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BY MARK LARSON
High costs have hit just about every industry, and construction is no exception.
Ted Bumgardner, principal and vice president at San Diego-based Gafcon Inc., a 150-employee construction management and consulting firm, saw a similar down cycle in 1990.
But this time around, the downturn comes on the heels of high fuel costs and global competition for building materials from Asian countries.
That has forced materials costs upward in a scenario that didn’t exist in 1990.
Not only is the higher world demand for materials a factor, but the decline in the value of the dollar in recent years has made imported goods more costly.
Lately, however, declines in the euro and the yen have slightly eased conditions for the dollar.
Bumgardner points to three main facets of construction affected by higher prices: Materials and equipment, labor, and overhead/profit.
“We have seen some dramatic increases in materials cost due to the price of oil,” he says, citing petroleum-based products such as roofing materials and fuel costs associated with transporting materials.
Meanwhile, construction commodity materials have gone up in price since January, reports Bumgardner. Copper prices are up 19.5 percent; aluminum up 25 percent, and steel up 46 percent. To top it off, crude oil prices rose 44.3 percent.
Some materials have bucked the trend.
Costs for lumber and the gypsum used to make cement, for instance, have not gone up, he says.
But the product-pricing index for construction materials overall indicates they rose 10 percent during the past year.
Meanwhile, costs of hoisting equipment used in construction are up 10 percent.
And even though California lost about 88,000 construction jobs last year, or about 10 percent of the industry manpower, labor costs remain high, says Bumgardner. That’s because most union labor pay agreements were struck during the construction boom, and their two- to three-year terms have yet to run out.
While the construction market is shrinking, he notes that public works construction projects are carrying on as usual.
Some small contractors and subcontractors have migrated to those projects.
But contractors are caught in the middle. They’re paying higher costs, yet if they want business, they have to charge less.
“This will go on until enough contractors go out of business,” says Bumgardner. He predicts that at some point the industry will strike a balance between the demand for work and the number of contractors available to do it.
For now, he sees the home construction slump continuing for some time.
“I don’t think we’re anywhere near the bottom,” he says. “Maybe by this time next year. It won’t start unless lenders feel comfortable lending on private construction projects.”
Gafcon, founded in 1987, did $17.4 million in revenue last year, up from $13.2 million in 2006.
Scott Murfey is vice president of La Jolla-based GDC Construction Inc. His 25-employee firm specializes in custom homes and remodels and has annual sales of $5 million. He’s had to cut costs to maintain business in tough times.
“The first thing we do is try to lower our overhead and profit,” says Murfey. For instance, to make a project more affordable, project management fees, typically charged by the hour, are eased.
Fuel and dump fees for debris are among the high costs he copes with. So the company tries to keep its waste to a minimum.
“We try to help the environment rather than throw something out that could be re-used,” says Murfey.
Metals are resold and old appliances donated to defray project costs, he says.
“The first half of the year was pretty quiet,” says Murfey. “There’s a lot more movement in the second half. We’ll probably have a smaller year than last year, but we’ll survive in the long run.”
Since midyear, Murfey has noticed, “People aren’t as scared to hire an architect. And remodels are so competitive. Contractors are slashing prices to stay in business. Now is a great time to build. You’re going to get the best bang for the buck.”
His advice to clients wanting to save money on their remodels is to get a set of plans that are well detailed and accurate.
Unspecific, vague plans can end up costing more for builders to follow, he says. And once a trustworthy contractor is found, he says bids can be put out to subcontractors to get the best deal on various jobs on a project.
These days his company will take any building job it can get, even if it’s as small as a living room remodel. The theory is that a reference from a small job could lead to a large job down the road.
“You never know who’s going to call,” says Murfey. “Basically, our reputation is what it comes down to.”
Relying On Referrals
Gary Marrokal of Marrokal Construction in San Diego has been a designer-builder for home remodeling for 28 years. His average job costs around $200,000. He has 31 employees and this year expects to do $18 million in sales.
His business depends on referrals, and these days of tough economic times, he’s seeing fewer job leads. But it isn’t all bad news for him.
“The leads we’re getting are more serious about coming on board,” he says.
And while he’s coped with high gas prices like everybody else, he’s seen workers’ compensation liability insurance premiums stay flat.
“They certainly haven’t gone up, they haven’t doubled,” he says.
As for riding out the economic dip, Marrokal says, there are ways to do it.
“If I was a trade contractor and wanted to keep busy, I’d charge a little less, and not the same as three years ago when I couldn’t keep up with the work,” he says.
Sales And Leases
Meanwhile, times are also lean on the other side of the equation: Homes and commercial space already built by contractors need to be sold or leased.
Steve Hundley, chief executive officer of 1 Park Place, is a Silicon Valley veteran plugging in his San Diego company’s online marketing savvy to help out.
Hundley found a disconnect in the sales efforts of homebuilders and real estate brokers.
His company is working on a software solution that connects the sales office of a homebuilder to the home pages of a network of real estate agents.
“We want 20,000 Realtors to market a project,” he says. That, in effect, allows a builder to advertise a project for much less than through traditional media, says Hundley.
“The cost of distribution might be $100 (online),” he says, “compared to the $8,000 to $10,000 cost to advertise in print and television.”
Last year, Hundley’s business doubled its sales from $3 million to $6 million. He’s confident it will double again this year to $12 million.
Mark Larson is a freelance writer for the Business Journal.
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