Dive Brief:

• Revenues fell marginally at Watsonville, California-based Granite Construction during the third quarter amid a hypercompetitive bid environment, owners dragging their feet on projects due to supply chain hurdles and higher prices for fuel and asphalt cutting into profits.  
• The firm reported Thursday $1.06 billion in revenue for Q3 2021, essentially flat from its results in the year ago period, when it notched $3 million more in sales. Granite's backlog, or the jobs it has won but hasn't started working on yet, improved to $4.3 billion — up $135.4 million, or 3%, from the same time frame in 2020. But it declined sequentially by $117.4 million, or 2.6%, from the $4.4 billion it reported in the second quarter of this year.
• Gross profits in the third quarter decreased 4.8% from a year earlier to $119.9 million. The company reaffirmed its guidance of low- to single-digit revenue growth for the 2021 fiscal year, but narrowed its guidance for its earnings by a half a percentage point on the low and high end of its range to 6% to 7% for the full year.

Dive Insight:

While Granite's situation is unique — the firm is still recovering from accounting irregularities that forced it to restate its books earlier this year — its Q3 results reflect many of the challenges that U.S. contractors of all sizes are currently facing.

During a question-and-answer session with financial analysts, Kyle Larkin, Granite's president and CEO, explained how the continuing grip of the COVID-19 pandemic, supply chain snarls, hesitant project owners, high fuel and material prices and a tight labor market were coalescing to stymie its business growth.

"We are seeing some of the projects kind of being held up, as owners look to determine whether they want to put projects out just based on some of the inflationary side of things," Larkin said. "It's a little bit of everything out there."

For example, while he said the company benefited from lower diesel and liquid asphalt prices in 2020, their whipsawing this year has impacted the firm's profits. "We couldn't keep that margin expansion into 2021," he said.

Heightened competitiveness in the bidding environment — a factor economists called out as a potential detractor heading into 2021, citing survival bidding by some firms just to stay alive — has come to pass. Questions about public funding are also still hanging over the market as Congress languishes on passing an infrastructure bill, Larkin noted.

"There's still some uncertainty in the public spending side of things," Larkin said. "There's a lot of debate and discussions today on the federal infrastructure bill, and so hopefully that will provide some clarity to agencies, so they feel confident they can put work out."

As "Striketober" has gripped firms in multiple industries with workers hitting the picket line, Larkin noted that Granite, which is a union shop, has had consistent access to labor in union areas, but has struggled to fill positions in non-union markets

"We have a lot of hires in that non-union environment, and that's been a challenge for us," Larkin said. "There's definitely… a lot of competition for labor that's out there today."

Finally, Larkin said the inflationary forces that have come to play in construction are actually influencing the kind of work Granite is pursuing. Today, it's more likely to go after "best value" contracts, or bid-build projects, than design-build jobs, which have longer timelines, and thus introduce more risk.

"From the point of time that you actually price the work to the point that you actually build the work, there's definitely a higher risk profile," Larkin said. "And certainly, in kind of the inflationary times that we're in today and even supply chain times we are today, that risk profile is only going to get worse."