ENR 2019 Top 400 Contractors: The Market Keeps Growing
The construction market has been growing steadily for nearly 10 years, with no signs of stopping. Industry veterans know the market can’t sustain this pace forever, but they are focused on the opportunities in front of them.
The still-healthy market is evident in the results of this year’s ENR Top 400 Contractors survey. As a group, those firms generated a new record of $405 billion in contracting revenue in 2018, a significant increase of 8.3% from the 2017 total of $373.98 billion. Contracting revenue from U.S. projects rose a healthy 9.1%, to $369.15 billion, over last year’s mark of $338.43 billion. Contracting revenue from projects outside the U.S. rose just 0.9% last year, to $35.85 billion. But with rising oil and commodity prices spurring new work in the oil-and-gas and mining and metals markets, the international revenue stagnation may be coming to an end.
One constant over the past two decades of the Top 400 has been Bechtel ranked No. 1 on the list. This year is no exception, as the construction giant rides the new surge in U.S. energy projects to revenue growth. “The U.S. is rapidly becoming the leading producer of oil and natural gas in the world,” says Jack Futcher, Bechtel president. The firm recently completed two liquefied natural gas trains—in Corpus Christi, Texas, and Sabine Pass, La.—and is building two more in the same locations, all for Cheniere Energy Inc.
But Futcher points out that the recent rise in oil prices has not slowed growth in the downstream petrochemical industry. Bechtel is building an ethylene-polyethylene complex located in the Ohio River Valley north of Pittsburgh that is designed to produce 1.6 million tons of polyethylene per year. “It is the biggest petrochemical project in the U.S. outside the Gulf Coast,” he says.
In 2018, many contractors made moves to expand or enhance their offerings. Perhaps the biggest was McDermott International’s acquisition of CB&I, which boosts its presence in the hydrocarbon market. “Through the combination, McDermott gained Lummus Technology. With the addition of Lummus, McDermott now has one of the industry’s most robust technology portfolios in the hydrocarbon processing sector,” says Samik Mukherjee, McDermott group vice president for projects.
According to the executive, this licensing of proprietary technology has resulted in $8 billion in petrochemical and refining projects in the last five years. “Furthermore, we believe there are approximately $39 billion of identified potential pull-through EPC opportunities related to the Lummus Technology portfolio,” he says.
Many other contractors have gone the acquisition route recently. Structure Tone added Canada’s Govan Brown to enable it to work throughout that country and with a new portfolio of clients, while the firm’s purchase of Florida-based Ajax Building Corp. expands its reach into public facilities and into the U.S. Southeast region.
Structure Tone now has rebranded itself as STO Building Group Inc. With that expanding platform, “we expect to see even more opportunities to enter new markets—both in geography and market sectors—in the coming years,” says Bob Mullen, CEO of STO Building Group.
Another firm on the acquisition trail is Gray Construction, with the recent additions of GraySolutions, InLine Engineers and SPEC Engineering. “These companies focus specifically on the food and beverage market, which is where we anticipate the greatest growth in the future,” says CEO Stephen Gray.
Many contractors also are expanding their geographic and market-sector reach. J.T. Magen & Co. opened a new office in Los Angeles and has won projects for the Jumpman LA and Foot Locker flagship stores, according to CEO Maurice Regan. Moss moved its Texas team from El Paso to the Dallas-Fort Worth area, where it recently was awarded a 257,000-sq-ft residential project, says Bob Moss, its CEO. AECOM has expanded its California operations and has completed or won several high-profile projects in the Los Angeles region, says Jay Badame, AECOM’s president of building construction.
Other contractors are diversifying their markets. While Walbridge works primarily in the metals and automotive sectors, “we’ve found massive opportunities that are allowing us to translate our industrial experience to the mission-critical market,” says John Rakolta III, executive vice president.
Sundt Construction recently formed Sundt Infrastructure Development, a subsidiary that is “dedicated to developing and investing in project opportunities through partnerships with premier infrastructure companies,” says James Geer, Sundt Infrastructure Development group manager. He says this development and investment group “will be applied to our core business lines—transportation, industrial and building.”
Most Top 400 Contractor execs believe the market is strong, and they do not see any near-term bumps. “The markets we serve continue to look strong; all indications in our metrics point to 2020 and 2021 being good years, in terms of opportunities,” says Ramin Cherafat, CEO of McCownGordon Construction. “Certain cities and market sectors may show some signs of slowing down, [but] the overall market continues to be positive. We see this trend continuing for the next two years,” says Brasfield & Gorrie CEO Jim Gorrie.
There are some contractors who are watching for signs of a downturn, even though the current market looks good. For Turner Construction, the nation’s largest domestic contractor, the market looks fine. “We use our large footprint to watch for signs of market shifts,” says Pat A. Di Filippo, executive vice president. However, right now Turner prefers to focus on the work and opportunities in front of them rather than worry about what might be down the road, he says.
Gilbane Building Co. also is watching the market carefully. “We all remember 2009-11 and don’t want to see that again. So we as an industry are constantly wary, watching for signs of a downturn. But we don’t see any yet,” says Dennis Cornick, its executive vice president.
