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A Slow Climb

BY DEBRA WOOD
As the country continues its slow climb out of the Great Recession, many construction professionals have learned to operate more efficiently, embrace new technologies and prepare for better days ahead. AGC of America’s industry leaders shared their thoughts about the trends and how to adapt to an evolving environment.

 “It’s an exciting time to be in the construction industry, because the industry has changed and is continuing to change, for the better,” says Joseph Jarboe, senior vice president of Clark Construction Group in Bethesda, Md., a member of the AGC of Metropolitan Washington DC chapter, and current president of AGC. “But, there are challenges, and you will have to be on your game to succeed going forward. It’s the value you bring and the skill of your staff.”

 OPPORTUNITIES RETURN
What goes down, must come up again.

“The industry is coming back but very slowly,” Jarboe says.

AGC chief economist Ken Simonson anticipates overall spending will increase by 7 percent to 10 percent, much as it did in 2012, with strong activity related to oil and gas drilling; transportation and processing; other manufacturing; private higher education; and multifamily construction. Public spending, office, retail and healthcare will likely remain weak.

“Construction will continue a slow and uneven recovery in 2013,” Simonson says.

FMI Corp., a construction and engineering industry management consulting and investment banking firm in Raleigh, N.C., a member of Carolinas AGC, in its third quarter 2012 Construction Outlook projects an 8 percent increase in total construction put in place for 2013, with an expected $892 billion invested. The report says with state and municipal budgets “in repair mode, it will be the private markets that must lead the way.”

Landon Funsten, managing director of FMI, projects increases in residential, nonresidential and non-building construction, with 25 percent to 30 percent more multifamily projects breaking ground. He also predicts growth in power-related construction, including gas-fired plants, transmission lines and alternative-energy projects.

With the re-election of Pres. Barack Obama and the assurance of implementation of the Affordable Care Act, Funsten anticipates more consolidation in the healthcare sector, with the need to build new facilities and merge existing entities. Healthcare facilities will need to modernize and will deploy more technology in patient rooms.

“That will be a positive impact for the industry,” Funsten says. However, the FMI report indicates with state budgets continuing to be constrained, getting new projects off the ground will be difficult. It forecasts $84.7 billion in construction put in place for highways and roads in 2013.

Paul Diederich, president of Industrial Builders in Fargo, N.D., a member of multiple chapters, reports road builders are waiting for Congress to act on a continuing resolution to fund highway projects. Until that happens, many states have cut back on lettings.

“We’re seeing more reliance on local funding,” Diederich, AGC’s senior vice president, says.

Christian Zimmermann, president of asphalt paver Pike Industries in Belmont, N.H., an AGC of New Hampshire member, also reports a flat volume in the road-building sector. Dollars invested in highways have for the most part remained the same for the past 20 years.

“We have the same volume of work as we have had, except for the stimulus year,” Zimmermann says. “The trend is more of the same, unfunded, no political will.”

Zimmermann says he finds it valuable getting to know government decision makers and educating them about the industry.

“It’s the squeaky wheel,” he says. “If we sit back and assume everything is going OK, somebody else will get their ear. We need to keep in front of these people about how important infrastructure is.”

NURTURING PUBLIC-PRIVATE PARTNERSHIPS
With governments spending less, more public-private partnerships are taking place to create the infrastructure needed.

“If you are going to be successful today, you better be thinking out of the box every day of the week,” says Al Landes, president of Herzog Contracting Co. in St. Joseph, Mo., a member of multiple chapters. Herzog already is heavily invested in transit projects that it not only builds but also operates and maintains, such as Cal Train in San Mateo, Calif., and Trinity Railway Express in Irving, Tex. He expects more partnership opportunities will occur with limited federal dollars for infrastructure and projects getting bigger.

“A lot of states and transit agencies will be forced to go to public-private partnerships, because it will be the only way they will be able to get the money to provide for their infrastructure needs,” Landes says. “Those opportunities exist today, but a lot of contractors haven’t figured out how to make that next step. … You better be innovative to keep the doors open.”

In the states Diederich and Zimmerman work, they have not seen opportunities with public-private partnerships.

Public-private partnerships are not limited to civil projects. The U.S. Department of Veterans Affairs has started seeking developers to construct new clinics, says Eric Hedlund, executive vice president and chief operating officer at Sundt Construction in Tempe, Ariz., a member of multiple chapters. The developer would assume delivery risk and lease the building back to the government.

