It’s a new time with smarter practices and better results.
Although the construction downturn in 2009 will surely continue into 2010, these top construction experts say that there’s a lot to be optimistic about. Despite the decline in new construction, there has been an overall rise in quality, flexibility and innovation.
Learn how our construction gurus plan on arriving at the end of this tough economy stronger than ever.
PUBLIC WORK
David Krumwiede – How do you break into public work?
Mark Pendleton – You bid it. It’s the old way. It’s challenging though. Or you find partnerships to get into public work.
Chris Johnson – In recent years, there has been a lot of alternative delivery work – CMAR and design-build. That work is very limited now. Now, they’re reverting back to design bid build to get a bargain. I cut my teeth on public work. All my father did was public work – valley banks, schools and churches. Even though I’ve spent a lifetime in public, it’s a whole different thing today… 30 firms are now bidding on public.
David Krumwiede – How do you win?
Bob Roble – We are fortunate in Arizona to have some pretty progressive public procurement laws. A lot of public sector work is awarded on a qualifications and proposal process. So I think part of the answer to your question is you leverage your expertise and your reputation in private sector into the public sector.
Steve Jordan – Find a place that’s conducive to getting in. The three state universities used construction firms that they typically worked with, but now it’s really about resumes and experience, you can get in if you have it. At NAU, we were able to convince them that we could translate our skill sets from the private/commercial side to the public side. That’s where we were able to get in.
Bo Calbert – We’re on our 110th proposal this year, and 75% have been qualification-based selection.
Steve Jordan – On certain projects, the owners may contemplate going to hard-bid; but sometimes there isn’t reality in those numbers and one has to understand the context. Yes, construction costs came in at 20% below budget, but many of those budgets were established during the high peak in the market.
Mark Pendleton – Things have now flipped. You see more negotiated work in public sector – you’re seeing more private work hard-bid. Now the hospital systems are taking advantage of today’s market. Their renovations are now resulting in very competitive pricing.
CHANGES
David Krumwiede – Obviously fees have dropped. What’s the typical fee on a 20 million job?
Bo Calbert – 10%. (Everyone laughs.)
Mark Pendleton – I’ll bid nine next time. I think that’s a sign of the times and it will bounce off the bottom and come back up. We’re seeing things under 2%.
Bo Calbert – I talked to an owner of a company in this market sector; great firm, great reputation. At their peak, they had a volume of $180 million and had a backlog of $3 million. I sat next to him at an industry event the other day and he hasn’t bid on a job for the last three years that he’s put a profit on. I’m hearing that fees are down about 50% on average.
Mark Pendleton – We just had our subcontractor appreciation day. It was different than in the past years. Their mindset is that they have to get through next year, get in any way that they can to keep the doors open. They are pricing things in that mindset.
Chris Johnson – Buying work is not going to get a company through next year. You have a diverse group here… how you operate has a lot to do with the size of the company, the structure of the company. We’re looking at a bear going into hibernation. We won’t take cheap work.
Bo Calbert – Even though we’re down in volume, we’re up in the opportunities that we’re chasing. It takes bodies in new markets to do it. Our BD department is so much bigger because they’re pursuing and it’s been a good decision.
Adam Mays – I’m just in Arizona and I have 50 employees. Our volume has been cut in half from $100 million to $50 million – we’re still finding quality work in Arizona. It’s not walking in the door, it’s a matter of picking up the phone and finding a job. The work that we’re doing right now is cash work. Our projects are from half a million to $20 million and they can come up with the money.
Steve Jordan – David you mentioned that you need to go out and chase the business. Our current philosophy is that everyone has to be a marketer, including the project manager, which does add a little more to already reduced resources. With your past success in P3, how do you manage through those RFPs now?
David Krumwiede – When we go to team selection, we tell them that you’re donating your time. If we get it, you get paid, if we don’t, no one gets paid. We all need each other… the architects take the brunt of it but they are the hungriest. We don’t go into it unless we think we can win it. These P3s, oftentimes the governmental entity thinks they don’t have to take a risk and it’s not that at all. We try to underwrite the deal. We’re chasing the GSA deals and that’s been interesting. The amount of solicitations in California is unbelievable.
Bob Roble – When the economy improves, the commercial development, design and construction landscape will look much different than it did previously. Owners will rightfully expect more for less. Does anyone here shop the same way that we used to shop? Off-balance sheet projects are going to be more the norm than the exception. It’s the faster, better, cheaper wave of the future.
