"We've seen a major sea change, where we have a large number of contractors that work principally for private customers who are now realizing the only future work out there is with governmental agencies," E&Y's Mike Lucki tells GlobeSt.com. For contractors, that means learning how to follow the rules entailed by doing business with the federal government, which are bundled together under the headings of the Federal Acquisition Regulation and Cost Accounting Standards, says Lucki, global leader of E&Y's construction, engineering and infrastructure practices.
"There are probably 50 contractors that weren't compliant with FAR and CAS a year ago and have spent the past year becoming compliant so they can actually bid on these federal projects," Lucki says. He adds that in fact it takes the course of a year to get in line with these programs. Contractors that hope to bid on federal jobs have had to develop accounting procedures and controls to conform with these standards and also train employees to follow them. A big part of the process is in determining where the contractor is and isn't FAR- and CAS- compliant and then "developing patches and fixes to get you where you need to be."
When bidding for a job, federal rules call for preparing a disclosure statement and making sure the contractor complies with the government's Truth in Negotiations Act. Failure to comply means what Lucki calls "onerous" audits, potentially getting bounced from a project, criminal liabilities for the individual who signs the disclosure statement--and, in the long term, penalties in terms of being able to bid on future contracts. "You have to walk the walk and talk the talk."
About half the respondent to the E&Y survey say they have bid for jobs through the American Recovery & Reinvestment Act, popularly known as the stimulus program. Will the work be enough to cover the private-sector drop-off? The survey makes it plain that the CFOs know what they're up against. "There's a huge drop-off on the commercial side that's due to a number of issues," says Lucki.
The CFOs polled by E&Y said that construction and engineering opportunities in commercial real estate declined significantly in 2009. Further declines are expected over the next 12 to 18 months, as the sector deals with a lack of financing--78% of respondents think the credit crunch will end no sooner than the third quarter--an oversupply of product, rising unemployment and lackluster economic fundamentals. There's also the question of valuations, which in this distressed climate often mean that properties are being sold for below replacement costs. "That's really driving down that market dramatically," Lucki says.
About $113 billion in ARRA funds have been set aside for construction-related projects, Lucki says. "There's been about $40 billion of that left already, so there's still a fair amount to come," he says. "It's clearly not going to be able to fill all the void left by the commercial side, but it's almost the only game in town."
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Paul Bubny
Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.