“We, and others as well, are trying to move up the deal stream,” Hedlund says. That means becoming more involved in selecting a capital partner, rather than simply designing and building the structure. “The further up the deal stream you can get, the better chance of not being a commodity service provider.”

Jarboe expresses more caution about the risks associated with public-private partnerships when the contractor is the lead and responsible for the funding. He advises studying up on it and understanding the drawbacks before plunging into one.

COLLABORATING ON PROJECT DELIVERY
In 2009 and 2010, prices for construction projects were dropping through the floor and owners moved to a hard bid, but that is starting to change, Hedlund says.

“The result of that feeding frenzy is fewer contractors in business and owners not liking the outcomes of projects,” Hedlund adds. “They are late, over budget, getting change orders, claims, all the things that drive an owner toward a collaborative project delivery, where the team is formulated early and you create value.”

That has led to a trend toward greater use of integrated project delivery, he says.

Jarboe also expects more collaborative delivery, working on preconstruction with architects and owners, and more design-build in both the public and private sector.

“It’s exciting,” Jarboe says. “My theme for the year is building connections.”

Funsten has observed more collaboration between design teams and contractors in the healthcare, industrial and biotech sectors.

CONTINUING TO DEAL WITH SMALL MARGINS
“With so much competition among contractors and margins so thin, owners are able to get away with contractors beating each other over the head,” Funsten says. “Owners expect they can extract the last nickel out of contractors and, typically, they do.” The same is true on the civil, road building side, according to Zimmermann.

“It’s not necessarily new bidders involved, although there are people who didn’t used to do DOT work or town work,” Zimmermann says. “But the big players are beating each other up. That means thin margins.”

Hedlund, while seeing more collaboration, also finds much hard bidding taking place, but some owners, such as the U.S. Army Corps of Engineers, are limiting the number of bidders but still seeking best price on design-build projects.

Jarboe adds that he thinks it will take some time to get past the low-bid mentality.

DOING MORE WITH LESS
Contractors are trying to make as much money as possible on the work they have and building a backlog, Funsten says. That includes more efficiently managing labor, a large cost center, and doing more with less.

Pike Industries has focused on reducing overhead and employs fewer people now. Zimmermann says volume is off 35 percent from 2006, because the private economy has not come back. And the industry is operating at 30 percent capacity.

“Margins are much thinner,” Zimmermann says. “It goes with the territory.”

Some firms also are streamlining processes and wringing waste from their operations. Sundt and Clark have employed Lean processes at jobsites and eliminated organization.

“You are building better, smarter, cheaper and faster using Lean principals,” Jarboe says.

BOOSTING EFFICIENCY WITH TECHNOLOGY
GPS and laser systems have allowed Pike to operate more efficiently.

“We’re making investments in that technology at Pike for grading roads, parking lots, sites as well as surveying stockpiles of aggregates,” Zimmermann says. “We’re finding big savings and huge productivity gains with these systems. You don’t need as many people and you get things done quicker.”

Hedlund reports a greater refinement of technology devices, applications and tablets that are easier to use in the fi eld. Deployment of electronic tools will continue.

Building information modeling (BIM) has caught on, has become a standard of practice for many firms and is growing in the civil construction sector, including leaving subsurface as-builts on a road project. “BIM is a given,” Hedlund says. “It will continue.”

Jarboe calls BIM a catalyst for moving the industry toward greater efficiency, starting with clash detection but leading to better projects, without mistakes and saving money by avoiding re-doing work.

“It took the use of BIM to communicate so we could avoid problems,” Jarboe says.

Sundt and other contractors are working toward converting construction models to facilities management models for their owners.

PREFABRICATING COMPONENTS
Another trend Hedlund and Jarboe see is using will take place in a manufacturing environment offsite with components brought to the For those reasons and more, Balfour Beatty Construction in Dallas, Tex., a member of multiple joint venture which include Balfour Beatty Construction, Austin Commercial, H.J. Russell & Co. and Azteca Enterprises, all of Dallas, are prefabricating bathroom pods, multi-track overhead multi-track overhead rack systems and head wall units for the $1.27 billion Parkland replacement hospital in Dallas.

