Bottom Row: Victor Fuchs, Helix Electrical • Jeff Vilkin, Tradewinds Construction • Aaron West, Nevada Builders Alliance
What happens in Nevada’s commercial development industry usually filters down to commercial subcontractors. And there has been a multitude of headaches for subcontractors in the last year and a half with supply inflation and labor shortages. Executives from this industry recently met in a virtual roundtable, sponsored by City National Bank, to discuss what comes next for subcontractors.
Connie Brennan, publisher and CEO of Nevada Business Magazine, served as moderator for the event. These monthly roundtables bring together leaders from different industries to discuss relevant issues and solutions.
How Has COVID Affected your Industry?
Patricia Farley: We serve two different markets – commercial home builders and residential. Both had really odd outcomes [from COVID]. On the residential side it went crazy. People were installing $50,000 backyards. We could not keep up. In home building everything slowed down in March. Then, we were super busy over the summer. By December if we saw 14 homes come through the home builders, that was a good week. We got some good custom projects to keep our guys busy, but it was slow and we’re just now starting to see it pick back up. All of us sat there in amazement. We probably had one of the best summers we ever had only to be followed by a third and fourth quarter that was abysmal.
Jeff Vilkin: When COVID hit in Las Vegas the gas pedal was pretty far down on the floor [in commercial construction]. We were firing on all cylinders. When the economy shut down was all the preconstruction work paused and some of it went away. A good part of it didn’t restart or didn’t restart for a long time. We used Payroll Protection Program (PPP) money and our loses were done by the end of December, so about four months. January and February [of this year] we did well enough to break even or do a little bit better. Now it’s looking like we’re going to have a good strong year. There’s no shortage to new work opportunities coming in the door. We had to educate everybody about what the new rules were and what the new requirements were [when it comes to safety]. We’ve only had a few people, myself included, get COVID. We have very strict, well understood policies.
Abraham Camejo: A lot of companies are not paying attention to their work policies regarding safety and human resource policies regarding the changes of days off when employees are going to be sick. When they’re not playing by the rules, I am seeing a lot of OSHA fines. On my desk right now, I have six companies that have been hit with OSHA fines due to their employees not following rules. OSHA has hired more inspectors and are going to more jobsites. They are asking what is in the written policy, what’s in the books and what training are you providing? For the owners I suggest a strong audit on your manuals, training and safety program. Re-do, if possible, your safety program to incorporate time off, sick leave and what to do if somebody is sick with or without COVID. Make sure your policies are up to date. We’ve auditing to make sure companies are following the protocols as much as possible. There’s a new storm that’s going to be coming and I believe it’s through the legal department.
Victor Fuchs: We have a very strong process in compliance with the CDC. On our jobs everybody is wearing masks. We also wear gloves, we have wash stations, tool cleaning and everything associated. We took the CDC very seriously, and we took OSHA recommendations very seriously. We have several fulltime safety directors who handle that process. We try to work together with our customers and the general contractors on site. Sometimes we take a hard stand if they’re not enforcing the policy because we’re not going to expose our people to danger.
Aaron West: What COVID did, especially for the construction industry, was show how fragile our supply chain is, and how reliant we are on offshore manufacturing. We continue to struggle with that. As a nation we have to prioritize manufacturing and bringing in the production of necessary elements [to building], whether it’s appliances or windows. It’s crazy to me how that is impacting our ability to complete projects.
What has Happened to the Cost of Materials in the Past Year?
Farley: It has been crazy, the cost of materials. Lumber’s going up, cement is starting to be rationed and then on top of it, labor [is an issue]. We do a lot in the home building business. Not only were we slowed down by COVID, but when lumber triples, the framers slow down. We get deep valleys of drought then, all of a sudden, they get lumber and everybody gets [their work] done. Then they’re trying to get all the homes closed. It’s ridiculous. There’s no evenness, or schedule and it’s hard to get labor. It’s hard to get people back to work. The other interesting thing we’re seeing is a race to the bottom, or dumpster diving for work. A lot of developers and builders are trying to drive the price down for our work and make their profit up because these costs are too much. I don’t work on the back of my labor which means I don’t lower their pay to go out and perform work. We look for different jobs. We do a lot in home building but we’re starting to back away from that a little bit until it slows down.
Fuchs: We cannot get a handle on [commodity pricing]. We have contracts we had committed on. They are fixed contracts. We go out and try to purchase material and it’s completely out of control. You don’t know what’s going to happen tomorrow. [For example,] the wiring for apartment or multifamily projects is two and a half times what it was in November. I never seen the price of [that wiring] at the level it is today. That’s very challenging. So far, we’re absorbing [those costs] because of our contracts. We guarantee the price, and we stand behind it, but it is very difficult. Also, supply is a huge problem. We’re getting a quote right now on a box [of plastic supply material] and it says 20 weeks for delivery. That is five months, and the project has to start now. This is rough end material. I don’t think these are real prices. I think they are artificially inflated at the moment. I think that everybody is just taking advantage and seeing what they can get away with. Are they going to come down? If people stop buying, then prices will come down. If they keep asking for this price and their going to accept and pay for it then they have no reason to come down.
