Building Nevada - January 2008

Subcontractors in the Silver State

Experience Market Shake Up

by Doresa Banning

Subcontractors’ work accounts for about 78 cents of every dollar earned at Martin-Harris Construction, a Las Vegas-based general contracting firm. At some companies that percentage is higher. In essence, subcontractors are crucial to general contractors and the construction industry’s residential and commercial segments.

Currently, they’re in abundant supply throughout Nevada due in large part to the residential real estate slump. Consequently, many, but not all, subcontracting firms face a competitive, builder-controlled market in addition to their usual challenges and new industry trends.

Market Outlook

During the housing boom at the beginning of the millennium, both Southern and Northern Nevada experienced an extreme shortage of subcontractors. That situation since has reversed due to the housing recession, along with the subsequent slowdown and, in some cases, halting of residential construction. “More subcontractors are available because of the housing drop,” said Tony Abreu, president of the Builders Association of Northern Nevada and director of construction for Pearce Construction, a high-end custom home builder in Reno.

Commercial construction activity in Northern Nevada has slowed some, but remains strong. Subcontractors are somewhat plentiful, and the market is competitive. “We’re seeing a lot of pressure being put on the more specialized and smaller subcontractors,” said Sean Carnahan, private works manager for Reno-based Granite Construction. “Now the problem is just having enough work to sustain all the subcontractors in the market.”

Sundt Construction Inc., a regional general contractor with a branch office in Reno, promises clients at least three subcontractors’ quotes per trade on a project. Generally, the company can do so easily, with the occasional rare exception, said Tim Krump, senior project director.

Commercial construction in Southern Nevada is booming, particularly in the hospitality industry. “There’s an unprecedented volume of work in the commercial sector of our market with the core driver being the mega-projects on the Strip,” said David Matula, regional vice-president for Bergelectric Corporation’s southwest region. “The Strip volume has influenced growth in the other portions of the commercial market and forced those portions to new heights.”

Recently, the availability of contractors, overall, is better than it’s been in the past few years, according to some general contractors. “Primarily, supply is better due to the fact that more people are out there for the subcontractor market to employ,” said Frank Martin, president and chief executive officer of Martin-Harris Construction, a general contractor that does light commercial, industrial, public works and hospitality projects.

However, some trades remain in high demand in Southern Nevada, especially the firms able to complete large, complex projects such as those on the Strip. “Subcontractors who can do the light commercial and industrial projects are more numerous than those who can do a project like CityCenter or Echelon,” said Martin. For example, electrical subcontractors able to handle the larger jobs and the great volume of medium-sized projects are in limited supply. Now, one or two companies may bid on a job whereas in the past several did, Matula said. “There’s a definite stretch in the market,” he added. “My conservative estimate is that we end up passing on half of the opportunities we’re presented.”

The work in progress on the Strip hasn’t affected general contractors’ ability to hire subcontractors for other work. “Strip work is really a market of its own,” Matula said. “To a large degree there are general contractors and subcontractors that focus primarily on Strip work.” Due to the volume of work on the Strip, most of which is performed by union members, unions have been recruiting workers from the non-union firms, which has created some issues for a number of companies.

Subcontractors’ Response

Currently, many subcontractors are facing hard times. “Many subcontractors are now calling for work,” Abreu said. “There definitely are subcontractors shutting their doors because they can’t stay open. A lot of people are being laid off.”

Some subcontractors are reinventing themselves, diversifying their offerings and, sometimes crossing from the residential to the commercial sector. For instance, due to the scarcity of work, Carnahan said, traditional residential contractors that do earth work and road paving on the civil side are trying to move into public sector work.

“Because home builders have slowed a little bit, we’re getting an influx of subcontractors bidding our jobs,” said Joe Crisci, president/owner of Crisci Builders, a Las Vegas-based commercial general contractor. “A lot of them are looking for work. It’s helped us.”

However, whereas some subcontractors, such as suppliers of doors, windows and roofing materials, can easily move from one sector to the next, not all are able to perform both types of work, Krump said. “They have had to be more creative,” said Cindy Creighton, executive director of the Nevada Subcontractors Association, an organization that promotes, enhances and protects subcontractors’ rights in Nevada. “Previously, subcontractors might be inclined to keep all their opportunities in one basket, restricting their work to new residential for one or two national builders. Now, they perform tenant improvements for light commercial clients and do some repair work. There’s plenty of work to be done. One just needs to think outside of the box.”

Retention Strategies

General contractors also work to develop relationships with the best subcontractors to retain them. “There’s a saying in the industry: When your subcontractors make money, you make money. It suggests you need to take care of your subcontractors,”

Carnahan said. “In turn, they will take care of you in terms of their performance and meeting their commitments.”

Jerry Daugherty, president and owner of JD Construction Inc., a Henderson-based commercial concrete subcontractor, said general contractors wanting to build lasting relationships with his company work hard to submit payments and retentions in a timely manner. A retention is part of the subcontractor’s pay typically withheld until a job ends to ensure continued performance throughout. “It’s a big incentive for us to do a better job,” he added.

Bergelectric Corp. tends to work repeatedly with the same builders. “We focus on long-term relationships with general contractors that we can count on to perform at a high level on their part and that we also know will treat us fairly,” Matula said.

