Home Building 360: Trade Contractors Shrink, Diversify to Survive

During the first construction downturn of Ron Sparrow’s career, he had to stop hanging drywall because there simply wasn't any work to be found. “In '75, we ended up cutting grass for a living,” says Sparrow, owner of Phoenix-based Better Walls and Ceilings. “You have to survive.” Then, when the late 1980s recession hit, he was lucky enough to work for somebody who kept him on the payroll. “But I was cheap labor,” Sparrow says. Now, at age 60, Sparrow finds himself to be cheap labor again. As the new-home construction market all but disappeared in Phoenix, Sparrow was forced to lay off the crew of drywall hangers he employed and go back to wrestling with the heavy boards himself to complete the few $500 to $1,500 remodeling jobs he gets these days.

“I have to do what I have to do to survive,” says Sparrow. “Fortunately I have enough stamina.”

While cash-cushioned large production home builders across the country use the term “challenging” to describe the current market, their trade contractors use a rawer word: "survival."

The unemployment rate for construction jobs was 17.3% in July, down from 18.2% in 2009, according to the U.S. Bureau of Labor Statistics. But even that decline is deceptive, according to experts. “Given the drop in employment over that span, the decrease in unemployment reflects workers who have left construction for other industries or have stopped looking for work in the past 12 months, not net hiring,” says Ken Simonson, chief economist for the Associated General Contractors of America. “Overall, the figures remain pretty bleak.”

Among the five BLS construction categories, residential building contractors had the most severe losses in employment, with a July drop of -1.7% for the month and -8.9% over 12 months. Residential specialty trade jobs had the second biggest drop, with employment -0.5% for the month and -4.3% year-over-year.

Those numbers are one more indication how contractor owners like Sparrow are dropping their own sweat now on job sites.“I didn’t have to work” [before the market crashed], Sparrow says. “I just drove around and put out a lot of fires. … I was doing gross receipts of $50,000 to $60,000 a month. … I was doing okay. I was paying my bills. I was able to buy insurance for myself.”

Still, being a small business owner has its challenges. “It’s a serious misnomer that when you go into business for yourself you are your own boss,” Sparrow says. “You are never your own boss as long as someone else is writing you the checks.”

These days, the people writing checks to Sparrow are homeowners who want to remodel, perhaps hiring him to rid their homes of popcorn ceilings, or investors who have bought houses and want to do small remodels before renting out the properties they are picking up at bargain prices.

“There’s a place in the Valley here where these investors can buy a four- or five-bedroom house for $40,000, put $5,000 or $10,000 in it, and they are looking pretty,” Sparrow says. “But those are going to end.”

But as Sparrow learned in the 1970s, even laying off employees isn't enough to keep some subcontractors' businesses alive. Laborers and business owners must be willing to branch out to other trades during a slump like this one.

In Chicago, electrician Jaime Fumes has started hanging drywall and  doing handyman work. “Just about anything,” Fumes says. “I can’t just sit back and wait on electrical (work). I will starve.”

During the boom years, his company, Good Guys Electric, employed Fumes, his partner, and three or four others, pulling wire and installing electrical panels in the booming Chicago condominium market.

“Now we do a lot of advertising, but it is not working,” Fumes says. There was a brief pick-up in work at the beginning of the summer, he says, but in August, business slowed to nearly nothing. For a Midwest contractor such as Fumes, that's scary stuff, because winter is traditionally the slower season for construction work in Chicago. 

Unfortunately for Fumes and his counterparts, the AGC's Simonson suspects that business might, indeed, get worse before it gets better for subs. As single-family housing suffered, some subs kept themselves employed working on multifamily or other projects, at least until last year. “Many were able to re-cast themselves doing commercial work or non-residential work" such as schools and hospitals, Simonson says, "but that pipeline has shrunk.”

With commercial work tapering off and government stimulus work limited, subs are in a tough spot. “This is unprecedented in how deep and long the downturn  has been,” said Simonson. “Most contractors, even those who have been in business since the 70’s, say they haven’t seen this business so bad. Subcontractors, in particular, don’t have any cushion to fall back on.”

And in some cases, those trades, subs, and other builder partners who did manage to keep a financial cushion are having those funds taken from them.

In 2007, the now-bankrupt public builder TOUSA paid The Spiro Group, an Orlando, Fla.-based advertising and public relations company, more than $400,000 for print brochures and television advertisements they created and the related advertising time and space they purchased for those ads. Then, early this year, attorneys involved in the TOUSA bankruptcy sent The Spiro Group a notice asking for the money back.

“The first thing you do is brush it off as a joke, and then you call the attorney, and it’s: ‘We sent out 4,000 of those notices,’” recalls Steve Martin, a partner in The Spiro Group.

It's not an uncommon practice. Creditors of bankrupt companies can demand the return of funds paid by the company in the months immediately preceding the bankruptcy filing under a law related to “preference claims.” The law was written to keep companies from emptying its accounts of assets immediately preceding a bankruptcy filing, perhaps sending the money to other entities controlled by it or friendly parties. But the strategy has begun to be used by creditors to try to recoup many different kinds of bills, even legitimate ones that the company paid just before the filing.

“It’s within their rights under the law,” Martin acknowledges. Still, it's a difficult situation for the Spiro Group; 85% of that cash from TOUSA went to pay for the advertising placements, with Spiro retaining only the remaining 15% for its work.

The downturn has certainly affected the company. Spiro has shrunk from 26 employees at its peak to 11 staffers now, and those employees work reduced hours. The firm has also diversified its clients well beyond the home building industry that once made up 60% to 70% of Spiro's business. “We had to go out and seek out other clients,” Martin said, reaching out to industries, such as medicine and law, which have been less impacted by the recession.

“We could pull the same trick,” Martin says of TOUSA creditors' strategy for demanding funds be repaid. “But that is not our business model," he says. "We work hard and stick it out.”

 Teresa Burney is a senior editor for BUILDER and BIG BUILDER magazines.

Learn more about markets featured in this article: Phoenix, AZ, Chicago, IL, Orlando, FL.