Chris Johnson – The competition has forced us to look at different ways to do things. We’ve diversified in ways that we’ve not done before. If you think you’re doing business the same way in the past few years, you’re kidding yourself. For an old company like us it’s tough. It’s the younger guys who are pulling me along, putting new ideas on the table.
Mark Pendleton – If you look at what we’ve been talking about, especially the public sector, I’ve got to believe that is because there has been a lot of money coming down the federal pipeline but they can’t do that forever. Maybe they can get away with it twice, but I don’t think so. So about two years from now, that funding will dry up and what’s going to be the focus when the federal stimulus money is spent? The private sector will come back when the economy comes back. The government can’t keep re-funding. Capital markets have to re-engage and it’ll be totally different. Core businesses won’t grow as fast as they did in the past five years and you’ll have to build different competencies.
SOLAR
Adam Mays – Is the solar energy going to make that big of a difference? How is solar going to do anything in this state?
Mark Pendleton – I think it’s going to make an impact. I think it will be 5 – 10% of energy which is a lot.
Bo Calbert – The utility companies are mandated to produce 15% of their power from renewable resources by 2020, so it appears to be this is a market you should be in.
Mark Pendleton – There is going to be investment in power generation. Some of the first nuclear power plants were very inefficient. They’re going to have to learn from technology to make them more efficient. Do you know what’s happening with natural gas? They’ve figured out how to get it out of shale. Have you seen our reserves? They’ve quadrupled. Natural gas prices are coming down. Now they’re building what used to be the most expensive power generation peaking units, now they’re among the cheapest. Things are changing rapidly.
Steve Jordan – It’s a gamble. We looked at ethanol plants, but ultimately decided to pass. We’ve partnered with a few companies to do a wind farm. Solar will be pushed by public works-type projects. On private side it doesn’t pencil out, it’s still cheaper to buy it from APS or SRP than to put a solar ray on your building.
Mark Pendleton – The utilities are going to be mandated to start producing more and more percentages of their output from alternate fuels.
Bo Calbert – Here’s a great idea to put it in perspective for everyone at the table…these companies come in and negotiated a power purchase agreement. I think they’re getting 14.5 per watt vs. 11 cents. So that would be like you coming in to a build-to-suit opportunity and saying, “You build it, and I’ll lease it from you for $25 per square foot.” But, you’ve never built one of those before, and you don’t know what they cost, but you know if you can get it built for $100 per square foot, you can make some money. So you try to find a builder…and you want design performance and cost performance. The price comes in at $150 a square foot and that doesn’t work at $25/sf rent. So then you’ve got to go back to the owner and say I need $30/sf in rent and now it’s too expensive. We see a lot of that happening out there.
HEALTH CARE
David Krumwiede – With the health care bill passing, will it affect medical demand for buildings?
Bo Calbert – It will increase demand for health care and the infrastructure isn’t there. What does that mean brick and mortar-wise?
Mark Pendleton – The boomers are getting old… all are hitting 60. That’s an interesting question. How does that affect the future? How do we work that? Now we have health care reform pushing more people into the system. They have to be funded somehow. The leaders of the health care systems say they need to get more efficient. We have a computer-driven simulation group that helps hospitals become more efficient through functional spaces, such as ERs, ORs, and outpatient areas. They’re looking at all sorts of things.
Steve Jordan – You look at the proliferation of the medical office buildings… the MOBs are really taking off, they’ve been a great model to address some of the needs and specialization over time. The hospitals are great, but they’re expensive to build and you don’t necessarily need all of the infrastructure and high tech hospital components. That’s why you see the model of a hospital with MOBs or surgery centers located in close proximity. It’s cheaper.
Bob Roble – One of the potential outcomes of government sponsored healthcare is the continued increase in popularity of public-private sponsored projects. Normally public sector construction spending is inversely proportional to private sector spending. Due to pent up demand for public sector capital improvement projects, I believe that when we emerge from the current economic downturn, public construction spending will keep up with that of the private sector. Primarily through privately financed, public sector projects. When the private sector starts to go up, the public will go up too, based upon the help from the private sector. We’re seeing more GSA and VA work in the healthcare industry being privately financed and developed.