Crisci Builders, which has used the same subcontractors since its genesis in 1990, strives to stick to the schedule so subcontractors can make money and move to the next job. They ensure subcontractors start on time and urge them to finish on time. Also, per Crisci’s contracts, subcontractors get paid when Crisci does. “It’s an important element of our strategy to retain them,” Crisci said. “Consequently, they take care of us. It’s a two-way street.”

Granite Construction, in Reno, doesn’t withhold payments, tries to be fair with payment, and helps resolve issues that may arise from a project, Carnahan said. “If you play money games, you won’t have a good selection of subcontractors to work with because they simply won’t work with you,” he said.

Sundt Construction Inc. provides general liability insurance coverage for every subcontractor, which also acts as a bond and has been well received, according to Krump. It saves subcontractors from having to commit to a bonding capacity, the maximum value of uncompleted work the insurer will allow the subcontractor to have on hand at any one time.

Industry Challenges

A subcontractor’s responsibility entails scheduling jobs, maintaining a solid workforce, keeping employees busy, as well as satisfying general contractors. “We have to wear many hats,” Daugherty said. “It’s always a balancing act. I could plan work for the next six months and the schedule might look great, but everything could change tomorrow.”

Keeping the workload steady for workers is difficult, because the market is unpredictable. “It requires a crystal ball,” Daugherty said. “We always try to schedule just enough continuing work, but something always seems to fall out or become delayed. It seems you never have enough or you have too much.”

A remaining challenge among subcontractors is receiving timely payments from general contractors. “Subcontractors are always concerned about payment and the schedule,” Krump said. “They want to know that the general contractor understands how to schedule a job and recognizes that the subcontractor must get paid in a timely fashion.”

Subcontractors moving from the residential into the commercial sector may struggle with the difference in lag time before payments. With residential work, subcontractors get paid after they finish a particular project phase, which is quicker than with commercial contracts, where it could be 60 to 70 days before they get their first payment, Crisci said.

Dealing with unethical or incompetent general contractors is taxing. “We only look for ethical general contractors,” Carnahan said. “If we bid a project to a general contractor, we want to have the level of confidence that they won’t try to shop our bid to other subcontractors to get a lower price.”

Fed up with some general subcontractors’ lax job supervision and inflexibility, JD Construction, about a year and a half ago, shifted its focus from concrete subcontracting to offering design-build concrete projects as a general contractor. Design-build is an approach to building wherein a general contractor oversees both design and construction, hiring a team of subcontractors in various trades to collaborate on design early in a project. “We can save clients money, do jobs faster, and not have some of the headaches in dealing with general contractors’ poor management and supervision,” Daugherty said.

Managing materials costs is increasingly difficult. The fluctuations in prices of certain commodities, such as copper and lumber, make it difficult for subcontractors to guarantee their pricing for a period of time, Abreu said. Sometimes builders require that they hold prices for a year or throughout a particular project’s phase.

For residential subcontractors in Southern Nevada, construction defect litigation is an ongoing problem. Many subcontractors have a full-time person on staff to only handle lawsuits, NSA’s Creighton said. In November, a flooring subcontractor and NSA member was served 32 lawsuits all pertaining to one development of single-family homes, she added.

The number of lawsuits has caused general liability insurance rates to increase as much as 500 percent to 600 percent, Creighton said. Further, policies often exclude subcontractors from performing certain types of work, such as condominium projects. Sometimes, builders will obtain a  policy, which covers the entire project. The subcontractors then pay back to the builder their portion of the coverage amount.

Today, before a lawsuit can be filed, the subcontractor has the right to repair any problems and must be notified in writing what those issues are. In October of last year, the Nevada Supreme Court ruled right-to-repair notices now must detail the addresses, floor plans and elevations of the residences with problems, so subcontractors can readily fix them. “We’re all optimistic that it’s going to help,” Creighton said. “The ruling probably won’t change the insurance rates much in 2008. I would imagine most insurance companies will need a full year to find out how it’s affected their lawsuits.”

Impacting Trends

Although not a new concept, design-build is gaining ground in Nevada, especially with resort casino work being so time driven. Products are delivered faster with design-build, Carnahan said. Granite Construction’s Reno Transportation Rail Access Corridor project in downtown Reno, completed in spring of 2006, was design-build.

Sundt Construction is seeing more and more design-build clients, which allows the company to handpick subcontractors for each design-build team. Those subcontractors still must go through a proposal process.

Increasingly, city, county and state governmental agencies are electing to use design-build, Martin said. In June of 2007, the Nevada Department of Transportation awarded its first design-build highway contract, to widen and improve Interstate 15’s north corridor in Las Vegas.

Governmental entities also are employing construction management at risk (CMAR), a new method of awarding contracts, Martin added. Rather than being based solely on price, CMAR contracts are awarded based on price, qualifications and experience.

A growing trend in residential construction is green or sustainable construction. Subcontractors will have to learn green practices and train their employees in them. “As construction practices are required to become increasingly green, the role of the subcontractor in the overall success of a project will grow more critical,” Abreu said.

Doresa Banning
Doresa Banning is a freelance writer based in Northern Nevada.