The downturn in the construction market has the industry on edge, and owners, the ultimate consumers of construction services, are no exception. The credit crunch, plunging consumer sales, falling tax revenue and uncertainty about the next administration in Washington have owners increasingly reluctant to green-light projects and they are tightening up management of those jobs that are going forward.
As part of its overview of owners, ENR once again is presenting its Top 425 Owners list. This list ranks publicly held companies based on the 2007 construction-in-progress figures they supplied to the U.S. Securities and Exchange Commission, as compiled by Standard & Poor’s Compustat, like ENR a division of The McGraw-Hill Cos. Because many public firms do not separate their construction spending from other elements of their capital expenditures, ENR also is publishing a ranking of 200 publicly held companies ranked on their overall capital expenditures reported to SEC, as compiled by Standard & Poor’s Compustat.
The quick turndown in the economy has many owners worried. “Three months ago, our top concern was to find people in the industry. Now, we are all worried about the credit crunch, the economy and the new administration,” says Egon Larsen, global construction manager of Air Products and Chemicals and current president of the Construction Users Roundtable, a Cincinnati-based organization of large owners and service providers. “Owners look for predictable results and hate uncertainty. But now, what you predict today will doubtless be proven wrong next week. This is the kind of environment that we hate.”
From a sector standpoint, most owners are reacting cautiously. “Among our members, there’s still a fair amount of strength in the power market,” says Gregory L. Sizemore, executive vice president of CURT. But he says there will be a general belt-tightening in owners’ capital programs. “We are already hearing reports of layoffs from some of the big engineering firms in the [Cincinnati] area,” he says.
“The economy is a concern in that everyone is feeling the pressure on all levels,” says Ricardo Aparicio, manager of project services in Europe, the Middle East and Africa for General Electric. He notes that recent construction downturns generally have been local or regional events, such as the U.S. building downturn early in this decade, the Asian financial meltdown in 1997 and the South American woes of the late 1990s. “The market problems this time are worldwide,” Aparicio says.
Sizemore says owners are anxious to see what happens in the new Obama administration. “Owners are always concerned about the level of federal regulation. It will be interesting to see what happens now that the administration and both houses of Congress are controlled by the same party.”
The economic downturn should take the pressure off prices. “The drop-off in price pressures, especially on fuel, is welcome. It will really benefit the smart owners with price de-escalators, as well as escalators, in their contracts,” says Aparicio. He also notes that there are cost pressures on contractors, design firms and suppliers. “That’s good news to a point, but it could be bad news at times if companies start bidding too aggressively. You have to be careful to make sure the bidder can perform at those prices.”
Workforce shortages also are easing, but this has some big owners worried. “The problem with a reduction of the impact of workforce shortages is that we will become complacent,” says Aparicio. He says that once the credit crunch eases, work will begin to ramp up again. “We must continue to emphasize workforce development. Complacency is our greatest enemy.”
During perilous times, there is nothing more important than keeping track of risk. At its annual convention in October, the Construction Management Association of America, McLean, Va., unveiled its “Ninth Annual Survey of Owners,” which addresses this issue. The report, conducted in conjunction with Raleigh, N.C.-based management consultant FMI Inc., surveyed owners on their perceptions of and strategies to deal with risk. “We have tried to make owners understand that they can’t simply push all risk down on the contractors and designers,” says Bruce D’Agostino, CEO of CMAA. “If you transfer risk, you are going to pay higher prices for your project.”
The survey asked 225 owners from a variety of industries on their assessment of the frequency and impact of 28 factors that affect project risk, from estimating accuracy to government regulation and environmental conditions. It also asked owners to place their own reactions to dealing with risk in one of four categories: (1) accept and manage the risk; (2) accept and transfer the risk; (3) accept and ignore the risk; or (4) avoid the risk by canceling, deferring or changing the project.
The study found that owners in the sports, financial and real- estate development sectors were most likely to attempt to transfer risk or avoid it (see table p. 13). On the other hand, the chemical industry was the sector that was most likely to accept and manage risks, followed by several other industrial sectors.
The two biggest risks in terms of impact on the success of projects from the owners’ standpoint were breakdowns in vendor performance and unanticipated costs. Although many of the listed risks were found to be either rare or of limited impact, all 28 risk categories were listed as a contributing factor in a failed or unsuccessful project by at least one survey participant, says Mark Bridgers, a consultant for FMI who helped lead the survey project. He notes that the survey also asked participants to list “other” risks, and 70 owners responded.
When asked where risk management should be improved, owners said they should do a better job in planning and budgeting, team integration and build-up, design and review. The owners also faulted contractors and designers for not doing a better job in communication and coordination and in quality control and management. Finally, the owners surveyed said the entire construction team should jointly work harder at cost control, training, education and technology.
