General contractors getting caught in the squeeze

Too many contractors taking on too much low-bid work just to stay alive may soon result in a market shake-out, according to a report by FMI, a leading provider of management consulting and investment banking to the engineering and construction industry.

FMI’s third-quarter nonresidential construction report index has dropped 5 points, putting it back at second-quarter 2010 levels. On the rise is the number of contractors participating in self-funded projects as a financing partner with owner/developers, the report said.

“Eighty-five percent of our work is being funded through self-funding or in some case, equity investors,” said one construction industry executive who serves as panelists for FMI’s quarterly surveys. The survey found fewer bank loans for construction and more government backed loans and grants.

The rising material and labor costs, combined with lower project management fees and profit margins, are resulting in an upturn in bankruptcies for construction industry firms, the report said. Nearly a third of the panelists surveyed have seen a decline in trade contractors, with more than 10% noting fewer general contractors and design firms.

“There are still too many contractors chasing too little work,” commented one survey participant. “Owners still seem to be selecting the lowest price, driving margins to the lowest level we have ever seen.”