CREATING SUSTAINABILITY
More and more owners are seeking sustainable structures, particularly among those who plan to continue operating a building for the long term.

Hedlund finds a push toward limiting energy consumption and building net zero, which means the structure will produce as much energy annually as it consumes. That requires reducing the energy consumed and generating new power through renewable sources, such as wind and solar. He cites two military bases — Fort Bliss in Texas and New Mexico and Fort Carson in Colorado — working toward being net zero throughout the compound.

Many municipalities and school districts also desire net-zero projects. Salt Lake City’s new public safety building, under way by Okland Construction of Salt Lake City, a member of the AGC Utah Chapter and the Arizona Builders’ Alliance, aims for net-zero status. Turner Construction of New York, a member of multiple chapters, has a net-zero project for the Sacramento Municipal Utility District in California and recently completed the Colonel Smith Middle School Complex at Fort Huachuca for the Fort Huachuca Accommodation School District in Arizona. (For an in-depth look at net-zero facilities, read the article on page 38.)

Construction companies also will have to heed regulations related to environmental protection, as the federal government steps up enforcement, Hedlund warns.

 WORRYING ABOUT BENEFITS
The re-election of Pres. Barack Obama means implementation of the Affordable Care Act will move forward, and employers of a certain size will be required to provide employee health insurance or pay a tax. Industry experts express mixed thoughts on that. Larger employers, such as Hedlund with Sundt, consider it a non-issue, since the company already offers employee health insurance.

Some employers in other industries are looking for ways to circumvent the law by breaking themselves into multiple smaller companies with fewer employees each or employing primarily part-time workers. Funsten says he has not seen that in the construction industry, perhaps because many firms already offer basic benefits. Contractors also hire many seasonal workers.

A bigger problem, for union contractors, is unfunded pensions, Funsten says. The Financial Accounting Standards Board has said that pension shortfalls must be listed in financial statements. “It’s an item of discussion in every board room of every union contractor,” he adds. “Plans are struggling due to poor returns in the financial markets and people leaving the industry. The folks working for union contractors are contributing less for more retirees and people outside the industry.”

ADDRESSING WORKFORCE SHORTAGES
As business picks up and many professionals plan retirement, the industry will face a shortage of workers — both laborers and management talent.

“During the economic downturn, companies became lean,” says Laura Cataldo, director of Workforce & Industry Outreach at AGC of Wisconsin in Madison, adding that some of those people will not come back. “As things have built up, [companies] have reached the capacity of their people. People are stretched pretty thin.”

Ron Kubitz, Brayman Construction Corp. in Saxonburg, Pa., a member of multiple chapters, says contractors in some geographic areas are currently facing labor shortages while others will not feel it until the middle of 2013. Many displaced workers will stay in their new career fields and not enough young people are choosing construction.

“We’ve had fewer graduates coming out of [construction] programs,” Cataldo agrees. “From a population standpoint, as baby boomers start to retire, there are not enough younger generation workers to fill those spots. There will be a workforce shortage.”

Grassroots efforts can help attract new candidates, Kubitz says. He has focused on expanding options beyond the traditional worker, reaching out to women, minorities and displaced workers.

“I try to interface with different groups on Facebook and Twitter,” Kubitz adds. “I utilize social media. I send out four or five messages per day. I try to target my audience and have had pretty good success with people seeing those and wanting to find out more information.”

Cataldo suggests the industry can do more to improve people’s perceptions about construction careers. The field offers multiple points of entry and can lead to high-paying and rewarding jobs or company ownership.

“There’s some image enhancement that has to be done to make construction as a career pathway more attractive to students,” Cataldo says. “One of the biggest ways is getting AGC members face time with students.”

AGC Wisconsin supports six high school construction career academies with manpower and financially, and a seventh one is in the works. Students learn core subjects and how they apply what they learn in academic classes to the industry.

Kubitz and Cataldo agree that the country needs to become more accepting of students choosing alternative paths after graduation, such as technical school or an apprenticeship. More options exist for young people than universities.

“We need to redefine success in the educational system for young people,” Cataldo says.

As an industry, the time to prepare for recruitment and changing perceptions is now as opportunities for new projects start to open up, not as firms reach a breaking point.

“Contractors need to be asking themselves if they have the workforce in place to do the work,” Cataldo says. “Preparing now for the shortage is critical and contractors need to be involved with their chapters promoting the industry.”