ENR Top 400: Building Contractors Enjoy Home Cooking
Demographics drive building construction
The market finally has come all the way back to pre-recession levels for U.S. general contractors and construction managers. The market is strong without overheating and without the crippling worker shortages that were predicted. However, large contractors in the big-ticket international oil-and-gas and mining markets did take a hit in 2015, although most are poised to weather that storm.
For ENR’s Top 400 Contractors, 2015 was a pretty good year. The Top 400 generated $344.14 billion in contracting revenue in 2015, an increase of 3.7% from 2014’s $331.94 billion. The figure marks a record high for the Top 400, eclipsing the previous record of $338.38 billion in 2008, reported in our 2009 Top 400.
However, the real story is on the domestic side. Contracting revenue from U.S. projects rose a healthy 9.5%, to $294.35 billion, and international contracting revenue plunged 21.1%, to $49.79 billion, in 2015. The international market saw major declines in projects in the minerals-and-mining, petroleum and power sectors.
Bechtel continued its dominance on the Top 400, ranking No. 1 for the 18th consecutive year. However, low oil prices and a decline in the minerals-and-mining sector have had a significant impact on its markets. The slowdown in the Chinese economy has hurt commodity prices in many sectors, says Brendan Bechtel, president and COO. “I expect the international market for commodities [such as oil and gas and minerals and metals] to be on a down cycle for the next couple of years.”
Fluor reported a record backlog in the first quarter of 2016. At the quarterly analyst briefing on earnings, CEO David Seaton said he has not seen any major project cancellations. However, he noted that schedules on some of Fluor’s oil-and-gas projects have been stretched out.
Bechtel is much more optimistic about the domestic market. “Here in the U.S., we still have the most robust economy in the world," he says, noting that there are opportunities in the market for liquefied-natural-gas export terminals, and he expects a significant spike in gas-fired combined-cycle power plants as coal plants are closed and a few nuclear plants are retired.
Overall, Bechtel believes that, while the international market has softened, there continues to be a lot of work available. “There are plenty of good opportunities for firms that are smart and disciplined,” he says. For example, Bechtel just broke ground on the Edmonton Valley Line Light Rail Transit-Stage 1 project in Alberta, Canada.
- Near-Term Optimism
- Diversify, Diversify, Diversify
- Urban Jungle
- Lack of Energy
- Find Me Workers!
For most firms, the current market is strong and poised to be healthy for the near term. “We are very optimistic for the not-too-distant future,” says Pat Di Filippo, executive vice president of Turner Construction. He is not seeing signs that any sectors are getting overbuilt. Di Filippo notes that there are some huge projects on the horizon, including the proposed James A. Farley Post Office-Penn Station renovation.
For many firms, the robust U.S. market has meant an easing of competition. But the U.S. market increasingly is gaining notice abroad. “U.S. competition continues to diminish. However, those voids have been filled by the European construction companies as they try to learn to compete in our marketplace,” says Ronald N. Tutor, CEO of Tutor Perini.
It is not just European firms that are interested in the U.S. For example, China Construction America acquired Plaza Construction in 2014 and has helped Plaza to grow. “CCA has been unequivocally supportive of our efforts, providing us with direct global contact to their suppliers and manufacturers and giving us direct access to building materials we wouldn’t normally have the ability to reach,” says Richard Wood, Plaza’s CEO.
Wood believes the market will continue to grow in the near term. “Construction activity towards the end of 2015 and beginning of 2016 has remained very busy due to low interest rates, consumer health and a growing population. We believe this trend will continue in the near future, and construction growth will remain on a better-than-moderate growth track,” he says.
For many firms, the current market is hot enough that some community groups want to douse it. Because of a scarcity of land, “Los Angeles is going vertical,” says Jocelyn Topolski, executive director, project development, at Bernards.
However, “with the robust market has come pushback from the local communities, including an anti-development ballot measure that has gained momentum,” says Topolski. The so-called Neighborhood Integrity Initiative is being pushed by a group called the Coalition to Preserve LA. It seeks to slow new developments in Los Angeles by requiring city planners and developers to stick to the city’s General Plan, a set of city planning guidelines, including building height and use restrictions, that are now more than two decades old.
No one is certain that the domestic market will continue at this pace. “There is still significant pressure on margins in the construction industry and a lack in confidence that the work hitting the market is sustainable,” says Kevin McCarthy, president and CEO of PC Construction.
As construction tends to lag other economic indicators, most contractors anticipate no rapid change in the market. “I think we are in the late innings of a vertical construction boom in U.S. gateway cities,” says Dan McQuade, group president, construction, at AECOM. McQuade thinks the market will slow down, not bottom out, but he is not too concerned. “We have built such a robust backlog in vertical construction that it will carry us through the next few years. Companies that have significant backlogs of work and are well capitalized, like we are, will have no problems,” he suggests.
