The ENR Top 400 Contractors: Despite Growth, Firms Worry
The construction market is making progress toward recovery. However, many large contractors remain uncertain as to where the market is going. They see persistent softness in the U.S. market, and those working in the public sector are finding that funding shortfalls among clients are an obstacle to growth.
Related Links: The Complete 2013 Top 400 Contractors List
The modest turnaround in the construction market can be seen in this year's ENR Top 400 Contractors list. As a group, the Top 400 generated $309.45 billion in contracting revenue in 2012, an increase of 9.7% from 2011's $282.14 billion. The figure is still some 8.5% below the record $338.38 billion in 2008 contracting revenue reported in our 2009 Top 400.
Domestic contracting revenue for the Top 400 rose 6.1% in 2012, to $233.99 billion, while international contracting revenue jumped 22.4%, to $75.46 billion. While the domestic market clearly is beginning to make progress toward prosperity, it still has far to go to match the record $281.36 billion in domestic contracting revenue by the Top 400 in 2008.
There is a marked contrast between the domestic private-sector markets and those dominated by the public sector. Manufacturing, which rose 82.7% in 2011, again was the top gainer in 2012, this time by 22.9%, showing the strongest domestic turnaround. The industrial-process market came in a close second, rising 21.9%. The power market was up 15.3%, petroleum was up 13.1% and telecommunications climbed 10.4%.
The domestic infrastructure markets continued to struggle. Contracting revenue in the U.S. transportation market rose 3.9%, while hazardous-waste contracting was up only 0.8%. Water-supply work, on the other hand, was the big loser in the 2012 market: Contracting revenue from projects in the water-supply market fell 25.8%. The sewer-and-wastewater market also fell, with revenue down 0.7%, the fifth straight year for declining contracting revenue in the sector.
The largest domestic market is general building, which rose 3.6%, to $113.33 billion, in 2012 over 2011. However, this is a far cry from 2008, when contractors from the Top 400 generated $135.47 billion from the general-building market.
The largest contractors continue to win mega-projects. Bechtel won over $19 billion in new contracting work in 2012, on top of a record $47 billion in contracting sales in 2011. "We think 2013 will be another solid year—not a record-breaker, but solid," says Bill Dudley, Bechtel's president. Bechtel won the front-end engineering-design contract from Anadarko Moçambique Area 1 Ltd. on a new liquefied-natural-gas processing plant in Mozambique in January and a 758-MW natural-gas-fueled, combined-cycle powerplant in Temple, Texas, in April.
Fluor also is having a big year. On April 30, Fluor and its partners received a notice to proceed on the $3.14-billion Tappan Zee Bridge replacement project in New York, and on May 2, Fluor won an ethylene cracker project for Dow Chemical in Freeport, Texas. "New awards for the quarter were strong [at] $6.5 billion, including $3.1 billion in oil and gas and $2.2 billion in industrial and infrastructure," said Fluor CEO David Seaton at a May 2 earnings conference. The firm's consolidated backlog is $37.5 billion, he says, "which is down from a year ago primarily due to the downturn in the mining-and-metals market." But Seaton is encouraged by improving margins on Fluor's backlog.
Kiewit Corp. also has reason to celebrate, having won—with Macquarie Infrastructure & Real Assets, Weeks Marine and Massman Construction—the $1.5-billion Goethals Bridge replacement job in New Jersey, and, with partner Skanska Koch, a $743.3-million contract to raise the deck of the Bayonne Bridge. Both contracts were awarded in late April.
Getting Bigger
There has been a significant trend toward industry consolidation over the past two decades. However, much of this trend has been centered on the design side of the market, with large, publicly owned companies—such as AECOM, URS and Stantec—using their financial capabilities to acquire capacity and market share. But there have been some significant acquisitions on the contracting side. For example, DPR Construction made a major move into the Southeast early this year by acquiring Atlanta-based Hardin Construction.
A few large contractors have been in acquisition mode. One major acquisition in the past year was by Granite Construction, which acquired Northbrook, Ill.-based heavy-civil contractor Kenny Construction. "Together with Kenny, our plan is to expand our presence into targeted markets such as power delivery and water-and-wastewater infrastructure, both of which have attractive long-term fundamentals," said James H. Roberts, CEO of Granite Construction, during a recent investment-analyst teleconference. He also says Kenny will bring Granite a greater presence in the Midwest market.
But some contractors have not relied on acquisitions to move into new markets. "In August of 2012, we expanded our offerings to include environmental services, specializing in assessments and abatement," says Bill Hannah, CEO of Nabholz Construction Corp. He says the firm is moving beyond its private-sector client base and now is successfully constructing public highway and street projects.
Further, many contractors are focused on making sure their size works in their favor. No stranger to acquisitions, Balfour Beatty US is interested in trying to make its parts work together. "We are not interested in size for the sake of size. We are more interested in creating synergies within our organization," says Robert Van Cleave, CEO. He says Balfour Beatty has been working with sister company Parsons Brinckerhoff on numerous projects to provide a strong combination of talent for projects.
