October 29, 2008

British Columbia construction industry enters new stage in its business cycle

Keith Sashaw

President, Vancouver Regional Construction Association

In just a few months, B.C.’s construction industry has shifted into a different stage of the business cycle.

We have moved from a period of unprecedented growth to volatile financial markets, tightening credit conditions and shaky consumer confidence.

The province’s plan to accelerate investment in capital infrastructure is welcome news, but institutional-government projects are only a portion of overall building activity.

Our industry is coming off one of the strongest and most prolonged periods of expansion that we have ever experienced.

Steady growth was sustained for more than seven years in an industry that has typically operated in a seven year cycle from peak to peak. As we move into this next stage and see significant declines in the demand for construction compared to last year, it is important to note that 2007 was the strongest year construction has ever experienced. Many would even argue it was unsustainable.

That said, the next nine to 12 months will likely be a difficult period.

The VRCA board of directors foresees a significant reduction in the value of residential construction, especially in mixed-use and multi-family projects, as developers are hit with increased requirements from lenders.

We also anticipate some moderation in commercial activity, as the economy responds to eroding consumer confidence.

It will be important for contractors, suppliers and manufacturers to carefully navigate the economic situation and be willing to adapt to changing markets.

VRCA is closely monitoring the situation, and will be working to provide up-to-date information on trends and issues.

In the meantime, prudent contractors should consider the following as they respond to an increasingly volatile economic climate:

• Diversify your operations – Contractors who can operate in a range of sectors will be better able to ride the ebb and flow of the markets. We are already seeing companies diversify out of residential construction into other sectors, such as infrastructure, industrial and commercial projects.

• Determine your true strengths as a company and market how you can add value to a project – As we move to a scenario where construction costs are going to be carefully monitored, companies that can contribute to improving the bottom line of projects will be in high demand.

• Focus on improving productivity – Over the last few years, we have seen declining productivity, primarily due to an influx of younger, inexperienced workers. As these workers become more proficient, employers need to focus on ensuring their workforce is as productive as possible, by encouraging their workers, utilizing better tools and processes or with a combination of the two.

• Select your projects carefully – Connecting to the right projects will be key. Be prepared to actively pursue business opportunities by utilizing services such as VRCA’s planrooms and pre-bid information services, by building strong relationships with others in the supply chain and by paying close attention to opportunities as they arise.

This next stage of the cycle should not be cause for panic or engaging in counter-productive behaviour such as low-balling projects, “buying jobs” and acting unethically. Contractors will have to bid their jobs carefully and will have to pay more attention on ensuring all of their costs are controlled and contained. But engaging in unethical practices serves no one and will only result in a race to the bottom.

There are challenges ahead, but there will also be tremendous opportunities to pursue. While declines in building activity are seemingly inevitable, the market is expected to maintain a position higher than just a couple of years ago. The strong growth period we’ve experienced should see most contractors through the period ahead. The underlying economic fundamentals of this province are among the strongest in North America.

B.C.’s stable, prudent government is in an enviable financial position.

Our province’s attractive business climate should result in a strong rebound in construction activity that lets us pick up where we were.

Keith Sashaw is president of the Vancouver Regional Construction Association and member of the Journal of Commerce editorial advisory board.

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