Chris Johnson – I’m not going to take work cheap. Consequently, we’re geared down to be picky. I don’t need to do it and I don’t want to. I want it to be fun. I’m a journeyman carpenter. I’m a builder and I like building. I love it. As we get older, our motivation changes… it’s important for me to enjoy what I’m doing and who I’m doing it for. The selection is qualification-based, more so than any other healthcare industry.
Adam Mays – I want to see the public go away because I can’t compete with your qualifications. I’m the 25-year old company.
Steve Jordan – You’ve got a point. In that qualifications-based environment, you have to have the experience. They also want to make sure that the proposed project team have worked together on previous projects. It’s a tall order.
Bob Roble – I want to know how Bo teaches his operations people how to sell.
Bo Calbert – It’s been an interesting transition. Our BD folks are really facilitators. It seems that most buyers of constructions services want to buy from the people delivering the service. Over the last five years we have transitioned our operations personnel early into the BD process and have had much better success.
LESSONS LEARNED
David Krumwiede – Not a lot of people saw what we got hit with coming. But what did you learn and what would you do different if you had a crystal ball?
Chris Johnson – I thought that this was coming for a long time. We’ve been so on fire for 10 years and sooner or later we were going to hit the wall. It’s a cycle.
Adam Mays – It’s all about accessibility to money. If the people buying it have money for the granite countertops, then they think the house is worth more. Your house will be worth more if the money is accessible. We’re all waiting around for accessible money.
Steve Jordan – Accessible money without excessive strings attached to it.
Adam Mays – It was very high risk for anyone to buy a shopping center at 6% cap. Lose one major tenant, incur damage or expensive maintenance work and profit for the year is gone. That number is no longer available in today’s market and will not be seen again for many years to come.
Mark Pendleton – Get more diversified and push a good position. We had a master planned communities group that did great, but it went down very quick. You have to have some diversity that will hit the niches with opportunity.
Bo Calbert – Getting into a new market when all the other markets are all down is too late. It’s a big investment to take on a new market. Trying to do it when your revenue is down is really tough that’s why we will see a lot of attrition in this cycle.
Chris Johnson – Everyone thought I was out of my mind because I started a luxury home group. Today it’s the best part of our company. I had a couple 20-year employees that wanted to do it, and I backed them. It just turned out that it’s paying a lot of bills right now.
David Krumwiede – I ride around Paradise Valley on my bike, and I can’t believe how many homes are being built.
Mark Pendleton – It’s about something being custom, which drives that market. And they don’t need a loan. Back to your question about diversity, if you wait until you’re at the bottom and try to create diversity, it will help you on your next market downturn. Contractors are slow to invest themselves. We’re very conservative when it comes to investing our own money; maybe a little investment in the good times. A lot of us have been around for a long time. There’s a risk to growing in a new industry because there’s usually someone there that you have to compete with.
Bob Roble – Most companies are trying to balance short-term profitability with long-term growth projections. Short-term vs. long-term is a challenge for everyone. Entrepreneurial business ventures are important.
Mark Pendleton – I always wondered what would happen when the pool is a big pool and you have a lot of fish in it. Same fish are here, pool is small now. You have to do other diversities because we’re going to continue to chase the jobs for a long time.
David Krumwiede – A lot of people are arming themselves with speculative development. We’ve had a toe in the pool in the P3 business and a lot of folks are wondering why we spent $100,000 purchasing a P3 deal, when people ask me to do a deal without asking my field. Those are the guys who aren’t going to make it. It’s going to look good on the other side.
Steve Jordan – I’m a native of Phoenix. When I came back to Phoenix in 1996 it was on the upswing. Everyone was saying we really learned our lesson on the last downswing. Yet, the building spree took off, and in 2000 and 2001, when that scenario hit, people said we really have to understand this so it doesn’t happen again. But then the next spree went through 2005 and 2006. The recovery will occur, it will be a lot longer this time for commercial construction and development – we’re thinking 2012 or 2013. Will we really be smarter? As an industry I hope we do better. There are a lot of developers that are going under.
Mark Pendleton – This is the fairest recession I’ve ever seen. We really don’t drive the capital investment. But going to the public side, this state has problems that will inhibit us coming out of the recession and needs strong leadership at the state and county level. Otherwise I don’t believe businesses will move here. We ought to learn from Oregon. They almost bankrupted the state then they had to reverse themselves. Now they are pro-business, pro-growth with a strategy. We have to follow up on some of the incentive model. We must incentivize growth in the state.
