By Jerry Davis, CPA - I have been asked to post on the topic of "When Disaster Strikes". The worst disaster that can happen to a construction contractor is having someone killed on their job site. That was my first thought and original blog idea. However, I think there is a current disaster happening in the construction industry that is a more timely topic.
I assume that you are aware of all of the housing industry woes. Residential real estate developers have overextended themselves. Banks and mortgage companies have made bad loan after bad loan. Individuals have used adjustable rate mortgages and interest only loans to buy more house than they can afford. The question is, how do these housing woes affect the rest of the construction industry?
Well, I am afraid it is not good news. Heavy equipment contractors that do the grading and utilities for residential developments do not have any work. They are having to lay off their work force and sell off their equipment. Unfortunately, since the equipment dealers lots are full of repo's and new equipment they cannot sale, the contractor is taking a huge hit when they sell their equipment. Most of the equipment being sold is going overseas. There is also the problem with retainage. The owner/developer has withheld 10% of the contractor's money and now does not have the money to pay. Contractors are taking huge write offs for work done for real estate developers.
The heavy equipment contractor is not the only one suffering. Residential subcontractors are flooding the commercial\industrial sector trying to keep their business afloat. The problem is most of them do not know how to perform the work and they are underpricing it. The domino effect is that the subcontractors usually doing the commercial\industrial work are losing contracts to companies that are performing substandard work.
Sad to say, the construction industry is a mess right now. The things I have mentioned here are only the tip of the iceberg. I could go on and on about the effect on the vendors, suppliers, etc. The good news is that the industry will recover. The big question is when will the recovery happen?