Central Texas RMA
Road to profit ? Texas job frustrates contractor.

Large transportation projects have disappointed some of the biggest infrastructure contractors in the country lately. Those kinds of projects are a key part of the strategies of companies such as Skanska and Washington Group because the big companies face fewer competitors, can form joint ventures and, in theory, run into less price competition than with your average small highway overpass.

It’s not a foolproof strategy, some are learning.

Granite Construction Inc., Washington Group International and Fluor Corp. all took unexpected charges or booked lower-than-expected earnings in the third quarter and cited highway projects. Although Washington Group and Fluor didn’t say whether these projects were large design-build contracts, both companies perform those types of jobs.

Watsonville, Calif.-based Granite was more specific and mentioned design-build projects. The company’s chief executive, William G. Dorey, spoke about the problem at a teleconference for investors last month on the company’s third quarter financial results. He bemoaned the effects of his company’s recent big-project cost increases on an otherwise superb overall performance.

“No matter how we view our heavy construction division results, we are disappointed,” Dorey said.

The two largest problems were Interstate 183a near Austin, Texas, and State Road 22 in Orange County, California. Both are design-build contracts in partnership with other firms that presumably share any expected costs or losses.

And Granite has already adjusted its bid strategy in the past 15 months to avoid repeating the problems. “We fundamentally decided we’re not going to get involved in large complex projects with owners that are going to be really tough,” said Dorey. “We realized this game’s a lot more complex and tougher than we thought it was and some of the industry is coming to the same conclusion and if they aren’t, they ought to.”

How the projects are progressing is different depending on whether you hear it from Granite or from the owners.

In the case of 183a in Austin, Granite in its third quarter results recognized anticipated losses for design changes, many scope changes and disputed extra work, said Dorey. Granite hopes to recover most of the costs through negotiations with the owners.

On that project, Granite is part of a joint venture that is building 11.6 miles of divided elevated roadway and 22 bridge structures through a 400-ft corridor that starts at the edge of Austin and runs northwest through Cedar Park and Leander. Although the 4.5-mile main toll highway has six concrete travel lanes, the remainder will be four-lane asphalt frontage roads. The project cost including design, construction, maintenance and a 5% contingency fund is $238-million. The design-build team’s contract is worth $167.1 million, of which 75.3% has been paid to date.

“We have paid $1.8-million in change orders to date, and we have another $2.5 million change-of-scope orders outstanding due to owner design modifications,” says Steve J. Pustelnyk, communications director with the Central Texas Regional Mobility Authority. “We’ve had 11 change orders on the project to date.”

Some of the changes include upgraded medians and an improved toll system integrator. At the end of Sept. 30, design was 94% complete and construction was 78% complete. The project is reportedly on schedule and expected to finish in March 2007.

“We are generally pleased with the project and the work,” Pustelnyk says. “There is nothing on our end that’s a major red flag. ... Many of the change orders that we’ve had are well within the contingency budget.”

On S.R. 22, Granite is partners with two other contractors in widening an existing 12-mile freeway intersecting many major north-south roads for the Orange County Transporation Authority. Scheduled for substantial completion Nov. 30 with $50,000-a-day in penalties, the project was budgeted at $550 milllion.

Rick Grebner, OCTA’s project manager, says OCTA did revise its seismic criteria for the project and the weather had been terrible early in the job. “So we had those two things out of the chute and subsequently resolved those in change orders with Granite and Granite was compensated for those impacts.” Overall, adds Grebner, “it’s been a hugely successful project out here,” and he is very happy with the contractors’ performance.

Making a solid profit, however, is what Granite tries to do. And on S.R. 22 there is no guarantee of recovery.

“Most of the additional cost is recognized losses in production resulting in acceleration for substantial completion of Dec., 2006 despite delays by the owner for seismic changes and extraordinarily wet weather for 2004 and 2005,” said Dorey.

Weather has continued to be a problem as the project headed toward completion in the first week of December with winds gusting to 60 mph, rain and record cold temperatures hitting the area. As of Dec. 4 the general purpose lanes and auxiliary lanes between the I-5 and Magnolia St. had opened but OCTA wrote that the contractors had “informed us that contingent on weather conditions new lanes on other segments of the freeway will continue to open throughout the week.”

Adds Dorey: “We will be more careful in future months particularly as to results of design-build projects.”

“We’re just having an awful time trying to predict the outcome of this work,” Dorey explained. Granite spends time with owners on what additional work an owner is entitled to. But that isn’t the whole story.

“This deisign-build work is a complex game, and you’ve seen this with Washington Group which has had similar experiences, although we haven’t had the same experience…we are doing our level best to get a handle on how to forecast this work so we can avoid these ups and downs and surprises we’ve experienced over numerous quarters.” Granite is trying to predict the way the various project risks affect the cost structure and forecast and those in turn affect the current quarter forecast. Then the company may be able to develop risk contingencies, but “it’s still a difficult game,” said Dorey.

In addition to scope growth, the contractor must come up with enough productive workers if it hopes to meet its expected profit margins. “If we’re not getting the production we expect that was estimated then the actual activity doesn’t meet expectations” and things can go wrong, said Dorey. “We’re working hard to adjust crews and procedures to get the best productivity, but it’s really a function of what’s in the market place.”