Contractors vie for limited municipal projects
Commercial contractors are vying for a limited number of municipal projects and private sector work at a time when financial options for funding those projects is changing.
The result is one of the more competitive bidding environments in years, says Kevin Moyes, division president forFlintco Inc., among the largest general contractors in the Memphis area.
Flintco is the general contractor for the $89 million ground transportation facility that recently broke ground atMemphis International Airport.
The company won the project through a competitive bid process against eight other bidders, Moyes says. Three years ago, on the cusp of the recession, the project may have gotten three bidders, he says.
A call for bids on a $2 million Memphis-area fire station drew 25 bids from companies well outside the region, Moyes says, demonstrating just how desperate contractors are for work.
“It’s a good market for clients that have capital and need to build something,” Moyes says.
But getting capital is the key. And for contractors, the challenge is finding clients who can get it — especially in the public sector.
State and local governments challenged by depressed revenue have been reticent to take on more debt and are putting off projects, says Mark Brown, Collierville’s assistant town administrator.
Investors now attracted by a booming stock market have created more competition for municipal bonds, a move expected to drive down yields and drive up costs, further hurting finance options, Brown says.
“There’s definitely a lot of concern about their ability to fund outstanding debt and take on more projects,” says Brown, who just recently left the City of Bartlett where he was finance director for nine years.
Collierville hasn’t taken on any debt to fund projects since 2008, Brown says. But since the recession has dampened growth, the need for expensive infrastructure projects also has been limited, he says.
Contractors that enjoyed steady work from growing cities like Collierville have had to look elsewhere.
Covington-based general contractor Rose Construction Inc. was fortunate last summer to the secure a federal contract for the pipe installation portion of a new $9.7 million child development center at the Millington Naval Air Station, says Cindy Dunn, vice president of operations.
The 20,000-square-foot center was financed by American Recovery and Reinvestment Act funding. The project is considerably larger than most civil infrastructure projects the company typically handles, Dunn says.
It was fortunate to get a federally funded project, she says.
“City and counties just don’t have the funding,” she says.
And the future isn’t looking any rosier, at least for state governments. An April 12 report by Standard & Poor’s said that states are expected to begin coping with a $100 billion gap for their 2011 budgets thanks to a drought in tax revenue.
Tennessee alone is facing a $1 billion shortfall.
The lack of adequate funding by governments is tempering expectations of what was a pretty optimistic 2010 forecast for the municipal bond market, according to the Securities Industry and Financial Markets Association 2010 Municipal Issuance Survey.
The survey of some of the largest investment banks nationwide showed hopes for a 14% increase in both taxable and tax-exempt bond issuances.
That was based on a fairly optimistic economic recovery and a belief that Congress would extend and beef up the wildly popular Build American Bond program. That hasn’t quite happened.
That program, set to expire in December 2010, has generated more than $450 billion in issuance since April 2009, including $380 million in Tennessee.
A proposal as part of the Small Business and Infrastructure Jobs Act, which passed the House in March, extends the program to 2013, but reduces the tax subsidy from 35% to 30% over the next three years.
Getting less tax benefit may mean less usage as the Build American program competes with other tax-exempt bonds, says Wayne Breunig, managing director of public finance for investment banking firm Duncan-Williams Inc.
Also putting potential pressure on bonds is a resurgent equity market, which has siphoned off potential bond investors and driven down yields and increased prices, Breunig says.
All of that does little to soothe the spirits of construction executives like Flintco’s Moyes, who closely monitor opportunities or challenges to construction financing.
While health care projects and federal contracts have kept Flintco busy, Moyes says the construction industry is bracing for the impact of financing constrictions just around the corner. Besides the increasing competition for fewer projects, the dollar value for projects has also shrunk, a further indication of financing concerns.
“We’re just now hitting the recession head-on,” he says. “We were the last in and we’ll be the last out.”