QUALITY
David Krumwiede – Where have you seen quality go?
Chris Johnson – We’re doing the same high quality.
Bo Calbert – To put the market conditions in perspective I brought the McGraw Hill report. Non-residential construction in AZ in 2005 was $5 billion, 2007 – $7.8 billion. In 2009 its projected to drop to $2.3 billion. This is a huge impact to our industry.
Mark Pendleton – On the types of projects that we do, large and complex, where you need very experienced people, the talent isn’t there. There’s a market there for someone. I don’t know how to handle the liability now between design and construction.
Bob Roble – That’s the driving force between integrated project delivery. (Steve agrees) Apparently there are more registered architects retiring right now than new architectural grads coming into the profession.
Chris Johnson – That’s why we work, to make a good living. The generation today is more financially motivated. For the most part, they want to know how to make the most money.
Adam Mays – We’ve seen quality in the trades going up tremendously (Steve agrees).
Mark Pendleton – The gain in productivity and quality as this goes on and they get less work.
INNOVATION
Bo Calbert – If you see BIM play out as a tool in delivering projects it takes on the master building concept. The builder is integrated into the design process so you have a complete and coordinated product versus the finger pointing between the designer and builder that we’ve seen in the past. It’s also having an impact on the cost and quality of construction. More work is prefabricated in the shop and assembled at the project site.
Steve Jordan – You’re going to have that on the design professional side. Their resources are reduced, and with the trend towards integrated design phase services, it presents another challenge. At times we’ve supplemented with our in-house design team. Also in some cases on fast track projects when the design professionals can’t complete fast enough, we’ve continued forward with coordination through the BIM model. Ultimately, in the
competing price wars, what design professionals are providing is not what it used to be. It’s going to continue to diminish. . The BIM model developed by the design professional is typically a different software than the subs use. There are other interfacing softwares that have to be used for collaboration.
Mark Pendleton – They’re doing that now–Phoenix hospital, they’re all on the same platform.
Steve Jordan – For most of the M and P guys, the software translates to the pipe being cut--it isn’t the same software.
Mark Pendleton – We did it. When we selected the MP&E subs we told them that they had to do it on the same software – it was a selection component to be on the job. We did it all in-house.
David Krunwiede – Tell me how you’re building that without the crane.
Mark Pendleton – I have a phobia about cranes. Greatest necessary evil in our trade. We try to use the least amount of cranes for the least amount of time. We don’t have a lot of area to move a crane around. When you look at it, it would have swung over so many of the buildings. We’re not swinging a crane over the whole campus. This was all BIM modeled too. We’re doing night loading of the building using a special material lift. They came up with a simulation model to get the equipment up there.
David Krumwiede – How are you doing the skin?
Mark Pendleton – Going up now on scaffolding and we’re doing it from the inside of the building.
David Krumwiede – This whole BIM model can revolutionize the industry. If your subs are on board, it works. The subs and contractors know how to build it, the architects don’t. What we saw in the ‘hey day’ was crazy coordination issues and they were a wreck.
DESIGN-BUILD
David Krumwiede – Have the GCs figured out design-build?
Chris Johnson – We’ve done design-build over the last 20 years. I think the architects were not doing their job and contractors will be taking over the design more and more. They’re better managers, but not as creative.
Bob Roble – Just as importantly, project owners need to see the value in design-build. In order for the design-build project delivery method to be sustainable, there needs to be an equitable sharing of risk. Many of the earlier attempts at design-build seemed to shift a disproportionate level of risk to the design builder.
Steve Jordan – That was part of it, but when other models came up, they liked it better because it took the owness off of them. Contracting, purchasing individuals have architectural backgrounds, so they want control.
David Krumwiede – In my experience, contractors are going that direction, but they’re struggling with it. They see them at-risk or design-assist. To get a design contractor to take control is hard.
Adam Mays – It’s heading that way anyway.
Mark Pendleton – You have to have the right team. You can’t just say, “Do design-build.”
Chris Johnson – I didn’t want to do it. I was tired of taking the risk and taking over and assuming completion of a bad design. I’d rather have the control and do a great job. We’re talking simpler projects.
Bob Roble – (Asking David) – You’re now a design builder. You’re right, a contractor has to be relatively sophisticated to pull off a design-build process, as an owner you must make sure you don’t take away the creative portion of the project and expect the design builder to do the building.
