Construction and Design Industry Outlook 2013



(front row, left to right) Steve Swanson, Centric Projects David Rezac, 360 Architecture Scott Vath, Titan Construction Courtney Kounkel, Centric Projects Don Greenwell, Builders’ Association / AGC Richard Wetzel, Centric Projects Rosie Privitera Biondo, Mark One Electric Dan Beutler, George J. Shaw Construction Brett Gordon, McCownGordon Construction John Almeida, Turner Construction Bill Iler, Design Mechanical Matt Rybowicz, CBIZ (back row, left to right) Phil Thomas, A.L. Huber Construction Chuck Teter, Lockton Companies Matt Nordhus, Burns & McDonnell Christian Arnold, Clockwork Rory O’Connor, Grand Construction Bob Simmons, University of Missouri–KC Jay Steinmetz, Kiewit Power Engineers Dirk Schafer, J.E. Dunn Construction Joseph Mabin, Minority Contractors Assn. David Seitter, Spencer Fane Britt & Browne


Building Industry Holding Its Own

At Ingram’s 14th annual Construction and Design Industry Outlook, those gathered had a shared sense of the current state of the industry, but their choice of words to describe it showed the power of nuance. One participant described it as “stable,” a relatively positive term suggesting an absence of change. A second described it as “static,” which suggests an absence of change because nothing is moving. A third described it as “stagnant,” which suggests an absence of change because nothing can move. And a fourth described it as “collectively flat,” meaning warm in some spots but cool enough in others to offset any general movement forward.

That much said, the session hosted by Centric Projects at its offices on Main Street in Kansas City’s Crossroads District was largely upbeat. It is not as though the participants could pinpoint new momentum in the marketplace, but they have at least adapted to the reality of the past four years.

They have also improved their productivity along the way, and prepared themselves for a surge in demand that many think inevitable—sooner or later.

“It’s interesting after 4 to 5 years how ‘stable’ sounds so good,” said Phil Thomas, president of A.L. Huber Construction. Although the company’s backlog is still shallow, “the phones are ringing, there are a lot of opportunities and, really, more significant opportunities than we were working on the last 4 to 5 years.”

“I see quite a few contractor financial statements, and I guess I’m cautiously optimistic,” affirmed Matt Rybowicz, senior manager at CBIZ Mayer Hoffman McCann, but he too cautioned about holes in the collective backlog.

Sponsoring the event were Centric Projects and the Builders’ Association and the Kansas City chapter of the Associated General Contractors. Ably chair-ing the event were Richard Wetzel, a founder and partner at Centric Projects, and Don Greenwell, president of the Builders’ Association and AGC.

Financing

For Richard Wetzel, the first question concerned financing. As became obvious with the answers, the past four years have reminded industry participants of the value of creativity.

Bob Simmons, an associate vice chancellor at UMKC, spoke to the university system’s institutional advantage in being able to issue its own bonds. Given a low interest-rate environment and the university’s strong credit rating, this has proven to be a viable way to create financing at competitive rates and keep building projects moving forward. As Simmons pointed out, the University of Missouri system now has $1.4 billion in outstanding bonds at an average interest rate of only 3.5 percent.

John Almeida, manager of business development at Turner Construction, observed that banks have not been particularly forthcoming of late. Those companies that have demand, he said, “are just having to find different ways to go out and get the money.”

The power industry has not been quite so constrained. “We’ve had a good balance sheet for many, many years,” said Jay Steinmetz, manager of engineering at Kiewit Power Engineers, “and we have been able to win jobs because of that.”

Given the capital reserve requirements within the banking system, event chair Don Greenwell wondered what the participants had seen in the way of private capital formation. “What’s your sense of where projects needing financing will be coming from?” he asked.

