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This year will be pivotal to the future of Wichita's commercial construction industry.
Subcontractors are falling by the wayside, pinched by poor cash flow in a down economy. And, it's likely that some contractors will drop out, as private business dries up amid intense competition for public projects.
It's truly survival of the fittest, and one of Wichita's fittest is Key Construction.
"It's been tough," said Dave Wells, president of the Wichita builder he and his brother Ken founded in 1978. "We're just really fortunate to have many long-standing client relationships and continuing to work with them on projects."
The recipe for survival has become more complicated for Key and some of its builder peers in the Wichita area.
Survival has an expensive definition: Wells said Key had sales of $353 million in 2008 and around $300 million in 2009, down around 15 percent.
"And in 2010 we're thinking another 15 to 20 percent," Wells said.
"But you know, we're really happy to have that. I've talked to a lot of people not sitting in that position."
So, 2010 will be an important year for construction firms to polish their austerity plans.
'No margin for error'
The recipe for survival includes:
* Trimming the work force. Key once employed 328 people. Today, the number is slightly less than 200 with major layoffs in October 2008 and May 2009.
"I think that everyone in our industry is looking at everything," said Corey Peterson, executive vice president of Associated General Contractors of Kansas.
"Unfortunately, reducing staff is one of the most logical areas impacting your bottom line. It's critical, though, to step back and evaluate your operation from top to bottom."
* Tight financial diligence, internally and on all subcontractors. "Nowadays, the subs are understanding that their qualifications and financial standing are absolutely critical," Wells said. "If you have a sub, it doesn't matter whether he goes down on your job or not.
"If he goes broke on a job over there, then he's going to be robbing Peter to pay Paul, shifting his manpower or just flat not performing.
"It's just unbelievably different, the diligence you must do now on your subs and their qualifications. There's no margin for error because all margins are down."
* Work. Key has several major corporate clients with consistent but evolving projects, such as Wal-Mart, Walgreens, Dillons and Slawson Cos.' NewMarket Square.
"The Wal-Mart program has changed," Wells said. "Used to be new stores, but now they're more focused on remodels."
Locally, they're also focused on competition with Dillons, a grocery retailer in the midst of its own building program.
Surviving builders share that kind of constant work, said Mark Hutton, president and founder of Hutton Construction.
"Health care is great for us, and the education market is decent, but it's on momentum mode," he said. "Health care, especially on the hospital side, is more dependent on the community's willingness to help fund it. There are more public- private partnerships, and that's about all there is."
* Track record. Wells said his main focus is "get it done on time and under budget."
That's kept Key as the builder of choice for NewMarket Square since 2000, said Jerry Jones, Slawson's vice president for commercial development.
"They've delivered every building out there, and everything they've constructed for us has been on time and under budget," Jones said.
"They're exceptional communicators. When we've had some tight deadlines, they've helped us work through the challenges and get the projects done successfully."
* Versatility. Key will go anywhere for a project, from retail and government work to call centers and hospitality projects.
"One thing that's been a big deal for us is that we've always said that we specialize in diversity," Wells said.
"We build all types and sizes of projects, and we build all over the country, and that's allowed us to lessen the impact of the downturn on Key."
* A clear crystal ball. "My brother Ken is our CEO and he saw the red flags early (in the economy)," Wells said. "That's kind of what he does — sit back and look at the business instead of becoming immersed in the business."
So Key was able to begin early planning for a downturn, beginning the staff adjustments and project planning that have kept it on its feet.
Other challenges
It's tough for clients to get projects off the ground with commercial credit at a premium, Wells said.
"In today's world, one of the big challenges we face is helping a client close the lending gap," Wells said. "The market went from people too loose with money, where 90 and 95 percent loans were common, to 50 or 60 percent loans today. The pro formas on those don't work because nobody's got the extra equity to put the money in."
Tight credit has "all but killed the private side of the business," Wells said, making public work tougher to land.
"Private used to be a lot of what we did, and it hasn't disappeared, but it's way, way less than it was," he said.
"We're seeing unbelievable numbers of people on bid lists for public work, not only contractors but subs. It's intensely competitive, and when you're bidding against 20 other guys, the guy who gets it will be the guy who made the biggest mistake."
What does the future hold? Wells' crystal ball says a long, slow, steady recovery.
"All those years of your mom saying to save for a rainy day have come true," he said, chuckling. "It's still raining right now.
"We're not going to get out of this downturn early.... People forget real quickly that we've been riding a 15-year high, and it's going to take years, not months, to come back.
"It was artificially high in a lot of ways. The amount of lending people could get was higher than it should have been. So you can say that we've caused some of our own problems."
