tap) last line of defense against non-payment. But the realities of the day simply don’t allow such lackadaisical business approaches. Instead, more and more of us are adopting that old Ronald Reagan approach, “trust, but verify.”

Attention to Detail Counts

The idea of kicking off a new company in the current economy seems strange to most people.  But it is happening.  Some construction companies began directly before the recession out of bad timing and are trying to survive and other companies have started up due to layoffs and necessity. With new projects being at a premium and many of the larger more experienced companies bidding in markets untouched for many years, competition and experience is fierce. Many new contractors aren’t sure where or how to break into the market. But some basic concepts apply the same to both experienced and new companies.

Many companies tend to view the public bidding process as only a ritual, and wonder if they’re wasting their time on a contract that’s already been decided upon. What they don’t realize is that laws and regulations are in place to ensure the process is conducted fairly. Companies that shy away from government and state invitations to bid, miss out on potentially profitable business, as large dollar‐value sales, government or large‐company buyers are most apt to use a formal RFP process. It pays to understand the process, and to learn how your company can best respond to the next RFP that comes your way in this “post recession culture.”

Understand the art of competitive bidding. Small businesses must understand the art of bidding on contracts; this is the downfall of over 75% of small businesses. The problem is that small businesses either bid contracts way too low or way too high; it seems that there is no middle ground. Federal and state guidelines often require a competitive bidding environment. The reality is that businesses will need to know how to bid contracts; how to read and understand Request for Proposals (RFP), how to rearch their competition and know their industry.

When government wants to award work, it releases an “Initiation to Bid.” A full description of the product of service up for bids is provided, along with conditions for purchase, deadline for bids and other details. You may have to act fast—some bidding deadlines are as short as a month or less; it all depends on the agency and the urgency of awarding the contract. Have your business information ready so you can add whatever details apply to a particular bid.

Many businesses will need to create a “Boilerplate” that can be used on potential contracts. When a Request for Bid hits the street it is important that your business have the bare necessities needed to begin to prepare the proposal. First time bidders who enter in the government bidding process may assume that a low bid is the most attractive element of any winning bid. Not so. The truth is low bids can raise a red flag. Many small, inexperienced businesses tend to lowball bids. This means bidding contracts so low that no other business could afford to compete. The problem is that the government wants to know a business is going to be around in six months; the need to award bids based on cost and performance is where the industry is today. It’s called “Lowest Qualified Bidder” ‐ so it is important to understand the process and how your business fits in.

Remember, you won’t get rich over night; the government contracting world provides a host of opportunities; but never put all of your eggs in one basket. Balance both public and private contracts; keep all you options open and keep it simple.

When estimating projects—Make Sure You Calculate a Profit for Your Business

Businesses typically underestimate the costs of completing work on a contract they may be bidding on. Either they don’t calculate materials price increases on a long term contract, they don’t account for increasing labor costs, or they just don’t accurately measure and calculate when they’re bidding on the job. Paying attention to the details will save you time and money and will keep everybody honest.

If you are keeping an eye on the cost of materials, and wondering what to expect in 2011, here’s some information from ABC’s chief economist, Anirban Basu:

“While the slow growth of the U.S. economy, and certain parts of the global economy, are not showing signs of volatility, unsettled policy environments remain a major variable, and contractors should anticipate fluctuation in construction materials prices in 2011.”

Construction materials prices were down slightly in September falling 0.1 percent, according to the October 14 producer price index (PPI) report by the U.S. Labor Department. Prices were also down 0.1 percent for the quarter, but up 3.8 percent from the same time last year. (See Analysis below)

Leading the declines, prices for prepared asphalt, tar roofing, and siding fell 1.9 percent in September – the second monthly decrease – but were up 1 percent for the quarter and 2.4 percent higher over the last twelve months. Softwood lumber prices decreased 1.3 percent for the month and 7.5 percent for the quarter, but were up 4.7 percent on a year-over-year basis. Prices for fabricated structural metal products edged down 0.1 percent for the month and are down 0.3 percent for the quarter. However, over the past twelve months, prices for fabricated structural metal products were up 2.8 percent. Nonferrous wire and cable prices slipped 0.7 percent in September but were 0.3 percent higher for the quarter and up 7.3 percent from September 2009.

In contrast, iron and steel prices jumped 2 percent in September, the first monthly increase since May. Iron and steel prices were down 1.8 percent for the quarter, but up 16.5 percent from the same time last year. Steel mill product prices were up 1.2 percent for the month, down 4.1 percent for the quarter, and up 13.8 percent year-over-year. Prices for plumbing fixtures and fittings inched up 0.1 percent in September, up 0.9 percent for the quarter and 1.4 percent higher over the past twelve months. Concrete product prices were unchanged for the month and up just 0.3 percent in the third quarter. Still, concrete product prices are down 0.8 percent from September 2009.

Crude energy prices dipped 8.8 percent in September due to a 19.7 percent drop in natural gas prices. For the quarter, crude energy prices were down 4.2 percent, but were up 14.4 percent compared to September 2009. Overall, wholesale goods prices increased 0.4 percent in September and are 4 percent higher from a year ago.