“There’s a lot of real interest in data centers, anything that is connected to people with the Internet,” said Dave Seitter, a partner at the law firm of Spencer Fane Britt & Browne. Unfortunately, Seitter has not seen too much of that work come to the Midwest. In a related area, he believes there to be a pent-up demand to retrofit existing structures to enhance their connectivity.

The fact that Google has chosen Kansas City as its beta site for wiring a metro has attracted interest from technology clients, including some larger ones, said Christian Arnold, a founding principal of Clockwork Architecture + Design. A lot of the firm’s software clients are doing very well. Still, they face liquidity requirements from the banks that very few firms can meet.

Labor Supply

Don Greenwell asked his colleagues what trends they had been seeing in the availability of labor at all levels. “Five years ago,” said Rory O’Connor, president of Grand Construction, “we were all scared to death about where we’re going to get people from. Well, for the last five years we’ve forgotten all about that.” The problem was never solved, however, and when growth happens, O’Connor believes, that shortage will be worse than it was five years ago.

Dan Beutler, president of George Shaw Construction, agreed. For four years, companies were not hiring or training young graduates. In the interim, the existing work force got older, and the volatility of the profession scared people out of it.

“At some point, the situation creates opportunity for minority and women tradespersons,” said Joe Mabin, director of the Minority Contractors Association.

On the architectural front, said David Rezac, principal and part owner of 360 Architecture, the Kansas City area lost about 50 percent of its work force in the past four years. Rezac worries most about being able to replace experienced, mid-range architects. “It’s going to be a big issue,” he said, “and we’re already seeing it.”

The electrical industry presents ano-ther range of availability issues. The non-union markets, said Rosie Privitera Biondo, president of Mark One Electric, are much stronger than they have been in the past. To compete, she added, “we have to change our business model altogether.” Specifically, this means integrating construction workers into the workflow.

At Kiewit, said Jay Steinmetz, the partners have been bringing in high school whiz kids on technology projects. “We’ve really used them successfully,”
said Steinmetz. “And we’re hoping that over the long term we’re going to attract them to the power industry.”

Recruiting

Richard Wetzel asked colleagues how a fairly old-school conservative industry can make itself interesting to a new generation.

This will not be easy, implied Steve Swanson, a partner at Centric Projects. “They’re totally mobile,” he observed of the under-35s. “It’s a totally different generation. We as an industry, as employers, as people’s bosses, we have to recognize money is not what they’re wanting.” Swanson sees a need to show just how “fun and exciting” the industry is.

“Their generation is way more technologically savvy than we were,” said Chuck Teter, vice president, unit manager, at Lockton Companies. “So as the construction industry continues to evolve and continues to become technologically savvy, it will attract the younger generation.”

Jay Steinmetz and Dan Beutler both talked favorably about the practical applications—like robotics contests—they had seen in local schools. “It does become a lot sexier to get involved in,” said Beutler. Said Steinmetz, “The high schools are really trying to create some pretty cool things that could really benefit from our money and our time.”

Courtney Kounkel, a founder and partner at Centric, cited their offices as the kind of environment that young people are looking for. As she explained, it all happened rather accidentally. In the beginning, the three partners sat around a table at a small space and kept adding tables as they added staff. “As we grew,” said Kounkel, “we found that not only do the young people like to be collaborative, but they also like to be with everybody in the company.”

“It’s easier for the staff to push the mission forward if they’ve been a part of it and understand it,” said Steve Swanson. “I think that’s the difference in this generation.”

One other attractive feature the partners learned was flexibility, not just in time, but in space. Added Kounkel, the completely wireless environment encourages staff to work wherever they might be. This openness and collaboration is intri-guing clients and reshaping the industry. “It’s more than a trend,” said David Rezac, “It’s a reality. It’s really changing things up.”

Brett Gordon, of McCownGordon Construction, cautioned, however, that until the industry achieves some degree of stability, “It’s probably not going to be that sexy of an industry for the young group, no matter how much fun we make it.”

What Drives Markets?

