Volume 44, Issue 7 - July 2009
by Megan Headley and Ellen Rogers
The forecasts to which commercial glazing contractors have been paying attention for the first half of the year are now coming true. In many parts of the country, the threat of slowing commercial construction (see chart on page 31) has become a reality.
“The design and construction marketplace is extremely competitive right now,” reports Kermit Baker, chief economist for the American Institute of Architects (AIA).
Despite a recent moderation in the downturn in design services billings, the American Institute of Architects’ (AIA) Architecture Billings Index (ABI) shows that an economic recovery may have stalled. The rating for the May ABI, which reflects an approximate nine to twelve month lag time between architecture billings and construction spending, was 42.9, nearly identical to the 42.8 mark in April. This score still indicates an overall decline in demand for design services.
Baker adds, “Prospective clients are casting a wider net, causing numerous firms to bid for the same project, which is why the high level of inquiries is not necessarily translating into additional billings for project work at many [architectural] firms.”
Glazing contractors of all sizes are facing challenges as they pursue a limited number of nonresidential projects.
“I think the reality is that everybody is struggling with current work,” says Mic Patterson, director of strategic development of Enclos Corp. “Everybody has backlog to a varying extent and, for a while now, everybody’s been burning through their backlog.”
So what is a glazing contractor to do to keep busy until the market recovers?
“Fortunately, there’s a good amount of bid activity developing as it usually does pick up in the spring,” says Rob Nickerson of Tower Glass Co. in Woburn, Mass. Rick Hamlin with Trainor Glass’ office in St. Louis, Mo., says that while there have been cutbacks, the company’s backlog has been busy so far this year.
“We’ve moved some of our personnel in areas where the backlog is slow to areas where the backlog is still strong,” he says. “Bidding activity is fairly active, more so than you would think watching the news, so we’ve also been cross-training personnel in departments, such as estimating, that are busy.”
The same has held true, so far, for Enclos Corp., which also installs glazing systems in projects all over the country.
“We were fortunate to have really strong backlog, a couple of really strong years from the standpoint of revenue and profit growth,” Patterson says. “We have backlog basically through 2010.”
Not everyone is facing such good fortune.
“We’re fortunate in our regional market,” reports Fred Keen, president and CEO of Tepco Contract Glazing Inc. in Dallas, Texas. Tecpo installs glass for projects in Texas, Oklahoma and Arkansas. Keen adds, “I’d say we’ve seen a good 25-percent decrease in overall bidding.”
“In our region there are some companies having that trouble—we’re not,” says Michael Smith, president of Metropolitan Glass Inc. in Denver. The glazing contractor works primarily in Colorado, “but we follow other contractors,” Smith says. “We’re licensed in Arizona, Mexico, etc.”
According to Smith, “We’re full for this year. We’re full for the first half of next year.”
One well-known example is Minneapolis-based Apogee Enterprises Inc., which announced in fiscal 2010 first quarter earnings on June 23 that the company’s backlog remained relatively flat at $310.0 million, compared to $316.2 million at the end of fiscal 2009—down from $491.0 million at this same time last year. While that includes the backlog for both its glass fabricator subsidiary, Viracon, as well as glazing contractor Harmon Inc., the financial statement attributed the decline to project delays, the timing of project flow and cancellations experienced in the second half of 2008.
Apogee also reported that as work on existing backlog is completed, slower bid-to-award timing is impacting backlog levels, despite steady bidding activity. Approximately $254 million, or 82 percent, of its backlog is expected to be delivered in fiscal 2010, and approximately $56 million, or 18 percent, in fiscal 2011.
“Everybody’s struggling now with trying to build on that backlog and not burn just through what they’ve got because it takes a while for these projects to ramp up and actually get into construction,” Patterson says. “And it’s getting increasingly competitive out there.”
Competitive indeed. Many of those larger contractors (see the March 2009 USGlass Big Book of Lists, page 28, for rankings) are pursuing work they would turn away in better times—snatching up jobs upon which smaller contractors might normally leave.
Russell Huffer, Apogee chairman and chief executive officer, made note of that in the company’s recent financial statement: “We are seeing early success in pursuing work in underserved, shorter-lead time architectural glass markets, including smaller and international projects and our architectural segment bidding activity remains strong although already slow bid-to-award timing extended in the quarter,” he stated.