As contractors continue to expand and build their backlogs, many are looking to the future. The keyword is “diversify.” For example, JE Dunn Construction is moving into growing markets, including aviation and advanced manufacturing, says Gordon Lansford, CEO. “We have found that these market sectors require the same high level of advanced and emerging construction technology and processes that we have been successfully applying to highly complex healthcare, science and mission-critical facilities.”
Oltmans Construction Co. is another firm that is looking to widen its reach. “We are looking ahead to future markets. We are passing on some of our core business opportunities in order to diversify into new areas,” says John Gormly, Oltmans president.
For some firms, diversification has helped out in lean times. For example, Ferreira Construction Co. has been forced to seek new markets due to the slowdown in highway construction over the past few years, caused by an uncertain highway construction market, the low gas tax and the dwindling Highway Trust Fund. “Our strategy is to perform work in other regions of the country and perform different types of work, such as solar installation, all types of utility work, dredging, pile-driving, electrical and specialty foundations,” says Nelson Ferreira, president.
Urbanization, shifting demographics, integration of technology and the rise of new styles of workplaces are already making a huge impact on contractors across the building, commercial development and infrastructure markets. “With more people than ever living in cities, we need housing, workplaces and infrastructure to meet their needs. People are also living longer, so we’re seeing a need for improved health-care facilities and more of them, as well as more schools, that keep pace with evolving technology,” says Richard Cavallaro, CEO of Skanska USA.
Demographic shifts have many contractors watching carefully to discern where to focus their efforts. “We are definitely strategizing to skate to where the puck is going next,” says Steven F. Roznowski, CEO of The Christman Co. There has been strong revitalization of historic urban centers, such as Nashville, Richmond, Detroit and Charlotte, N.C., he notes. Christman reacted to these changes when it relocated its southeastern Michigan offices back to inner-city Detroit, which the firm left in the 1950s, he says, adding, “It’s a move that’s already paying off, with multiple large modernization projects underway, including the $140-million GSA Levin Federal Courthouse improvement project.”
Demographic shifts are not just about where firms are building but what they are building. “Millennials, who have now taken over as the largest population since the baby boomers, are the drivers of these trends and are choosing to live smaller, own less, and walk or bike more,” says Mike VanGessel, CEO of Rockford Construction. He says millennials and Generation Z, who are coming next, will transform market requirements in new ways for decades to come.
For hotels, retail and multifamily projects, however, developers are under increasing pressure from lenders that are demanding stronger past experience, more liquidity and highly experienced general-contractor partners, says Chris Barbe, senior vice president of dck worldwide.
Barbe says these changes in lending have opened up opportunities for dck worldwide. “Through the dck capital-solutions group within our company, we partner with owners and developers to add value through not only our construction expertise but also our ability to bring financing opportunities to their projects.”
Some contractors are stepping into a new role. “More construction firms are getting involved on the development side, which enables them to move upstream in the project and reduce or eliminate competition for the construction,” says Lansford of JE Dunn.
Falling oil prices have taken a definite toll on domestic and international markets, particularly in the upstream oil-and-gas sector.
“Exploration and production companies have reduced or halted expansions of surface production facilities. In response to this market cycle, we shifted our attention to downstream opportunities in the chemical market that focus on feedstock value-added products, including ammonia production,” says James L. O’Leary, COO of Haskell.
Bechtel sees a coming renaissance in the U.S. petrochemical market because of lower feedstock prices. But some of the projects on the boards have been slow to get started due to owners’ “crisis in expectations” over the higher-than-expected costs of such plants, Bechtel says.
While the upstream oil-and-gas sectors have faltered, many firms on the downstream side have found continued success. “Approximately half of our business has exposure to the energy markets, so we have felt the negative impacts of depressed oil prices,” says Robert Bryan, director of corporate development and strategy at Aegion. He says Aegion’s midstream and downstream oil-and-gas sectors have remained fairly stable.
For many contractors, particularly in the heavy and civil arena, lower oil prices have been a blessing. “The drop in prices has helped our asphalt paving and traditional highway construction. When you purchase over 40 million gallons of fuel a year, the drop in prices can only be good,” says Bob Alger, CEO of The Lane Construction Corp.
Further, the drop in oil prices has spurred some construction growth due to the reduced cost of materials and transportation. “While it is difficult to ascertain or quantify how much this has changed over markets, it is definitely a contributing factor to making more funds available for construction,” says Robin Savage, COO of Robins & Morton.
Despite the healthy market, many contractors complain that competition remains intense. “Competition remains strong in most sectors, although most contractors are beginning to see an increase in their market backlogs. Owners are still very price-conscious but are also driven by getting the right match of talent for their projects,” says Savage.
Because it is a healthy market, many contractors are taking a strategic approach to competing. “If opportunities do not align with our strategy, we are quick to decline and remain focused on our key clients and markets,” says Scott Skidelsky, senior vice president at Balfour Beatty Construction. “We are being very thoughtful about the opportunities we pursue so that we can maintain the focus and discipline to provide our clients outstanding construction services.”