Even in a flat economy, some sub-markets prosper. Richard Wetzel asked his colleagues which ones were prospering and why they were doing so.

“The multifamily residential is kind of the hot spot right now,” said Matt Nordhus, vice president of the construction division at Burns & McDonnell. He cited the drift away from home ownership as fueling this movement.

“A home hasn’t been the same investment it was in the past,” said Bill Iler, president of Design Mechanical. “In the past, you bought a house and it went up in price. Now, people have seen the value of their house go down. So why invest in a home?”

“We’ve seen a lot of activity in multifamily, particularly in walkable neighborhoods,” affirmed Christian Arnold. He cited a study that claimed 87 percent of housing growth would be in residential units that do not accommodate children. One very good reason that multi-family housing is being built, he added, is because there is financing available for it. He believes, too, that changes in the mortgage interest rate deduction “could have a radical impact on the housing product nationwide.”

Steve Swanson argued that the building of large multi-family projects will almost inevitably spur the building of supporting retail and other services in the immediate vicinity.

In reviewing an industry forecast recently, Dirk Schafer, J.E. Dunn’s Midwest Region president, was surprised to see just how big a percentage of growth in the larger industry was due to health-care construction. That growth has been uneven. As John Almeida noted, uncertainty about Obamacare’s future made many decision makers hesitate. Now, he sees a decrease in smaller health-care projects, but a return of some of the bigger projects.

Joseph Mabin worries that dramatic cuts in capital spending by the Missouri Department of Transportation will hurt not only the construction industry but also the highway-using public. “That’s crazy,” said Mabin of the cuts. “Sooner or later the infrastructure is going to have to get done.”

UMKC’s Simmons sees a lot of opportunity in going the bond route on state projects. The “splash of cold water” comes from his awareness that those bonds have to be approved by a public vote, “and we all have a probably similar sense of the hesitancy in the public vote environment for anything that might be seen as additional taxes.”

Prevailing Wage

Prevailing-wage laws establish a minimum wage rate that must be paid to workers on public works construction projects such as bridges, roads, and government buildings. Missouri has such a law. Kansas, a right-to-work state, repealed its law in 1987. These laws—and the regional variations in their application—add one more level of complication to the building industry.

“Obviously, prevailing wage has pros and cons,” said Rosie Privitera Biondo. The unions favor it. The non-union contractors do not. Biondo thinks “the way of the future” is a blended rate in which highly skilled workers get paid for highly skilled work and less demanding work is performed by workers at lower rates.

“Our industry has changed,” said Biondo. “We need our unions to be more flexible. They need to stay strong. They need to do the right thing for their rank and file, but we need to have some compromises.” She cited a major Florida contractor who is making that concept work in his state. “I don’t know why we can’t do that as an entire industry throughout the whole country,” she said, “and make this thing work so it is more competitive.”

“We want the union relationship to be strong with the contracting community,” said Dan Beutler, “but at the end of the day, the mindset has to change. The unions are going to have to become more flexible. It’s our responsibility to assist them in that.”

Beutler believes that the prevailing wage masks a larger problem, and that is the difference in work rules. “As long as prevailing wage is around, there’s a belief that it creates equality, and it doesn’t,” he added. “It’s very, very hard for the union mindset to grasp the change that makes that them more competitive,” said Rory O’Connor.

Dave Seitter argued that labor unions will have as much value in the 21st century as they did in the 20th. “The question,” he posed, “is will the union be as flexible and innovative as the business owner has to be?”

Richard Wetzel asked whether contractors had found that when they talked about “flexibility,” union reps heard “wage cuts.” Biondo did not think the two concepts were synonymous. With blended wages, skilled workers make as much as ever, but the contractor would not be bound to pay those same wages to lesser workers on jobs that require less skill. On non-union jobs, she ventured, the general foremen are likely paid more than they are on union jobs.

The prevailing wage, as Beutler sees it, is not the real issue.