One market constraint that has people concerned is the rising cost of construction. Interest rates may be one of the biggest threats to the overall market. While the U.S. Federal Reserve hinted earlier this year that its lending rates would not rise in the immediate future, a stronger-than-expected gross domestic product rise in March may shift thinking.
This has many contractors concerned. “We are closely watching interest rates,” says Chad Goodfellow, CEO of Goodfellow Bros. He says construction costs in the Pacific Northwest, Northern California and Hawaii have increased at a higher rate than consumer demand for housing. “If interest rates continue to rise, I worry many shovel-ready projects will be held back,” Goodfellow says. A rise in interest rates would have a particular impact on the commercial office market, says George Pfeffer, chair of DPR Construction’s management committee.
Costs also are having an effect on project financing. “We do see some hesitancy and a slight slowing in construction lending. Equity requirements are rising and banks are looking for higher balance sheets,” says Joel Stensby, president of KPRS Construction Services.
This reluctance to lend and unpredictable construction costs are having a major effect on developer-driven projects. One sector that is feeling the pinch is multifamily residential. “With increasing costs of construction, developers are starting to have difficulty getting larger projects to pencil,” says Ryan Heeter, COO of GE Johnson Construction Co.
Nowhere is this trend more apparent than in San Francisco, which ranks as the most expensive city to build in. “It’s very difficult to build a market-rate apartment because the rents can’t support the construction costs,” says Jeff Hoopes, CEO of Swinerton. Multiunit residential faces pressure in almost every city, he notes, where yields are lower and, right now, the cost of construction is so high.
This cost escalation is causing project slippage. When prices come in higher than expected, “owners are then faced with the decision to redesign or value engineer it, or delay the start by six months to a year in hopes that the market slows down and more subcontractors and general contractors become available to bid,” says Mark Luegering, COO of Messer Construction.
There also is some concern about the impact of tariffs on materials prices. Tariffs on aluminum and steel last year caused a great deal of uncertainty about materials prices among contractors and suppliers. However, many contractors managed to factor in the tariffs’ impact on their projects.
This may all change with recent moves by the Trump administration. On May 10, the administration announced a hike on tariffs on $200 billion worth of Chinese goods, to 25% from 10%. Among those goods are numerous materials and products used in construction. A week later, the administration cut tariffs on metals coming from Canada and Mexico, which should relieve some of the expected cost burden borne by contractors, suppliers and owners.
Tariffs have increased the consternation over construction costs. “Tariff talks are leading to material pricing uncertainty. Tariffs that would negatively impact the raw materials’ cost of construction inputs could create challenges, and our model to provide a [guaranteed maximum price] early on in the project could also create a bigger burden of risk,” says Dave Bangasser, CEO of Opus Design Build. He says the firm’s integrated design-build model has helped mitigate some of the cost problems by substituting materials early in the design phase.
Gray Construction is another contractor tracking this issue. “We continue to watch tariff trends closely. We’re experiencing a strong construction economy, but there is potential the tariffs could have a negative impact on future projects,” says CEO Gray. He says after original steel tariffs were announced last year, Gray began integrating an escalation clause in its proposal documentation by setting aggressive deadlines for decisions to be made. “We have had to realize some increases or make arrangements to procure items earlier than we normally would in an effort to mitigate price increases of the overall project.”
The other side of the coin on construction costs is the level of competition and the pressure on contractors to keep bids low. “As the construction market continues to be strong, you might think we would see some easing of the competition in the markets we work in, but we’re not. Competition is as fierce as ever and we are all putting pressure on each other to keep fees low,” says Heeter of GE Johnson.
One driver of this level of competition is the fear that a downturn is coming and that now is the time to build backlog to carry firms through possible lean times ahead. But some large contractors scoff at this mentality. “We are driven by growth, but it has to be profitable growth,” says Cornick of Gilbane. “All the work in the world doesn’t do you a bit of good if you aren’t making a reasonable return on it.”
Other contractors say the amount of work available has actually allowed them some breathing room from the pressure of competition. “With the massive amount of work happening across the Southeast, we are actually seeing less competition in our markets right now,” says Doug Davidson, CEO of New South Construction. He also is seeing less hard bid procurement. Instead, more owners are looking to create relationship-based partnerships to ensure project schedules and budgets are agreed upon and met successfully, he says.
One administration initiative has had a positive impact on the market: the Tax Cuts and Jobs Act of 2017. Some contractors say they are already seeing a positive impact from the corporate tax cuts in the law. Last year “proved to be a strong year for the industrial sector with tax and regulatory reform helping to pave the way for growth and investment in U.S. manufacturing, says Gray.
But that law brought more than general tax cuts. It provides incentives for development, including increased spending on reinvestment in existing properties, says Jason Rich, COO of Snyder Langston.
“Additionally, there is increased funding for senior and assisted living facilities.”
One contractor that has leaped onto this incentive program is Clayco. “So far, the tariffs have only been a slight bump in the road and are more than offset by the optimism caused by tax cuts, and the Qualified Opportunity Zone tax incentive is putting more fuel on the fire,” says Robert G. Clark, CEO of the firm.
