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Contractors Face Tough Year in 2003

Jan. 23, 2003

Despite the recent recession and the economy’s slow recovery, the nation’s engineering and construction (E&C) industry has had a long run of healthy growth – from 1996 to 2001, U.S. construction employment increased 26 percent compared with about a 10-percent increase in total U.S. employment. Now, the E&C industry may be nearing the peak of the cycle. Margins are under heavy pressure, project backlogs have been falling, construction has slowed, more contractors are shaky financially, and E&C companies are beginning to plan for a downturn.E&C contractors are trying to reduce their risk exposure in sectors expected to decline in 2003 – such as commercial and multifamily – and focus on stronger markets. But picking the better-performing markets is difficult because of the uncertain economic outlook. Construction could start to revive in the second half of 2003 if the economy continues to recover. Healthcare should remain a strong market because of demand for new construction or renovation and expansion of existing facilities. As contractors crowd into stronger markets, they could come under pressure to cut prices to win – or keep from losing – business. But price-cutting could erode margins to the point that they do not justify the risks. “Too often, contractors take on a project without the right pricing,” one CFO at a recent Ernst & Young roundtable said. As the experiences of more bankrupt engineering and contracting firms shows, there is little room for error in assessing and managing risk.This information was supplied by Ernst & Young (www.ey.com) and excerpted from the companies’ Annual State of the Real Estate, Hospitality, and Construction Industries 2003 Report.