In the beleaguered energy markets, many large firms are now looking at projects they may have previously ignored as too small. “Because of the lack of large-scale capital projects, many of the major players in the space are taking on smaller projects to fill their pipeline,” says Rick Domyslawski, executive vice president at Day & Zimmermann.
This movement by large firms into smaller jobs is creating a lot of downward pressure on prices and could lead to more contractor consolidation in the coming years, Domyslawski says. “We believe we can compete successfully because we have a long history of delivering successful projects and have been a reliable partner for our clients,” he suggests.
The willingness to be selective is not just affecting contractors: Subcontractors and suppliers also are very busy and being more selective with projects they choose, favoring more reliable general contractors.
This selectivity makes maintaining strong relationships with subcontractors and suppliers critical. “Like relationship with an owner, a subcontractor who gets to choose will go with the CM-GC that is more knowledgeable and more stable,” says George A. Pontikes Jr., CEO of Satterfield & Pontikes Construction.
Bechtel is one company that is making a big investment in competitiveness. Brendan Bechtel notes that competition in the international market is becoming heated, and owner demands for greater process efficiencies are becoming stronger. “It is embarrassing that productivity in our industry has not improved over the past 20 years,” he says.
So, over the next three years, Bechtel plans to invest $60 million to explore process and project delivery improvements. “Two-thirds of our ‘Future Fund’ investment will focus on internal entrepreneurship to communicate best practices and innovations across company segments,” says Brendan Bechtel. The rest of the fund will go to partnerships with third parties. “Our goal is to build a better Bechtel,” he says.
For contractors, a chronic problem is having enough staff and craftworkers to do the job—a problem that has not gotten as bad as quickly as many feared. The shortages in construction are not as severe as expected because many craftworkers now have returned to construction after the downturn in the previously red-hot oil-and-gas market. Most contractors are concerned this easing of pressure on the current workforce crisis will not last.
The great recession has left construction with a depleted skilled labor force as many younger employees gave up on the industry and found other careers.
“To the extent that contractors can staff construction projects with adequate manpower, those that have the best trained and most experienced skilled labor force will have the most opportunity to provide added value and increase their margins, as compared to the competition,” says Roznowski.
Many contractors are working hard to recruit young talent. For example, Turner Construction has increased its intake of new graduates this year. “We have been hiring 200 to 300 young people a year, even during the recession. This year, it will be 400,” says Di Filippo.
Some contractors think the energy downturn will help the construction industry’s staffing problems. “We lost a number of our skilled workers to the energy industry, and now that those job opportunities are decreasing, we believe we’re going to see a portion of those folks return to construction,” says Tim Steigerwald, senior vice president of Messer Construction Co.
Steigerwald says that, through job fairs and outreach to military bases, Messer is recruiting veterans as another source of talent. “These individuals have the focus and discipline we look for in our field operations, particularly as crane operators,” he says.
Other firms are actively recruiting by promoting their home markets’ quality of life. “Midsize markets such as Toledo are great places to live and grow professionally, and we work at promoting the benefits of building a career in this community,” says Bill Rudolph, chairman of Rudolph Libbe Group.
The Christman Co. is using its safety program as a means to attract young people who may be hesitant to get into construction. “Smart contractors who want to excel in the industry must get on board and set the safety bar higher on their projects. In the long term, a safer work environment will be more inviting to the younger workforce we are all in desperate need of attracting and developing,” says Roznowski. “Our safety slogan—‘Safety: It’s How We Live’—helps to remind us daily of the significant, positive impact safety has on our overall industry.”
Employee training and development is another tool being used to attract and retain workers. “As president and CEO, I’ve made a concerted effort to focus on existing employee development as well as making key hires from outside the company to help Plant grow,” says Chris Rivielle, CEO of Plant Construction Co. “We believe the balance between the existing culture and new ideas from the outside make for an innovative and, at the same time, stable environment.”
Some contractors worry that some proven recruiting methods may be taking a back seat to competitive pressures. “Internships used to be the way many young engineers became acquainted with a company and found a place to make a career. Many companies have scaled these [internships] back due to pressures to maximize billability,” says Domyslawski of Day & Zimmermann. Failure to provide basic skills training on pre-entry-level positions may backfire. “We see younger talent with high expectations for rapid career advancement without first mastering the fundamentals,” he says.
Day & Zimmermann has developed a long-term training-and-career advancement program to keep staff interested and motivated. “The Field Leadership Development Program initially will focus on roles that would prepare individuals for field assignments,” says Domyslawski. The firm is looking for people that are willing to make a five- to 10-year commitment to the program. “Participants in the program are going to rotate through every department and really gain an understanding of how the business works and where everyone fits,” he notes.
Most contractors agree that it is critical to keep institutional knowledge alive in the face of baby-boomer retirements.
“We are seeing a generation of senior-level superintendents and foremen that are soon to retire. We need to replace them, industry-wide, and make sure we’re training the next generation on more than processes. We have to make sure the years of knowledge that we possess stays with the folks who will take the reins on sites in the next five to 10 years,” says Cavallaro of Skanska USA.