Utility Contractors Look to Congress for Turnaround

Tue August 12, 2008 - National Edition
Jeff Cronin



James King is well aware that he works in a cyclical industry.

The president of DeKalb Pipeline Co. in Conyers, Ga., like underground utility contractors across the country, is trying his best to keep his company busy during the current downturn.

But as King, a past president of the National Underground Utility Contractors Association, keeps cranking, he looks toward Congress to help him and his colleagues find their way back to a more comfortable situation.

DeKalb Pipeline, now run by the second generation, has been working in metro Atlanta since 1960. It started out as a specialist in water lines, but, in the past couple of decades, has focused more on site development work.

In good times, the company performs $18 million of work a year with a staff of 100. But again, like most of his colleagues, those numbers have faltered this year.

King noticed the downturn start in spring 2007, when the number of available jobs began to tail off.

And now, in Atlanta, “there’s nowhere near enough work to go around.”

He attended a pre-bid meeting this summer at which 33 contractors were looking for the job. The average job nowadays sees 15 to 25 bidders, King said.

In Lafayette, Ind., the competition’s growing, too.

Terry Dillon of Atlas Excavating, a sewer and water main contractor that was founded in 1981, said 15 to 20 contractors are vying for the same project nowadays. More and more, he sees contractors who have specialized in residential work crossing over to the public sector and a number of out-of-state companies bidding for the same job.

“We’re busy, but we don’t have the backlog we once had,” said Dillon, the current NUCA president.

In the Seattle area, Mark Scoccolo, owner of SCI Infrastructure Inc. in Pacific, Wash., usually competes against two or three other contractors for a job. Recently, that’s up to seven or eight. He said Washington saw a surge in public contracts at the beginning of the year, but that has since fallen off.

But while the industry is suffering, King sees a way out.

The key, he said, is to look toward the public sector. He’d like to see Congress start pumping money toward municipalities for water and sewer projects.

“A little bit of well-placed government money would go a long way,” King said.

There’s plenty of work to be done, said Eben Wyman, NUCA’s vice president of government relations. He said the association is currently pressing for increased funding in Washington, D.C., to help pay for the $202.5 billion worth of improvements needed to existing infrastructure nationally.

The challenge NUCA contractors deal with is that their work is “out of sight, out of mind” when it comes to spending tax dollars. “When a bridge collapses, it makes national news for two weeks,” Wyman said.

A water infrastructure funding bill passed the House in March 2007, but has yet to get out of the committee level at the Senate. Wyman said there has been renewed interest in the Senate and he hopes that “in September, the Senate will get off of the dime and do something.”

Scoccolo said government intervention “has to be a part” of the turnaround. “It’s on the forefront of most legislators’ minds.”

He believes Washington will see its own boost with this summer’s 1.5 cent per gallon gas tax increase that is devoted to transportation projects.

To get the private sector going, King said the industry needs Congress to provide assistance to banks, so they loosen their mortgage purse strings.

Dillon agrees. The banks, he said, “scare me worse than anything.”

He’s seen banks pull loans from contractors who are making timely payments.

“They need to stick to their loans,” he said. “They scare the rest of us that are functioning.”

The contractors’ sentiments are echoed in the results of a survey sponsored by NUCA and Associated Equipment Distributors. The figures, released July 30 during a national teleconference, provide a glimpse into how government intervention, including the current Economic Stimulus Act (ESA), could help contractors and the companies from which they purchase equipment.

The survey suggests increasing federal funding of water infrastructure investment would “have an immediate and positive impact on the economy and enhance the ESA’s effectiveness.”

Seventy-two percent of the survey respondents said they would more likely buy equipment this year if Congress increases infrastructure funding. And 71 percent would be more likely to hire additional workers or add positions at their companies.

Dillon harkens back to the Depression and the New Deal. He said that type of program already helped fix the American economy once, so why not do it again?

“We need to take care of ourselves,” he said.

More than three-quarters of the respondents said they would likely purchase equipment next year if the current ESA capital incentives were extended into 2009.

Signed into law in February, the ESA created a temporary depreciation bonus allowing a contractor who buys equipment to depreciate an additional 50 percent of its cost.

The act also increases the amount a business can expense up to $250,000, but only if its equipment purchases stay less than $800,000. For each dollar a purchase exceeds the $800,000 limit, the amount that can be expensed decreases by $1. That means a company that spends $1.05 million would not be able to expense anything. This part of the act includes both new and used equipment.

