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The Machinery of Construction Economics

BY STEVEN H. MILLER, CDT

Are you acquiring new equipment to meet expanding opportunities from the economic recovery? Are you still keeping old machines running while you wait for the recovery boom? The answer depends on where you are and what type of construction you perform.

Recently, AGC of America surveyed contractors about business conditions, including their level of new equipment investment. A whopping 82 percent reported that they bought new equipment in 2014, and 80 percent leased new machines. Moreover, 79 percent of firms plan to buy new equipment in 2015, and 81 percent said they plan to lease new equipment. Sounds like a construction boom, at first. However, roughly two-thirds invested $250,000 or less, and expectation for 2015 are about the same.

Constructor reached out to AGC members as well as other key players to get some insight about what these numbers mean.

One of the big factors appears to be the type of construction work a company performs. According to Jeff Jensen, director, Keybridge Research, 2013 saw strong expansion in many areas of construction, but growth slowed in 2014, partially hampered by the severity of the winter.

Housing construction, however, missed most of that resurgence. Now, Jensen sees signs that residential may be on the upswing, citing the improving job market and the past experience that housing tends to flow from a better employment picture. He expects 2015 to be more positive overall for construction. He’s not the only one. “Construction firms continue to add new jobs at a pretty steady clip in most parts of the country,” says Ken Simonson, AGC of America’s chief economist.

PRIVATE VS. PUBLIC SECTOR
By contrast, Jensen notes that companies working largely in road construction and other infrastructure projects saw growth earlier because they built projects funded with federal stimulus money. By 2014, most of those projects were completing or completed, and those businesses have plateaued recently.

State and local governments are now doing better than in the previous two to three years, and Jensen expects that projects which they have been putting off will now get funded. Nonetheless, he believes that large investments like equipment purchases may depend on whether or not Congress passes a long-term infrastructure measure, with the sense of predictability that brings.

For example, Safety Striping Service, an AGC of California member in Goshen, California, is in the business of pavement marking, which is intimately tied to road construction and repair. Dave Preston, president, made minimal investments in new equipment last year, “A Dixon Road Pro and a couple trucks,” says Preston. “We’ve been trying to hold tight and see what the budgets are doing.” Their equipment investment amounts to about $360,000 for the year.

Local conditions can, of course, buck the national trends completely. Gratech Company, LLC, a member of multiple AGC chapters, works in the road-construction sector — what Gratech President Harley Nesham calls “horizontal construction” – but they have seen very different trends, because they are in North Dakota.

“We geared up quite a bit the last three years because of North Dakota’s oil boom. The western third of the state has seen a lot of highways and local roads deteriorate substantially because of seven-day-a-week, 365-day-a-year heavy truck traffic. We’ve increased our fleet here. Motor scrapers, motor graders, crawler tractors (dozers), and off-road articulated end-dump trucks.” For Gratech, the past three years have been constant expansion, with concomitant equipment purchase or rent-to-own. With about $25 million in annual business, they’ve spent three to five million dollars per year in equipment for the last three years. Nesham expects his next year’s equipment investment will be largely replacement of existing machines.

IT’S A LITTLE CRAZY AT TIMES
Contractors working more in the private sector feel that the past few years have seen slower growth, but the outlook now is much stronger. Some are expanding their businesses.

For example, Flintco LLC, a large general contractor based in Oklahoma and member of multiple AGC chapters, invested about $2.4 million in 2014 in new equipment, breaking down roughly as $1.4 million in new pickup trucks and about $1 million in other equipment such as bobcats. Peter Kozicz, executive vice chairman, relates that it was a mix of replacing worn-out machines and expansion of their fleet. “We have 175 pickups, one lasts about five years on average, so we usually buy 30-35 per year to keep current. But the last two years, we bought 50 trucks a year. The situation is similar with bobcats.”

“It coincides with Flintco’s acquisition by Alberici in 2013,” explains Kozicz. “Alberici’s philosophy was to invest in Flintco, stabilize the platform, and then grow it. We invested heavily in business infrastructure, for example, about $4 million in IT.” “The other factor in our expansion,” continues Kozicz, “is that the outlook for the construction industry is a lot stronger now than it was even 18 months ago. If we were still looking at a down market today, I’m not sure we’d be making the same level of investment even with Alberici’s involvement.”

Andrew M. Bosio, vice president of Restoration Specialists, Inc., an AGC of Colorado Building Chapter member, is also seeing business surge. His business includes concrete masonry repair, waterproofing, caulking, air and water barriers, expansion joints, and historic restoration.

