In its Nonresidential Construction Index (NRCI) for the third quarter, 2008, FMI reports that contractors were experiencing increasing project delays and cancellations due to owner financing difficulties. Sixty-five percent of construction industry executives serving as panelists for the survey said they were already seeing these problems. Panelists estimated project delays were running at 17% on average or an average of 2.2 times what they would consider a normal rate, and cancellations due to owner financing problems were running at 9.9% on average, 2.5 times what panelists estimated as a normal rate.

When we asked how owner-financing issues will affect backlogs over the coming year, one panelist hit the nail on the head, “Wake up. It is the whole game.” In the end, it is simple, if owners don’t have a way to finance the projects they plan to build, contractors don’t have work. Those with backlogs made up of mostly public work, have yet to experience serious delays and cancellations due to financing issues. Some contractors work with owners who can finance projects without going to the financial markets for funds. However, those are becoming the exceptions. Most contractors are working with owners who rely on financing assistance from the banking sector. Owners may be delaying projects, because their customers are delaying purchasing decisions.

While contractors are waiting on the economic traffic to clear, we expect there will be some challenging consequences. For instance, there will be greater competition looking for new markets. More competition leads to lower profit margins or worse, taking projects at a projected loss just to keep backlogs full and crews working. Project delays can also mean delayed payments and higher risk of bankruptcies. According to one panelist:

“While financing and credit issues are not affecting our business today, we anticipate that these issues will impact our business over the next 12 to 18 months. Credit and financing issues will slow the overall economy, and this slowing will adversely impact our education and not-for-profit work, especially as fundraising efforts are curtailed for some period of time.”