Firms Find Little Respite From Weak Economy
With backlog burning off and new sales in a prolonged slump, the vast majority of top contractors are feeling the full brunt of the recession this year. In an environment in which opportunities are limited, competition is fierce, and fees are slim, the best hope for many companies is that the market has bottomed out. However, rather than wait for a rebound, company executives are adjusting strategies to keep operations steady.
“We see everyone operating at a new norm,” says Derek Glanvill, president and chief operating officer of McCarthy Building, St. Louis. “All the top companies as a group have uniformly decreased revenues. You just have to deal with it, settle in and change how you operate in this new environment.”
In 2009, McCarthy saw revenues drop approximately 10%. With some of its backlog burning off, Glanvill says revenues could drop an additional 10% this year. Looking ahead, Glanvill says he sees no reason to plan for a rebound.
“If it does come back, we know how to operate in that environment,” he says. “For now, it’s best to not panic.”
For many top contractors, institutional work has been a lifeline of opportunities. Nick Makes, senior vice president of New York-based Turner Construction, says that while its sales in health care are down from the firm’s 2008 peak of $2.3 billion, the company expects to end 2010 with around $1.8 billion in sales. “We don’t see it going down any more,” he says.
Turner has numerous major projects already under way. The company broke ground in June on the $1-billion expansion of the Ohio State University Medical Center in Columbus. In April, it began work on the new $385-million Owensboro Medical Health System hospital in Kentucky. In July, a $161-million South Patient Tower broke ground at INOVA Fairfax Hospital in Falls Church, Va. In July, the firm’s contract on the $333-million Martin Army Community Hospital replacement at Fort Benning, Ga., was reinstated under court order, after it had been revoked following a bid protest.
Although some large projects are hitting the streets, companies generally see health-care clients reducing the scope of their work. Larry Casey, senior vice president at Skanska USA Building, says the opportunities are primarily in repositioning or adaptive reuse of existing facilities with very few greenfield projects being put out for bid. Still, all that work adds up, he says. “We have close to $13 billion in our [sales] pipeline of health-care work nationwide,” he says. “That’s a very positive sign.”
Some sector megaprojects remain—in federal hospitals, for example. Glanvill says McCarthy has dedicated significant resources to pursue major Dept. of Defense projects. The firm made a short list of three bidders on the $700-million replacement hospital at Fort Hood, Texas. Clark/McCarthy won a $394-million design-build contract for a new Marine Corps hospital at Camp Pendleton, Calif. The U.S. Dept. of Veterans Affairs had several other major hospitals out for bid this year.
“These are great projects, but they have been slow to award and painstakingly slow to get in the ground,” Glanvill adds. A joint venture of McCarthy and Clark Construction, Bethesda, Md., was awarded a contract for the $720-million VA Medical Center New Orleans replacement hospital in October 2009. Construction is expected to begin in October 2010.
Beyond health care, many contractors in the institutional markets are battling it out in the education sector, and the K-12 market is fiercely contested. Robert Van Cleave, chairman and CEO of Dallas-based Balfour Beatty Construction, says that, in many areas of the country, homebuilders and retail contractors are bidding while large, established firms go after smaller jobs. “The market is getting squeezed on both sides,” he says. “You’ll see easily 30 proposals on a project with fees that are absurd. We see owners who are not able to help themselves. They are dealing with taxpayer dollars. They are price-sensitive in their selections.”
“There are some big programs out there,” adds Dennis Cornick, senior vice president and national sales manager at Providence-based Gilbane. “Our concern is the fiscal pressure that will be on these cities, towns and states going forward. What will that do for the K-12 world?”