“It’s a little crazy at times,” confesses Bosio. “The problem is where to store the equipment we purchase. We bought 4,000 square feet of warehouse space two years ago, and we’ve already outgrown it. The expansion is coming quickly. In hindsight, there’s stuff I wish we had bought last year, but profit is different from cash-flow. Right now, we’re running at a level that I’d normally expect in June or July. All of January and February has been that way. But it takes time to get paid, and it’s putting a strain on our cash flow, making purchasing a little more challenging.”

His $5,000,000-a-year company seems caught in the middle, trying to take advantage of expanding opportunities with cash flow that relates more to the drought that preceded it. Of their $100,000 of equipment investment, about half includes replacement of old equipment and the other half represents expansion.

AGC member Pensacola Glass Company is a state-certified glass and glazing contractor, one of the largest in Florida, primarily building curtain walls, store fronts, and skylights. General Manager Woody Watters is not seeing business grow, but he is seeing business. “We’re just now coming out of the recession as far as construction in the Southeast,” he relates. They mostly lease equipment on a short-term basis – mostly scaffolding and rigging, such as a swing stage or climbing mask. They have a particular project which is making them consider buying a forklift.

Overall, Watters expects business to continue at about the same level as last year. “There are more projects on the boards, more being negotiated and bid. This year, we’re pretty well set on major projects, but it’s going to be pretty much status quo, about $20,000,000.”

Ron Hicks, vice president of Soltek Pacific Construction Co., a San Diego Chapter member, relates that his company constructs a mix of public and private sector buildings, and the two seem to be balancing each other. The company is not expecting business to increase, and its $100,000 of equipment investment in 2014 – six pickup trucks – represents only replacement of existing trucks.

POSITIONING FOR THE FUTURE
While many smaller operations are still being cautious, there are those who are actively using this transitional period to position themselves for coming expansion, even if they don’t have deep pockets to do it. Alabama AGC member firm Hurst Construction, of Munford, Alabama, is “a young company,” according to CEO Todd Hurst. They foresee business expanding and they are buying equipment to support it, but they’re doing it frugally. They spent about $100,000 in 2014, but they generally purchase used equipment: backhoes, scissor lifts, bulldozers, and dump trucks.

Since his first project in 2007, building a porch, Hurst says his business has doubled in size every year. What is driving his expansion? “We’ve been able to hire quality help,” he says, “and we’re just reaching out and looking for work.” He mentions that he’s had to lower profitability to increase his volume, but the strategy is getting results. “We see an opportunity and we go after it. My biggest job last year was $5.5 million.”

MANUFACTURERS RESPOND
Wheel-loader manufacturer KCMA Corporation, manufacturer of Kawasaki-KCM wheel loaders, believes that construction will continue to grow in the coming year, and they’re acting on their opinion by offering two new models of short-boom wheel loaders. These Tier 4 machines include the model 95 Z7 XTreme with a 9.0 cy bucket, and its cousin the 115 Z7 XTreme with a 9.15 cy bucket.

Kawasaki decided to bring out these two new models in late 2014 based on conversations with some of their customers. “There were many mergers and acquisitions between 2009 and 2013,” recalls Sam Shelton, marketing administrator, Kawasaki. “They were trying to consolidate and concentrate on their business models, not investing in equipment. Now, they have the data that drives the decision making.” Kawasaki sensed that contractors were getting ready to update their fleets, and designed these new loaders to help them with production.

A DIFFERENT TYPE OF EQUIPMENT
There is another form of equipment that contractors are buying, but which doesn’t fit in the heavy-machinery category. Electronic technology is a fast-growing factor in construction. Toolwatch Corp., a Colorado company that makes equipment and materials management systems, keeps a close eye on tech equipment trends. President and CEO Don Kafka sees a lot of investment in tech and automation. “Contractors are putting energy into making business more efficient and profitable through tech investment,” he says.

He’s observed an explosion of smartphone and tablet use, with a lot of available apps that are “helping to bring the field more closely in line with the back office and the warehouse.” He’s also seen an uptick in 4-D modeling, which adds the dimension of time. “It helps the entire project understand, through a visual, each event that takes place in the project’s lifecycle,” he says.

His own company’s experience is that sales “increased in 2014, but not dramatically. The number of companies that are interested in our automation and our tech has increased fairly dramatically over the last year. Now, we’re seeing not only the interest, but an increasing willingness to adopt that tech.”