D’Agostino notes that many larger and more sophisticated owners are able to identify and assess project risks internally. “But for those owners that aren’t building regularly, it is better that they bring in an expert to assist in recognizing and properly allocating the risks,” he says.
Owners in many sectors are taking D’Agostino’s advice to heart. They increasingly are relying on service providers to manage the construction process, according to a McGraw-Hill Research & Analytics report, “Products & Players’ Trends,” released at the McGraw-Hill Construction Outlook 2009 conference in October in Washington, D.C. Only 52% of projects still use the traditional design-bid-build approach for delivering projects, according to the study. It is often used in the retail, hotel, commercial-office and multifamily-residential sectors. But owners of manufacturing, K-12 education and health-care projects increasingly are turning to construction managers and design-build firms to deliver projects.
For many owners, design-bid-build creates an adversarial relationship among all parties. “Under the old style of project delivery, everyone was trying to build a better bulletproof vest rather than trying to create a neighborly work environment,” says Mike Robertson, an independent consultant on project delivery for the Utah Transportation Authority. He says delivery methods like construction management-at-risk are more collaborative and less adversarial than design-bid-build.
But Robertson says there are drawbacks to alternative project-delivery approaches. In design-build, the owner must know exactly what it wants and make that clear to the design-build team at the outset. In CM-at-risk, owners often have to wait far into the design process before getting a guaranteed maximum price. “You lose some of your negotiating leverage with CM-at-risk,” says Robertson.
“There would not be a migration to alternate project-delivery methods if design-bid-build was not fundamentally broken,” says Larry Eisenberg, executive director of facilities, planning and development for the Los Angeles Community College District. He says design-bid-build often creates tension between the design and construction sides and that its big selling point—a firm price—often is lost when changes in conditions or deviations from the original design result in costly change orders.
Many owners with large and varied building programs have used different forms of project delivery, tailored to the project and the circumstances. Wayne State University in Detroit is one such owner. The preferred method of project delivery there is construction management-at-risk, according to James R. Sears, associate vice president for facilities management and planning. He says CM-at-risk allows early input from the contractor on costs and schedules. “This avoids bad bid days.”
Wayne State has used other delivery methods. Sears says short time frames on projects often make design-build the best alternative. But he is wary of some of its drawbacks: “We have to have more trust that the architect and the contractor will work together well, as we will have less involvement.” Often in design-build, the architect is a subcontractor to the contractor. As a result, disputes or problems in the field sometimes may not come to the attention of the owner, Sears says.
“For straightforward projects, design-build is probably best,” says Michael Ellegood, retired director of public works and director of transportation for Maricopa County, Ariz. He says design-build has the advantage of speed, which is important given the volatility of materials prices. But he points out that owners using design-build have to be able to trust the designer and the contractor and need to specify exactly what they want because the owner sacrifices some control.
Ellegood says CM-at-risk is a good choice for more complex projects in which the owner needs more control. With this delivery system, both the contractor and designer can work out the details of the basic design to make sure it satisfies the owner’s needs. But he notes that in CM-at-risk, it often takes a lot longer to get a fixed price.
Novus International, a St. Charles, Mo.-based company that makes nutritional additives, considered several approaches for a recent project but settled on using an integrated design-build firm. “We liked the notion of having a single-source provider, but we especially liked that the architects worked in the same organization as the construction people,” says Don Vondriska, director of business development for Novus. “The process was seamless, with no silos among the people working on the project.” But he cautions that owners using design-build must be thorough in scoping the project from the beginning and build in the appropriate contingencies into the contract beforehand.
“The bottom line for any project-delivery system is for the owner to assess its own capabilities to manage the project,” says Jeff Larson, executive vice president of Beaumont Services Co., the management subsidiary of Royal Oak, Mich.-based Beaumont Hospitals. One of the biggest problems for contractors and designers is when the owner does not understand the process and insists on things that interfere with the advantages of a particular delivery method, he says.
Some project-delivery methods are more complex. The University of California at San Francisco is building a $176-million, 240,000-sq-ft cardiovascular research center. The project is making use of building information modeling (BIM) and is using CM-at-risk as the project-delivery system, says Michael Bade, UCSF’s director of capital programs. But once the project development design was done, the major subcontractors were asked to take over design on a design-build basis. “We have found that traditional project-delivery methods cannot adequately price complex buildings,” he says.
Bade notes there is a lot of waste in the construction process. The use of BIM not only makes the design process more efficient, but through 4D modeling also can make scheduling, fabrication and materials supply much more efficient. “I’ve seen estimates that 40% to 50% of craft workers’ time is wasted waiting. Just take a portion of that away and you have huge savings,” he says.
Part of the promise of BIM is to create these efficiencies and eliminate some of the waste in the process. As it is a collaborative tool, BIM cannot be used effectively in a design-bid-build environment, Bade says.