Public vs. Private
The public-sector market has been sluggish because of declining or uncertain revenue streams. "Government work continues to be anemic," says Bart Eberwein, executive vice president of Hoffman Construction. "I am guessing that tax revenue shortfalls have caught up with most municipalities, and federal agencies are feeling [wary] about the public's appetite for capital spending when sequestration and other belt-tightening measures dominate headlines."
On the other hand, contractors working in the private sector are beginning to enjoy a market turnaround. A big factor in the private-sector recovery is that banks and other financial institutions finally are beginning to lend on projects. "We are seeing projects actually getting built as developers are able to get the necessary debt and tenants to make the economics work," says Sam Alley, CEO of VCC Construction.
Further, many firms are seeing commercial and corporate clients beginning to spend. "We've observed that companies within our core market sectors have operated conservatively, stockpiling cash and avoiding expenditures. As we see the economy continue to improve, some of that money is now being put into play," says Fred Perpall, CEO of The Beck Group. However, he says clients are more cautious today in how they approach potential projects. "They're asking for what-if scenario planning to make sure they're making the best decisions on how to deploy funds to meet business objectives and create more value," Perpall says.
The increase in private work has balanced out shortfalls on the public side. "Certainly, the government market is experiencing some downward pressure, but there is work out there," says Terry Dunn, CEO of JE Dunn Construction. He says multi-unit residential is strong, and investment-related work, such as hotels and commercial offices, is coming on line. "We enjoyed 8% to 10% growth last year and are hoping that holds up this year. I am not ready to pop the champagne cork yet, but there are positive signs in many of the markets we serve," he says.
The upswing in private work has gone counter to previous construction recessions, when the industry relied on government to prime the pump to turn the industry around. "For the first time in U.S. history, a post-recession recovery is being carried by the private sector versus the public sector," says Jim Karambelas, CEO of GLY Construction.
Many contractors believe the industry is still a year or more away from full prosperity. "Most economic forecasts call for incremental growth for the next two to three years—likely in the 8%-a-year range," says Paul Little, CEO of Panattoni Construction. But he worries that budget deficits both here and abroad may keep the industry "in a low-growth, low-interest-rate, low-inflation environment for the foreseeable future."
"Real construction activity is likely 18 to 24 months off, but people are talking about projects again," says Eric Hedlund, COO of Sundt. "I think we're on the upswing but still in a fairly fragile economy," says Jeff Stone, COO of Brasfield & Gorrie. "We're definitely not back to where we were in 2007 and 2008, before the big downturn. We have several years ahead of us before we get back to that point, but we're on the right trajectory," Stone says.
Business Is Back
Manufacturing is enjoying a renaissance. "Many corporate clients are feeling bullish," says Eberwein. He says there are a variety of factors that should boost the sector for many years to come, including the emergence of an international middle class that demands American products and the ability of U.S. manufacturers to offer higher-quality products at lower costs due to low energy costs and low-interest-rate borrowing.
Another factor fueling the corporate building increase is competition for young, creative professionals who would like a redesigned workplace: more collaborative, more open, less cubicle-oriented, greener and healthier, Eberwein says. "This has led to an uptick in office work, corporate headquarters and campuses with not only reinvented workspaces but also health clubs, daycare, cafes, etc.," he says.
The manufacturing market should continue to remain healthy. "Our indicators tell us that manufacturing will continue to be on the upswing for the next five to 10 years," says Stephen Gray, CEO of Gray Construction. He says worker shortages may hinder some manufacturers. But "some manufacturers believe comprehensive immigration reform could shrink this gap without displacing American workers."
The new surge in manufacturing plants might not lead to the kind of job creation sought by local communities. "We put in industrial rail yards in a lot of these plants, and they are being built to be highly automated," says Jeffrey Levy, CEO of RailWorks. He says that many of these projects are conversions of existing plants. "A plant that used to employ hundreds may only employ a few dozen now," he says.
It’s a Gas
The shale-gas and oil boom in the U.S. has ignited a lot of excitement in the industry. "There is a relatively strong appetite for capital investments, driven by the expansion of infrastructure both to support unconventional natural-gas production and, more recently, the expansion of liquids production," says John Allcorn, executive vice president of Willbros Group. He sees increased spending on pipeline integrity and maintenance. "Pipeline failures over the past few years have brought more scrutiny, which will require additional investment to prove system integrity," he says.
Much of the oil-and-gas work will be focused on the Gulf Coast. "I think that everybody wants to talk about shale gas in the Gulf Coast, which is a great story. We're in the early stages of $35-billion worth of EPC value," says Seaton of Fluor.
The increasing availability of cheap domestic gas and oil has spurred potential opportunities beyond just the petroleum market. "There is a lot of work in North Dakota, but most of the growth will be in the South," says Dudley. "We are seeing several petrochemical projects moving ahead. We expect to book at least one, if not more."