Types of Projects
“The projects that we have been working on are coming to somewhat of an end so we’re changing our approach and our focus to different types of projects,” Bar says. He adds, “But even those are very competitive because everybody’s doing the same thing.”
And exactly what types of projects are those?
“We have going right now a 34-story casino in the mountains,” says Smith. Casinos are hardly the norm these days as developers tighten their belts; this example from Metropolitan Glass shows that big projects are still out there with some searching. Smith continues, “We have just finished a Westin hotel. We’re doing a hospital in Grand Junction.”
Apogee is finding that the institutional sector remains the largest portion of its backlog, followed by office projects, with condo and hotel/entertainment projects a much smaller portion of future work.
“We still expect to benefit from the addition of stimulus projects to upgrade government and school buildings that would incorporate our energy-efficient, green products and services, although it may not be until fiscal 2011,” says Huffer.
Government work is being touted as a constant in this down market, keeping everyone scrambling for related jobs.
“A lot of people are hoping, I think, for an increase in government work and work in the health care sector, hospital work, this kind of thing,” Patterson says. “It’s unclear whether that’s really going to manifest. The administration clearly has the intent of bringing a lot of these kinds of projects into the marketplace—and we haven’t seen a lot of that happen yet. There are some, but for the ones that do happen, there’s a lot of competition.”
Keen has found those government jobs to be manifesting down in Texas.
“The only thing bidding right now is government,” Keen says. “The private sector’s probably down 75 percent.”
“I think smaller government work is becoming very popular right now,” Smith agrees.
Sound Glass is another contractor pursuing government work.
“In the Northwest here we have McChord Air Force Base and Ft. Lewis Army Base; they’re really close to our operations so we’ve been doing a lot of work trying to get in with their contractors and maintenance people to do work at the bases,” Bars says.
Look Before You Leap
“For sure, not everybody can handle the [federal] projects,” Patterson says. “But in this kind of a marketplace you’ve got everybody coming out anyway, whether they can handle it or not—there’s a lot of desperation out there.
“That’s one of the things that happens—you have entities sometimes that aren’t really qualified for the work that they’re pursuing but they pursue it anyway because there’s not much else going on,” Patterson adds.
Smith speaks from experience that this is the case. “There’s a learning curve to doing government work; we sure went through one. In order to help fill our backlog we started looking at government work about a year ago.”
One snag for securing larger projects is the issue of bonding (see October 2007 USGlass, page 32 for more on bonding) and insurance.
“Bonding is always a concern with smaller companies,” Smith says.
Huffer agrees that bonding ability is “a competitive strength in today’s markets.”
“For us, it’s a little easier because we’re a bigger company, we have all the financing and the bonding ability that we need to do government work,” Bars says. “For the smaller shops it’s sometimes difficult for them to get bonding or insurance requirements that the government requires—even on bigger jobs the owner requires insurance. It’s just difficult for the small shop to do that.
”He adds, “It’s a tough market out there—for everybody, small and big.”
Hanging In There
“We are facing an unprecedented level of uncertainty in fiscal 2010, with commercial real estate markets still largely frozen and declining domestic employment levels,” Huffer noted in Apogee’s recent report.
Hamlin says cross-training, among other initiatives, is helping Trainor prepare for when the market returns.
“We are also reviewing our processes to improve efficiencies, which will be important to do early as the market does rebound,” Hamlin says.
And that’s the key—working harder than was necessary in the recent past of the construction boom to contract jobs that will help create backlog.
“We’re trying to run the work we have going right now more efficiently by placing extra resources into it,” says Nickerson, who says his company has budgeted some time of existing personnel to assist staff running projects. “Hopefully it will make for a more profitable bottom line.”
In addition, Nickerson says his company also is trying to bid more jobs.
“We would like to be better aware of the projects that best suit our niche earlier in the process and to do so, we’ll have to do additional missionary work with the architects and contractors,” he says.
Many are succumbing to the market pressure and not simply pursuing smaller projects but also smaller rewards.
“Let me say it this way, if we were to go under or go broke it would be because I’m leaning back with my feet on my desk, not because we’ve gone out and taken work under our cost,” Keen says.
“All I can say is hang in there,” Bars advises.
Megan Headley is the editor and Ellen Rogers is a contributing editor for USGlass.