Vilkin: We’ve seen some pretty volatile commodity pricing and material pricing in the past. Just to give you an example when we submit a material order to three vendors who would bid to us, they’ll honor the price for 30 days. What we see now is they won’t price it until Thursday or Friday because the new pricing indexes come out on Monday. We’ve actually seen commitments that last hours, which is completely impractical. We put out a proposal oftentimes with a spreadsheet on the proposal that says, “Based on the pricing increases we have been told to expect, if you’re ready for material delivery in May here’s your bid. If you’re ready for it in June here’s your bid. If you’re ready for it in July here’s your bid.” That way we don’t get stuck having to eat those increases. That creates a [headache] for the general contractors who have to then forecast when the job is going to be ready to go.” It’s hard to make that forecast. We’ve always seen it come back down. That being said we’ve never seen it this volatile or this high. When the demand settles down, I think prices have a shot at coming down as well.
Is Labor an Issue in your Industry?
West: The Office of Workforce Innovation was created under Governor Sandoval. The first director of that really got what we were up against and prioritized. They worked with the Governor’s Office of Economic Development (GOED) and identified the hottest job markets and [determined] how we are going to address those issues. One of the things they identified fairly quickly is that 75 percent of the jobs that were going to be created in the next 10 years, high-earning jobs, do not require a master’s degree. They set out to put systems in place and work with the K-12 education system and work with higher education. Unfortunately, our current regime at the state level really only sees one aspect of training and its union-based apprenticeships. They are awesome for what they do, but they don’t reach a broad enough market within the state. We had some great programs rolling and amazing collaborations in place, but it was all based on being able to access young people. When COVID hit, they shut down the schools and it gutted all that infrastructure. We’re trying to rebuild, dig within the communities and identify pockets of young people. The biggest thing all of our employers have to realize is that the skilled labor they are after just doesn’t exist. They have to get aggressive about growing labor organically. We’re trying to figure out how we can incentivize employers to bring on young people and start to grow that workforce.
Camejo: We get to train a lot of young people to use equipment like forklifts, scissor lifts and aerial lifts. We offer programs we call beginners classes where we take the time to train them. I agree there are other great programs, including the union, but there should be more opportunities for other types of trade. There is a young workforce that’s coming into graduation and they’re not ready for construction jobsites. There is an incentive [for potential job seekers]. They realize they can potentially make a lot more money going into the trades than going into college immediately. Pushing these programs out more is essential, it’s critical. These opportunities are essential for our future here in Nevada because we can’t fill jobs. I know owners that simply can’t find enough electricians, plumbers, framers, landscapers and so forth. We’re reaching the peak. Everybody needs to work together because the shortage is [affecting] everybody.
Fuchs: It is a challenge but it’s like any other challenge. If we don’t take it head on and try to solve it then we’re just going to sit here and complain. That’s a problem. In our company we take it very seriously and we’re going to figure out how to get through with it. We just started working together with high schools. From a legislative and high school standpoint we should put back trade classes into the curriculum.
What is the Outlook for Subcontractors?
Vilkin: The crystal ball is cloudy. The current pace of acceleration [in commodity pricing] is not sustainable. At some point people are going to quit building. The costs are too high and there’s not a lot left on the bottom line. When that begins to happen, I don’t see any choice other than the vendors become competitive with each other. It’s clearly not sustainable. The government at some point, with the hyperinflation we are seeing all over the place, is going to raise interest rates if they can afford to.
West: Unfortunately, I think a lot of [what is going to happen] is tied with what’s going on in DC right now. We’ve been able to keep interest rates low because of so much more money in people’s pockets. We’ve had inflationary pressure, but with all the extra trillion of dollars that got needlessly dumped into the system, we’re going to see real inflation now. That isn’t going to help our situation. I remain optimistic. If they raise corporate tax rates, well, Nevada still looks like a lot better place than California to do business. Regardless of what the federal tax rate is. I think it was pretty telling that, when the census came back, California lost enough people that they lost a congressional seat. I don’t see that slowing up, it’s easy for Nevada to be successful when we’re so close to stupid.
Farley: I’m worried when you drive around and don’t see anything but people from California and New York moving here. It’s spurring on the economy. Financially when all this stuff starts to resolve itself and it’s no longer hyper, it’s not going to be good. Mix that in with the fact that we have people raiding in the streets and burning down businesses and it’s all really scary. It’s going to be a rough 12 months to be honest. Businesses who aren’t bracing themselves for that and diversifying now are going to be caught in a real bad spot. We’ll just keep on chugging along doing what we need to do and we’ll let everyone else race to the bottom. Then we’ll still be standing when it’s time to get back to work.
Fuchs: We need to get very active in the political arena and where our state is going. It’s important. There’s a lot of things on the table that can hurt our businesses and we need to advocate and work very hard to make sure that we protect ourselves, outside of all the other factors that we cannot control. The economy is going to be strong as long as interest rates are where they are today. It’s sort of going to compensate for all these artificial price escalations. Now if we have an interest situation, then we have a lot of things to worry about.