“I think the root of the disease is in the benefits,” said Beutler. Too much concentration on wages, he believes, shifts the focus away from a deeper problem. Work rules are another problem still. His company might be required by a craft union to have 20 people on a project, whereas a non-union company might perform that same work with as few as 12.

A further complication with prevailing-wage laws, as Biondo pointed out, is the lack of consistent monitoring. “If you’re going to have prevailing wage,” she asked, “who’s going to monitor it? The state can’t afford it. The city can’t either.”

“Nobody ever gets punished,” Joseph Mabin agreed. “If you get caught, you pay restitution and you continue to cheat. That has to stop.”

Outsourcing

Don Greenwell observed that there has been much talk about outsourcing, but many think the phenomenon unlikely to affect the construction industry. Still, given the increases in fabrication and modular unit construction, as well as the emergence of technologies that detect clashes and reduce rework, Greenwell thought the question of outsourcing worth posing.

On the power side, noted Jay Steinmetz, companies are moving toward shop work. The unit rates are cheaper. It is a safer environment too. “Our tools allow us to come up with packages that we can shift to yards,” said Steinmetz. As a consequence, Kiewit is buying yards and investing in infrastructure, particularly in high union areas.

“I would add that in the active mar-kets, where the skilled labor is tied to a job site, moving into a shop eases that constraint,” said Mike Nordhus.

UMKC has used a fair amount of shop-fabricated materials, said Bob Simmons. This includes panelized vault construction for its Oak Street housing and the exterior panels on the new Bloch Executive Hall, the latter manufactured in Omaha. That much said, Simmons doubted that in the higher-education environment, where there is little rep-etition in building projects, there would be much of this kind of outsourcing.

Downturn and Technology

With the drop-off in work projects over the last four years, Richard Wetzel asked what the effect had been on technological progress.

“I’d say in the last four to five years, technology has helped the productivity of the guys that are there,” said Bill Iler. “All of our guys have iPads. You can have a wiring diagram e-mailed to them.”

The downturn “has forced everybody to be more efficient,” agreed Dirk Schafer. “There’s more and more tech being applied in the field.”

Brett Gordon elaborated. Today, he noted, tradesmen actually can walk right up to the place where they’re doing work, pull the drawings, see what the project is supposed to look like, note disparities, take a picture, send it off to the architect, and have an answer back almost immediately. “In our lifetime, there will be paperless job sites,” said Gordon. “And I think it’s a must.”

“I don’t think it will take a lifetime,” said Jay Steinmetz. “I think it will be quick.”

Dan Beutler believes that pre-planning is transforming the work environment. “It seems like everything is happening at the office level today,” said Beutler. “The way to make field workers more efficient is to take every question that they could ask and have it answered before they ever put a hammer or nail in their hand.”

“Finally,” said Steinmetz, “the computing-based technology, the physical computer, is running fast enough to actually run and not crash and do all these things we want.”

John Almeida believes that communication between client and contractor and contractor and worker is at the heart of the enhanced use of technology. Everyone now can see and know more. “Technology is pushing decision-making lower,” said Almeida. “It’s improving communications so we can all actually design and build faster.”

David Rezac agreed. “Technology is huge,” said Rezac. “But it’s also the way that we’re working together. The traditional design, bid, build methodology is almost the way of the past.” Rezac elaborated that the dynamic is no longer “architect vs. contractor, nor engineer vs. architect. When I say our model, it’s not only a design model, but it’s also a construction and fabrication model—that’s the future.”

Collaborating technologically has become part of the culture at Kiewit Power Engineers. “When we bring employees in,” said Steinmetz, “we have to have that discussion. We have to say this is how we operate. It may be different than how you operated in the past.”

“At the very first [Ingram’s] Con-struction Industry Outlook I came to in December 1999,” said Rosie Biondo, “they talked about design/build and there were folks in the room who did not even want to hear about that, and look where we are now. We have changed the culture.”