Virginia’s Construction Resilience Tested in Eye of the ’Perfect Storm’

Wed May 26, 2004 - Southeast Edition
Giles Lambertson

Commercial construction is “a tough industry,” said Steven Vermillion, executive director of the Associated General Contractors (AGC) of Virginia. Its toughness will be tested in 2004.

The outlook for contractors in Virginia is good … and bad, said Vermillion, who has been looking out for AGC members in one capacity or another for 30 years. “Some contractors are very upbeat, some are very concerned.”

Chandler Swope is some of both. The president of Swope Construction also is president of the state’s AGC, so he brings the perspective of businessman and statewide leader to the topic.

“I’m an optimist. Everybody is an incurable optimist,” Swope said from his company office on the western border of the state. “We all believe the industry will manage somehow.”

That said, he doesn’t dispute that these are perilous times for contractors across the state, at least in some regions.

Northern Virginia continues to enjoy a spillover of prosperity from the District of Columbia. Vermillion categorizes activity in the Washington suburbs as “strong. Period.” That compares to the Richmond and Tidewater areas of the state that he rates as “fairly solid.”

The same cannot be said across the state.

“My sense is that the east coast of the state is fairly strong,” Swope said.

“Some there are telling me that they are going to have more work than they can find employees to do it. It could lead to a bidders’ war.

“But go westward past Charlottesville and the work starts to taper off.”

He said that in the west, where his company works both sides of the Virginia-West Virginia border, the market is relatively flat “and competition is absolutely fierce.”

Why is this? The U.S. economy is recovering steadily, according to all the usual economic indicators.

Vermillion said the industry is being hit by “the perfect storm,” alluding to the movie by that name about the coming together of several weather patterns to produce a disaster.

Some of the storm clouds gathering above the heads of contractors these days are well known, some not as familiar. They include:

• rising steel prices;

• rising fuel prices;

• rising cement prices;

• rising plywood prices;

• lean state budgets;

• interest rates poised to rise.

Steel is the big one. The steady and dramatic rise in the cost of the building material has been noted for months.

Swope mentions a 50 to 60 percent rise in the cost of “red iron,” or structural steel. Some steel products like conduit are up 400 percent.

Suggestions that the price might have reached its peak are not comforting to contractors.

“[The rate of increase] has flattened, but it is not going back down,” Swope said. “No one believes prices are going to go down to January levels.”

Petroleum products are dealing another blow to the industry. Diesel fuel has virtually doubled in price, and petroleum-based products like PVC pipe and fittings are climbing in cost, too.

Ken Simonson, chief economist for the AGC of America, reported this month on a survey by the Institute of Supply Management. The April survey concluded that the highest rate of increase in prices paid was in the sector of construction, much of it tied to steel. Simonson said that several contractors have reported specifically that steel studs for wallboard are in scarce supply and downright pricey.

A relative shortage of cement exists in some areas and is tied to a smaller supply of imported cement reaching our shores. It is being diverted to other busy national economies.

The supply of plywood is down, meanwhile, for the opposite reason: It is manufactured in the United States but being shipped elsewhere. A federal demand for it reportedly exists in places like Afghanistan and Iraq.

“This business has so many variables,” Vermillion said from his Richmond-area AGC office. “But the steel thing is hitting steel suppliers hard. They are being hit tremendously hard. Some are going to go out of business.”

He doesn’t believe the full impact of the crescendo of steel prices has been heard yet. Suppliers are bearing the brunt of it now, but there is more pain to come, Vermillion suspects.

One of the ripples caused by the steel pricing is the frequency of projects stopped short because bids come in too high. Swope has experienced that on several occasions, submitting a low bid in a field of bidders only to see the project shelved because even his low bid was too high. The expected work suddenly vanishes.

He called this a “delicate environment” for bidders who must factor in the sharply escalating cost of materials and hope the bid is neither too high to be uncompetitive nor too low to absorb rising steel costs and still be profitable –– or at least break even.

“I’m surprised there have been as few business failures as there have,” Swope said.

He expressed particular concern for Virginia highway contractors. Most commercial contracts are relatively short term and rising prices can be kept in check. But projects for highway contracts are spread out over years, Swope noted. In this economic climate, time is not on the side of the builder.

It turns out that not much new highway work will be out there for bidding in 2004 anyway, according to the Virginia Department of Transportation (VDOT).

“There is nothing in the state budget for the Department of Transportation,” department spokeswoman Tamara Neale said as May got under way. “We don’t expect an increase in our programs.

“We’re not going to be able to add new projects. The state has scarce resources for new projects.”

Projects already in progress will continue to be funded, however, such as Route 28 in northern Virginia and Route 288 in the Chesterfield area.

Improvement of Route 199 that sweeps south of Williamsburg is on track for completion before 2007. That year the nation will celebrate the settling of Jamestown 400 years before.

Hovering just beyond 2004 is a $10 to $20 billion widening of Interstate 81 for the more than 350 miles (560 km) that it angles across the western side of the state at the base of the Appalachian Mountains. VDOT is in the early stages of negotiation with a consortium of companies — STAR Solutions — to reach a comprehensive agreement on the I-81 corridor, Neale said.

If the first tier of agreement can be reached by the end of 2004, it could mean money in the pockets of contractors as early as next year.

The massive project that might include segregated lanes for trucks will be less sensitive to the ups and downs of the state budget. That is because it is being considered under the state’s Public-Private Transportation Act, by which private entities can construct, improve, maintain and operate transportation facilities.

Consequently, the widened and improved roadway might incorporate toll booths.

School construction in Virginia, meanwhile, is not expected to mirror the steady activity of the last couple of years. According to School Planning & Management’s ninth annual school construction report, the five-state region including Virginia will drop fewer dollars in new and renovated school facilities in 2004.

Campus projects are winding down and fewer new ones are starting. Bonds passed by Virginia districts in previous years are carrying existing projects, but few if any school construction bonds are expected to be passed this year.

All in all, 2004 will be a roller coaster for many Virginia contractors.

Some will ride high. Some go over the side.

“If you take 10 contractors, five might be having the best year of their lives,” Vermillion said. “Three are in the middle of the road and two are dying.”

Still, said the association director, the industry is tough enough to survive. “The year has the potential to get far worse, but right now it’s just a hard time.”

VDOT Photo