However, Dudley says the impact of the gas boom will go beyond just upstream extraction, transport of the gas and petrochemical plants. "We expect manufacturing projects in the plastics industry," he says, which means power and infrastructure projects will follow to support this upswing in industry. "Unfortunately, we are not seeing the volume of power work that we might wish for," he says.
The power market is suffering from a great deal of regulatory uncertainty, leading many utilities to hold off investing in capital improvements until the rules are more clear. One area of uncertainty is what direction the U.S. Environmental Protection Agency will take since a federal court invalidated its Cross-State Air Pollution Rule in 2012.
"If you are a generator and the regulators aren't giving you the answers you need to make your capital decisions, you're going to have to [delay investments] until you have that data," says Seaton. He says gas-fired plants will replace some coal-fired plants, but "until [utilities] really know the capacity that they have to replace, they don't know exactly which gas projects to sanction and move forward with."
The renewable-energy industry has an uncertain future for the long term as tax breaks supporting that market expire. An Internal Revenue Service rule issued in April allows the production-tax-credit extension to cover all wind-farm projects that begin construction by Dec. 31 of this year. "It is our belief that several projects that would have been previously scheduled to build in phases may be consolidated into one larger project to ensure the developer or utility qualifies for the tax credit," says Paul M. Daily, CEO of Infrastructure and Energy Alternatives.
Electric transmission and distribution is an area of opportunity for many contractors. Willbros is planning to parlay the firm's high-voltage-transmission construction experience in Texas into surrounding states, says Allcorn. He says, "Our strategy is to expand our presence and provide our services to the markets between the mid-Atlantic and Texas," he says.
Roadwork
The transportation market has been struggling for a couple of years. The passage of the Moving Ahead for Progress in the 21st Century Act (MAP-21) legislation has provided some stability for state DOTs to plan longer-term projects, but many contractors say this is just a patch on what is really needed from Congress.
The irony of the market is that there are many enormous transportation projects across the country but few smaller jobs. "As I travel around the country, I do not see the smaller, bread-and-butter projects that keep regional contractors and pavers busy," says Levy.
Many contractors see public-private-partnerships (P3s) and other alternate funding mechanisms as a means to fill the gap left by MAP-21 and local budget shortfalls. For example, the $1.5-billion Goethels Bridge replacement project in New Jersey is a P3 job. Further, the federal Transportation Infrastructure Finance and Innovation Act authorizes credit assistance for alternative project financing.
Some contractors have been actively seeking out P3 opportunities. "We are seeing that large transportation projects using the P3 delivery system are gaining momentum, and we will use our expertise in this area to look to capture those opportunities," says Shaun Yancey, executive vice president, PCL Construction Enterprises. He says PCL is creating strategic alliances with consultants and contractors to pursue these jobs.
One of the difficulties in the increased use of P3s is that American investors are not used to this sort of investment. However, Canadian and European contractors have long used this type of financing for infrastructure. "The influx of foreign players is changing the market. They have unlimited access to capital as they are backed by their countries. That's something we don't have here in the U.S. It is not always a level playing field," says Robert Alger, CEO of the Lane Construction Corp.
One transportation market that has not had to scramble for funds is private railroads. "The large, Class 1 railroads have been listening to their customers and investing heavily to meet their needs," says Levy. To upgrade their infrastructure, railroads have been investing $10 billion to $12 billion a year for several years and will spend $13 billion this year, he says. "The problem is that it is a good market, so we are seeing new competitors, like highway contractors, trying to get into it," Levy says.
The Cost of Health-Care on Firms
The health-care market has been in flux as a result of the Patient Protection and Affordable Care Act and the uncertainty of its effect on health-care providers. However, contractors of all types, regardless of what market they serve, have their own concerns about the new health-care law.
Many contractors worry about the potential costs and mandates under the new law. "Costs associated with the required health-care coverage will have to be addressed in the next 12 months," says Joel Stone, CEO of SpawGlass.
SpawGlass is one of many major contractors that are concerned about the impact of the federal health-care law. "We work both union and non-union, and the law requires us to provide specific levels of coverage for non-union employees or face penalties," says Dunn of JE Dunn. He worries that expenses incurred under the law will hurt many contractors.
"But there seems to be new or added levels of record-keeping and compliance requirements," Levy says. Contractors are working hard to do more with less, squeezing out efficiencies in their processes and investing in technology and equipment to make themselves more competitive in a tough, hard-bid market, he observes. "We try to chase costs down, only to have federal regulations require us to hire a new wave of compliance officers. In a competitive market, you can't just pass these costs to the customer," Levy says.
The construction industry sees positive signs and uncertainties. Contractors continue to plan for the turnaround that is bound to come, seeking new markets and services. But some contractors are looking a little further into the future than others. On April 16, Bechtel announced it had become one of the investors and collaborative partners with Planetary Resources, a group researching the feasibility of mining asteroids. "This is something that is probably 30 years away from being a market, but it is something we are looking at for the future," says Dudley.
