Cuts and restructuring

By Dick Hughes  

SEPTEMBER 12, 2011 11:58 a.m. (0)

Upstate contractors doing industrial and manufacturing work are holding their own in this persistently sluggish economy, but small and midsized contractors dependent on commercial and residential building are hurting.

“We definitely are seeing a mixed bag,” said Brian Gallagher, marketing director of O’Neal, a Greenville engineering and construction firm that focuses on industrial and manufacturing. Business is “at or near pre-recession levels,” he said.

Things may have stabilized for contractors such as O’Neal that have the resources to take on large projects, but small and midsized firms that make their living on commercial projects – say, $1 million or less – are not only seeing no recovery, they are seeing further deterioration.

“Commercial is just dead,” said Bill Campbell, president of Walter Mechanical Service in Spartanburg and president this year of the Carolina Chapter of the Associated Builders and Contractors who keeps a close watch on the industry.

Despite the doldrums of commercial and residential work, Walter has been “able to ride the storm probably better than most” by being large enough to competitively bid on industrial, manufacturing and large university contracts, he said.

Walter has maintained regular employment at 155 but ramped up to as many as 200 this summer with use of temporary employees.

“Our philosophy is that we try to keep our employee base as steady as it can be; and when we have these peaks, we seek outside and bring those people into our company at some later point in time,” Campbell said.

Smaller Firms Are Hurting

But Walter’s success is not being enjoyed by many of Campbell’s smaller colleagues in plumbing, heating, ventilation and air conditioning.

“There’s no ifs, ands or buts about it, we’ve had three competitors that 20 years ago were major players in Upstate South Carolina … who in the course of the last year have made strategic decisions pretty much to get out of major construction,” he said. A fourth changed his business model.

“Those four players 20 years ago probably had 60 percent of the Upstate mechanical market, and they are virtually nonexistent as far as new construction.”

Stephan Brewer and his father Arthur know the truth of that. Their family-owned Easley Mechanical, also known as Barnes Sheet Metal, is struggling.

“We used to be a company that did between $6 million and $8 million a year, and we have been averaging $2.5 million a year for the last three years,” said Stephan Brewer, president.

Perfect Storm of Trouble

In 2007, the last pre-recession year, Easley Mechanical had a workforce of 50 to 60 in peak times. Today it has 15. To maintain cash flow, Brewer said the company is focusing on maintenance and service.

Easley Mechanical is in the crossfire of shrinking commercial construction, which has been hard hit by the reluctance of companies to spend for expansion until consumer confidence returns, an inability to get financing from banks and a fierce bidding war for the few jobs available.

Brewer said Easley Mechanical stopped bidding on projects two years ago.

“Where I was bidding at zero to 5 percent of cost and was getting beat by 15-20 percent, I decided this is the time to step back and take a look, ‘hey, what’s going on.’”

What was going on is that he was losing to bigger contractors scaling down their job selections and able or willing to take a loss on smaller jobs to keep crews and equipment busy.

Arthur Brewer, who at 87 still comes to work every day as general manager, founded Easley Mechanical 55 years ago.

“Since 1956, he’s never experienced anything quite this bad,” said Stephan Brewer.

Big Contractors Survive

It’s a different story for general contractors like O’Neal with the wherewithal to do the big deals.

With some multi-million-dollar projects recently completed, underway or in the offing, O’Neal has ramped up “pretty quickly,” hiring 65 architects, engineers and construction managers since January and is recruiting now to fill 20 open positions.

Gallagher said O’Neal has a backlog of construction projects “through 2011, 2012 and even some into 2013.”

Manufacturers who held onto capital during the recession “are making investments. They are doing that in anticipation of the market growing or rebounding in their market,” he said, adding that the investments are coming from both domestic and international firms.

O’Neal is doing “design, engineering and construction management” for Mitsubishi Electric Power Products’ $200-million transformer manufacturing plant in Memphis and Polyplex’s $187-million plant in Decatur, Ala., for high-performance plastic films, the Indian firm’s first U.S. investment.

Campbell’s Walter Mechanical Systems also is benefiting from major contracts.

“As we speak today, our backlog amount is probably as high as it has been in the seven years I’ve been here, and that is completely contradictory to most people in our business,” he said.

But, he said, if you take away the two large contracts Walter recently won, “our backlog would be slim pickings.”

Worrying Signs Bode Ill

Construction backlog – the value of projects in the pipeline – is one of the indicators Campbell as ABC Carolina president and Gallagher as board member keep wary eyes on as a measure of construction health.

They see worrying signs with the end of federal stimulus dollars, the tightening of capital, debt problems globally, consumer confidence in the tank and partisan battling in Washington.

The political gridlock in Washington over using federal dollars for roads, bridges, sewers, water systems and other infrastructure projects is frustrating “to many of us in the industry … and I am sure the general public shares the same feelings,” Gallagher said.

“Two big things” have to happen before construction can return to pre-recession levels, Campbell said. “No. 1, access to capital. It is very limited right now. Until that changes, it is going to be very difficult for businesses such as ours to expand and grow our employee base. The other is consumer confidence. It has to change.”