Analysis

“This month’s producer price index data contains a number of contradictory elements. On one hand, the weakness of the dollar and the impact on certain commodity prices is becoming increasingly apparent. Among the most noteworthy increases was the jump in iron and steel prices, which were up 2 percent for the month. This represented the first increase since May.

“Finished goods prices also rose, up 0.4 percent for the month, and 4 percent from a year ago. However, natural gas prices tumbled 19.7 percent last month. The ongoing weakness in natural gas prices remains a bit of a mystery given the general increase in energy and other commodity prices in recent months,” said Basu.

“All of this is a bit unsettling for contractors looking for price stability. While construction materials prices were down slightly in September, a deeper look into the data reveals significant volatility in prices. This volatility may continue as both U.S. monetary and fiscal policies remain unsettled and as investors seek to avoid assets that would fluctuate due to the value of the dollar,” Basu said.

“While the slow growth of the U.S. economy, and certain parts of the global economy, are not showing signs of volatility, unsettled policy environments remain a major variable, and contractors should anticipate fluctuation in construction materials prices in 2011.”

Earlier this year the construction industry worked for, and secured changes to, the two-year-old reseller permit law.  Passage of that legislation is now bearing its practical fruits, as the Department of Revenue announced it is sending renewed reseller permits to nearly 18,000 construction businesses this month.

In 2009, lawmakers replaced self-issued resale certificates with department-issued reseller permits. Contractors who do not provide a copy of a reseller permit or other acceptable exemption certificate to wholesalers must pay retail sales tax when buying goods and services for resale.

The law originally required contractors to reapply for the permits each year, but the bill (SHB 2758) that passed in the last legislative session allows the department to automatically renew permits to construction businesses that qualified based on tax reporting history. (Some construction business will be notified that their reseller permits will not be automatically renewed.)

Allowing the automatic renewals was one positive element of SHB 2758, and there were others.

Another important change allows contractors to use a two-year (rather than one-year) “look back” in determining whether their market mix of construction activities meets the 25 percent threshold to qualify for the permit.  This is important because if a contractor’s total dollar amount of business activity drops below 25 percent of taxable construction, issuance of a seller’s permit is jeopardized. Use of a 12 month “look back” in calculating market-sector activity in determining the 25 percent taxable activity threshold could be problematic for contractors and the Department when economic conditions cause many contractors to perform a greater proportion of their business as projects for government agencies which aren’t subject to sales tax. This makes achieving the 25 percent threshold more difficult than normal.

As the economy improves, these contractors’ mix of business will fluctuate, gravitating more to a normal mix of private sector and government projects. Calculating future permit eligibility based on 12 months of non-qualifying construction activity will make achieving the 25 percent threshold more difficult, resulting in more requests for special permit handling and appeals of permit denials or requiring contractors to pay sales tax up front and then try to get a refund from the state.  The two-year “look back” mitigates this.

Finally, the legislation allows contractors to apply for a Resellers Permit every two years, rather than annually (with the possibility of automatic renewal). Unfortunately, the bill puts off implementation of the two-year permit until July 13, 2013.  Industry groups are working with DOR to move that date up.

Remember this mess?  It doesn’t look like that now!  WSDOT’s Nile Valley Landslide Project, with Selland Construction as general contractor, won an Innovative Management Award from AASHTO and is now a finalist for national People’s Choice Award. It’s the only WA project in the final ten, vote for it now! (photo courtesy WSDOT)

In this election season, vote for…WSDOT’s and Selland Construction’s Nile Valley Landslide Project!  AASHTO, AAA and the U.S. Chamber of Commerce announced that the project is amont the Top 10 finalists in the 2010 America’s Transportation Awards competition.

The project already received an Innovative Management Award, which landed it as a finalist for both the “People’s Choice Award” (which you can vote for here – but do so by Oct. 18) and the Grand Prize, to be selected by a panel of judges.  If the Nile Valley project wins either award, Washington State will receive funds to support an educational grant in the transportation field, or to fund a community service project selected by WSDOT.

On Oct. 11, 2009, a massive landslide destroyed a half-mile of SR 410, west of Yakima, blocking and uplifting the adjacent Naches River and flooding the parallel Nile Loop county road. Fortunately, no one was injured by the movement of millions of cubic yards of rock and soil, but life will be forever changed for the estimated 600 residences and businesses west of the slide, as well as travelers on SR 410.

(As reminder of what WSDOT and Selland were dealing with, click landslide photos.)

SR 410 connects central Washington to western Washington via the 5,430- foot Chinook Pass, 38 miles west of the slide. Due to heavy winter snows and high avalanche danger, WSDOT closes Chinook Pass every winter, typically by late November. The pass remains closed until Memorial Day, effectively leaving the only access from SR 410 to employment, schools, and retail to the east.