Of NUCA’s 1,350 members, 78 responded to the survey, resulting in a margin of error of 11 percent. While it’s a higher margin of error than what is generally sought in surveys, the AED’s Christian Klein, vice president of government affairs, said it still “provides some useful insight into the current state of affairs in the industry. Even with the margin of error in mind, the housing downturn has had a major impact on NUCA members and increasing water infrastructure investment would very likely prompt new purchasing and create jobs.”

Of the survey’s respondents, 44 percent earned more than $10 million from utility construction in 2007 and 45 percent are located in the Southeast. The South Central and Rocky Mountain regions were underrepresented, only comprising 3 percent and 1 percent respectively. Eighteen percent were from the Northeast, 16 percent from the Upper Midwest and 13 percent from the West Coast.

Of the respondents, 76 percent said they’d more likely make a purchase if the depreciation bonus were extended; 77 percent said the same about the expensing increase.

The positive outlook into 2009 contradicts the impact the ESA has had in the first half of 2008, according to survey results. Only one-third of the respondents said they took advantage of the act by making an equipment purchase this year.

SCI’s Scoccolo decided to take what he calls a “calculated risk” and purchase three new excavators this year.

SCI, which generally carries $50 million worth of contracts a year, has seen a drop in work, but remains busy.

Scoccolo asked himself the question he said all contractors should ask before heading to the equipment dealer: “Do you have the work for the gear?”

SCI had jobs coming up that required the new excavators, which helped make the decision easier.

But other factors would likely have led Scoccolo to make the purchase even without the ESA. He chose to buy new machines to ensure they met Tier III requirements and the dealership was offering 0 percent financing, so he chose not to rent.

What about the other two-thirds who said they haven’t made an equipment purchase?

Their reasons were quite similar and, at times, despondent.

“The stimulus is nice if there is an actual upturn in sight,” said one respondent. “The construction market will be bleak for at least two years and you must have revenue to justify taking on greater debt regardless of increased expensing opportunities.”

Others seem to support NUCA’s efforts to increase project funding.

“We need to stimulate the infrastructure economy and the government should be spending the money in infrastructure, not giving a tax deduction to the few companies that have work and already have all the equipment they need,” another respondent said. “Projects first, then incentives.”

Of the 44 people who said they had not made an equipment purchase, 33 cited the economy and a decrease in work.

Just more than one-quarter of those who answered the survey expected to make an equipment purchase in the last half of 2008.

Atlas Excavating’s Dillon isn’t one of them.

With a handful of major Indiana cities seemingly on the brink of letting major sewer and water bids under and EPA mandate, Dillon was expecting a very busy 2008.

Toward the end of 2007, he made an investment in equipment to prepare for the work.

However, Indiana voters made a clean sweep of incumbent mayors and all of the newly elected officials decided to cancel the plans, he said.

“Like all good mayors, they were trying to be fiscally responsible,” Dillon said.

But, since the projects are required by the federal government, he expects 2009 will bring its share of work to utility contractors.

As a result, Dillon, who usually spends $1.5 million to $3 million a year to keep his fleet updated, will only buy a few pumps or generators.

While many of the comments seemed bleak, a ray of hope shone the same day the survey results were released.

On July 30, President Bush signed into law a bill designed to boost the housing market.

The AED’s Klein said the provision that will likely have the greatest impact on housing construction is the new home-buyer credit. First-time buyers can receive a tax refund worth 10 percent of the purchase price up to $7,500. However, the refund must be paid back within 15 years, interest-free.

Klein said the law “is not going to be a panacea,” but may be enough “to nudge buyers off the fence.”

Comparison to 2003

NUCA and AED conducted a similar survey in 2003, one year after Congress passed a 30 percent depreciation bonus. Then, 67 percent said they had bought equipment specifically to take advantage of the bonus, compared to this year’s 39 percent. This survey had 99 respondents with a margin of error of 9.5 percent.

Klein attributes the difference to two factors.

First, he said in the report that the timing of the surveys differed. This time around, only five months have lapsed since the legislation was signed into law.

“Many contractors probably waited to take advantage of the depreciation bonus until late 2002 when their year-end financial situation was clearer and the benefits of using the depreciation bonus to reduce tax liability were more concrete,” Klein said in the report.

Additionally, Klein said the nature of this year’s economic downturn is different.

“The 2000-2001 downturn was in large part attributable to a dramatic drop in businesses purchasing,” he wrote. “In early 2002, when Congress first created the depreciation bonus, the economy had suffered six consecutive quarters of declining business purchasing.”

This year, he writes, “the U.S. economy has experienced nine consecutive quarters of declining residential real estate investment. This has taken a tremendous toll on the construction industry. … Given the slowdown in the housing market, it is not surprising that construction companies are reluctant to invest in new equipment.” CEG