A provision in tax reform allows individuals who would cash out capital investments to defer capital gains taxes if the income from the investments is rolled over into “opportunity funds” designed specifically to invest in property development in Qualified Opportunity Zones (QOZ), which are low-income census tracts.
This provision in the tax law is designed to simulate economic development and jobs in low-income areas. As of the end of 2018, more than 8,700 census tracts across the U.S. and its territories have been designated QOZs. As of May 7, there are 130 Opportunity Zone Funds with more than $25 billion designated to invest in those areas, according to the National Council of State Housing Agencies, a Washington, D.C.-based group representing state housing finance agencies.
Interest in QOZ investments has been picking up, giving contractors opportunities to win projects in the residential and commercial sectors in low-income areas. Clayco is embracing QOZ investments. On April 4, it announced that its real estate and investment arm, CRG, had formed a partnership with Scott Goodman, CEO of real estate developer Fairport Development, to form Decennial Group, a QOZ opportunity fund, to develop and build properties in low-income areas. “CRG provides both development and site selection expertise, as well as a full-service design-build group able to act quickly on great OZ opportunities around the country,” says Clark.
He adds that Decennial Group is targeting $1 billion in projects that can help transform economically distressed communities. “We already have a pipeline of 250 deals throughout the heartland and across the country where we can identify projects, work with communities, and begin to deploy capital,” Clark says.
Contractors increasingly are using lean construction principles to manage their projects. However, some executives argue that too many firms rely on textbook or checklist definitions of lean. “You have to make lean construction part of your culture,” says Di Filippo of Turner Construction. He says the firm is committed to measuring the impact of lean construction by examining each day the work that was done the day before and trying to determine how it could be done better. Soon, applying these principles become a habit, rather than a set of boxes to be ticked, he says.
Di Filippo says lean principles are applied throughout Turner, not just by jobsite personnel. Even at the administrative level, staff are asked to see how each task can be done more efficiently, he says.
Many contractors are falling in line on the use of lean construction. “Collaboration throughout the entire construction process, from programming through commissioning, has been a game changer,” said Dave Kievet, COO of Boldt. “Using a lean, integrated approach helped us look at the process from the perspective of overall project performance improvement as opposed to a more narrow view of merely optimizing individual parts.”
In the fast-track construction world, speed to market is a primary project driver, yet this approach can increase risk levels. However, “we see clients willing to invest in preliminary engineering to better define scope expectations prior to finalizing project budgets, thereby reducing risks of cost overruns,” says Todd Allsup, vice president of corporate sales at Stellar.
Many contractors also are formalizing their study of lessons learned over what works and what doesn’t. “We’re drilling into the factors that make projects a success, through things like our Mega Project initiative and California Hospital Study,” says Pfeffer of DPR. He says the study has found nine keys to success that can be applied outside of health care work.
R&D on the Rise
Workforce shortages force contractors to rely more on technology to fill gaps. This causes a surge in research and development among the large contractors.
One example is Messer Construction. It has made an investment in a venture capital company that focuses on researching and investing in construction technologies. The investment “gives us a front row seat to observe what’s being developed and the opportunity to partner deeper with those companies if we see value in it for the industry,” says Messer’s Luegering. “It’s how we got involved with Smartvid.io and piloting artificial intelligence engine Vinnie on a handful of our jobsites to further develop its predictive capabilities and analytics for the industry,” he says.
Vinnie collects and analyzes data to help prevent jobsite safety hazards, reduce risk and detect quality, Luegering says. “Smartvid.io led us to join its Predictive Analytics Strategic Council, made of up nine construction firms and an insurance broker who have committed to share data and explore and discuss the holistic implications of this technology.”
Luegering says these investments help to know what’s coming in technology. “We also have partnerships with area universities and have a dedicated construction technology department that does its own research and testing in-house so we can decide where it might apply,” he says. “We won’t make big investments in a technology until we know they’ll work.”
Gilbane is another contractor committed to R&D. It is using HyperIntelligence to unlock data across a wide variety of sources at Gilbane, according to Jason Pelkey, chief information officer. This effort is being created in partnership with Tysons Corner, Va.-based business intelligence and software firm Microstrategy. “No longer are our teams having to go looking for insights—they come to them,” he says.
Moss is another contractor getting hands-on with technology. “The tight labor market has caused us to get creative. We are investing in a new technology company called TRIVA that has a unique application to monitor the movement of equipment and people to improve efficiency and safety,” says CEO Bob Moss.
Some contractors say technology is not the be-all and end-all to improving the construction process. “Technology doesn’t solve problems, people solve problems,” says Di Filippo of Turner. He says smartphones and iPads are great communication tools, but they don’t replace relationships. Di Filippo says Turner attempts to foster relationships, as one example, by asking owner representatives to “cohabit” in construction trailers on jobsites. “If there is a problem on the site and you are forced to call someone to work on it, their first reaction is to become defensive,” he says.
It makes a big difference when the owner or designer can see a problem, says Di Filippo. “It’s all a matter of trust. It is a lot easier to work out a problem face-to-face with someone you eat lunch with every day than it is on the phone with someone in a remote office,” he says.