Immediately after the landslide, the diverted Naches River flooded residences and the Nile Loop Road, cutting off the only remaining easterly access. WSDOT used innovative management in collaboration with Yakima County, which has jurisdiction over the river, to acquire needed properties, re-channel the river away from the landslide toe, monitor for additional landslide movement, and design and construct a 4,000-foot detour road that would withstand projected winter flooding. The state needed to ensure winter access for the residences and businesses that would soon to be shut off from the west. Six days after the landslide, Governor Chris Gregoire visited the site and committed to opening the detour route by Thanksgiving, a 45-day rush timeline.

WSDOT and AGC-member Selland Construction worked 14 hours a day, seven days a week to construct a new river channel and detour, while WSDOT environmental experts coordinated with resource agencies to ensure the agency mitigated and/or minimized long term impacts. On November 24, the day before the promised target, WSDOT opened the detour to traffic.

WSDOT’s post-project safety report noted that Selland’s employee worked in excess of 25,000 hours in just over 50 days of work, with most working 14-16 hours days, seven days a week. In many cases employees worked in excess of 30 days straight. Plus, at a peak, Selland had 87 pieces of equipment on site. Nevertheless, no injuries or equipment damage occurred.

“It’s quite a major accomplishment to rebuild a roadway like this in a just over a month,” WSDOT Regional Administrator Don Whitehouse said at the time of the road opening. “We could have never done this without the cooperation of landowners, our agency partners and our contractor Selland Construction, Inc.”

Remember: Vote here by Oct. 18.

Dan Barrett, Matt Lessard and Craig Klinkam (center) with future construction industry leaders (photo by Sarah Teague)

At the AGC Education Foundation and AGC’s Future Leadership Forum’s recent  Access to Experience event, Dan Barrett (Sellen Construction), Craig Klinkam (The Klinkam Company) and Matt Lessard (Wilcox Construction) shared some career advice with young construction industry pros.  Issues ranged from higher education to tips on what to remember when economic times are tough.

Here’s a quick glance at what they talked about:

When asked how they got interested in construction and what lead them to where they are today, Dan said that he loves to watch things being built, and loves the smell of concrete. He said, “It’s all about curiosity and helping change the landscape of the community.”

Adding to that statement, Matt reminded attendees to be flexible in life, and that “It’s not always what you thought it would be, what you thought you always wanted to do. Sometimes you just end up where you are in a company and it’s what you become good at.”

Speaking about the AGC Education Foundation’s scholarship, Craig said that the opportunity was like a hand on the shoulder, a feeling of encouragement. All three speakers were scholarship recipients, each from different years of the program.

When asked about higher education, Dan said that it’s important to do grad school or any sort of higher education for yourself, and to do it to make a difference in your life. It’s not necessarily about having a piece of paper to win over someone else. “School should be very intentional. I went because I wanted to fill holes in my expertise. I asked myself, ‘How can I become a better professional?’”

Continuing on to talk about the economy and his company’s approach to dealing with down times, Dan explained that the economy is always cyclical and everyone has to wait it out sometimes. “Be patient and work with the market. Be as scrappy as you need to be to get your foot in the door, once you create an opportunity make the most of it.” His company believes that it’s important to not overextend past the company’s resources. They try to keep their projects diverse, but they always have a strategy for the projects they bid on and the ones they turn down.

Craig and Matt agreed with Dan, saying that anyone overextending their company’s resources isn’t doing their clients any favors and that it’s important to plan early and know what’s coming. Keeping positives in your finances is extremely hard or it makes all of the following projects and financing more difficult.

When asked about key things to know about business and their tips on success, all three speakers focused on how important it is to know the people in your industry. “Focus on your clients and the people side of the business.  Finding new technology is great but in the end of the day it comes down to relationships – who your clients are and whether or not you are paying attention to them,” explained Dan.

Quickly agreeing with him, Matt followed up with, “Take people out, get to know them personally. There are a lot of people competing; it’s easy to be forgotten. It is a constant project to keep yourself at the table.”

Taking a different approach to the question, Craig brought up making sure you get to know everyone on the project, no matter what job title they hold. “Differentiate leadership from management; you don’t have to be management to be a leader for your company.” He talked about how important it is to speak up if you have a good idea, and how important it is for management to listen to all of the ideas out there.

Quickly bouncing to the next topic, they spoke about lessons they have learned while working up the ranks in the industry. Matt talked about working in other countries and how working abroad can make you see how efficient our country is, but it also makes you open your eyes to different aspects of construction. Working with different tools and expectations makes you notice that there are other ways of doing things that you might not have thought of before.

Speaking about general jobsite tips, Dan said, “Question your assumptions; you don’t always know all of the facts, so make sure you keep asking questions. Our business is very relationship based so don’t jump to conclusions, especially before getting angry or speaking badly of someone.”

The last question of the day was about standing out as a key employee in the company. Matt said, “Be willing to do anything that is asked of you. If you’re driven you can work really hard, but if you see your client needs something and you don’t ask for anything in return, it makes you stand out.”

Dan followed up with a great ending comment about assumptions. “If an answer is ‘That’s the way it’s always been done” – that’s the first thing I look at to try and improve and take the initiative to push change for the better.”