David Krumwiede – It was an eye-opener being in a totally integrated team. In the Opus world, the project managers are really the developers. After figuring out the financing and handing it off to the PM and expecting them to do the job. I have a lot of respect for those guys. They ask themselves should this be PT, steel…it’s wild, that they can’t figure it out after so many years. A spec architect can do it in 10 minutes. An institutional architect will take months. This whole BIM thing will change the industry… it’s taking control away from architects.
COMMUNITY
David Kruwiede – What is everybody doing for the community?
Mark Pendleton – We try to involve our employees in helping to improve our community in ways like making sure the education system is the best it can be: teaching, donating money for scholarship, speaking, and craft training. I think it’s important to be involved in community giving and you need to drive it culturally through the organization. I see it in the contractors, they are very involved.
Chris Johnson – Contractors are more engaged, they’re very generous. It’s like what Mark said, we’re involved in a dozen different charities, we all have our favorites, Make-a-Wish® and multiple sclerosis. The president of our company is a woman and she's sponsoring a lunch today for Arizona Women's Education & Employment, Inc. (AWEE).
Adam Mays – People pick their favorites. I’m involved in a lot of different charities. We donate a lot. I’ve participated in many, we don’t have one necessarily. We do a lot in Scottsdale because that’s where we’re based.
Steve Jordan – We’re proud of the fact that 100% of our employees are involved in community service. People do what they have a passion for. A lot of us do the United Way and we have fun with it. We’ve also done Habitat for Humanity, paint houses and swing hammers. We have folks involved on different boards throughout the community. I’m involved with Thunderbirds a lot, and that comes from the top down. Our principals have advocated that. We go to St. Vincent de Paul to serve lunches and you feel good about what you’re giving back. We want to do things to continue to give back.
Bob Roble – Primarily our involvement with charities are those supported by the industry organizations in which we are active.
Bo Calbert – Our business model is to be a community-based builder. If you look at the depth of our community participation, it’s pretty broad. We have a program in place called Heart–Hats that organizes all of our community programs. Last year one of the projects was to sponsor and build a home for Habitat for Humanity. We are sponsoring another home this year. Last year we had over 200 McCarthy employees and several of our subcontractors participate. It’s always important to support the community, it’s even more important during these tough times to be there and support.
David Krumwiede – The construction industry is strong in charitable organization. “I’m on the board of Valley Partnership and I’m doing some things for Salvation Army. There were a lot of construction people there helping.
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Bob Roble – Vice President of Weitz, a 150-year national general contractor company specializing in military, senior living, office, public sector, industrial and resort and golf course construction. |
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Adam Mays – With over 15 years of experience in the building industry, Adam formed A.R. Mays Construction in 1986 to be a proactive builder that customers could rely on to prevail over industry challenges and create superior product in commercial work. Specializes in hospitality, retail, office, industrial, medical and public sector. |
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Steve Jordan – Director of Construction Services for Ryan Company, focused on traditional office construction and development, moving into public work and medical a few years ago. A key competency is their ability to be flexible. Ryan Company is typically on the list of top 25 construction firms in Arizona. |
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Bo Calbert – President McCarthy Building, an employee-owned $3.5 billion company headquartered in St. Louis, MO and with nine community-based offices in other states. McCarthy specializes in healthcare, water waste, water, prison, Native American, commercial and hospitality industries. |
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Chris Johnson – Chairman and CEO of Johnson Carlier, a third generation Arizona-based general contracting firm founded in 1921 by his grandfather. Since 1972 he has overseen the operation of the firm which provides construction services to both the private and public sector. Recent projects include auto dealerships, higher education and industrial buildings. |
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Mark Pendleton – President of Kitchell Contractors, Inc. of Arizona and is responsible for providing leadership, direction and controls day-to-day operations. In their 30th year, Kitchell was incorporated six years ago and is doing a lot of diversification work, healthcare, Native American and other commercial work in Arizona and in other states. |
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David Krumwiede (Moderator) – Regional Partner of Lincoln Property Company, David oversees Real Estate Development, Acquisition and Property Management for Arizona, Nevada, Utah and New Mexico. Responsibilities include project feasibility, debt and equity financing, acquisition, entitlements, design and construction oversight, leasing, joint ventures and disposition. |
