How To Win Work in 2011
Early autumn of 2010 may well have been the rock bottom point for the New York region’s design and construction market. That’s when it was clear that its few active sectors – healthcare, K-12 schools, and higher education – had backlogs drying up and new projects delayed, adding to gloom that had already enveloped private commercial and residential construction.
And then came New Jersey Gov. Chris Christie’s announcement that the state was abandoning its commitment to the $8.7 billion Trans-Hudson Express Tunnel project – which would have built a passenger rail tunnel and stations for New Jersey Transit. The news deflated prospects for infrastructure, one of the market’s few funded sectors in the market, and carved out a low point that made a rebound in 2011 seem very unlikely.
But the year’s close introduced wisps of hope that 2011 might plant seeds of recovery, such as New York City Mayor Michael Bloomberg floating the concept of extending the No. 7 subway train to New Jersey, a $5.3 billion effort that would replace the abandoned tunnel project.
That of course leaves contractors in particular with a tough bid: survive another slow year but not weaken themselves further before a possible rebound.
The consensus certainly is that no fast rebound is imminent. “We’re in it for the better part of 2011,” says Jim Scully, principal of Scully Construction of North White Plains, N.Y.
Subcontractors face an especially harsh outlook, says Ron Berger, executive director of the Subcontractors Trade Association of New York City. He says cash flow problems and late payments from contractors and owners is devastating his ranks, with a half dozen of his members filing for bankruptcy in the last two months. “And it’s getting worse,” he says.
The slim hope sits at the end of 2011, says Mike Kolakowski, CEO of KBE Building, a contractor based in Farmington, Conn. “We may see an uptick in the industry at the end of ‘11 and into 2012, but we’re not overly optimistic,” he says.
Many contractors survived on projects started before the downturn, but as those near completion, 2011 requires expert navigation, says Joe Hogan, vice president for building services at the Associated General Contractors of New York in Albany. “The strategy is to keep working those niche areas and be careful about going too far afield,” he says.
A few contractors say they already see enough work to keep steady, such as Turner Construction, which is expecting a better 2011 than 2010 for project starts, says Pat Di Filippo, executive v.p. at the firm. “We have healthcare work in the pipeline,” he says.
And a few positive signs are popping up, including architects who see clients possibly starting projects in the third quarter next year, says Diane Harp Jones, CEO and executive v.p. of the American Institute of Architects in Connecticut.
There is a glimmer, too, in activity that a dozen real estate development attorneys at Tarter Krinsky & Drogin are seeing in residential projects in New York, says David Pfeffer, a partner at the firm. “We’re all seeing things start to percolate,” he adds. “It’s not like four or five years ago, but banks are starting to loosen up their ability to loan money at all levels.”
But until the work comes, firms have to keep key staff active in a slow market. KBE’s Kolakowski says finding that “right balance” is critical to not be out of position when the market returns.
Building Blocks for 2011
To find work in 2011, construction industry firms should aim in the same direction as 2010 – at public and institutional work, both on the building and infrastructure sides. But whether that goes beyond 2011 is unclear.
“There’s no denying that public work is the key to 2011,” says Richard Anderson, president of the New York Building Congress, which covers work in New York City. He estimates that school, transportation, infrastructure, and institutional projects combined will make up to three quarters of construction spending volume in the five boroughs next year.
Indeed, already-funded work is keeping some contractors busy, such as Conti Enterprises of Edison, N.J, which has a pair of $200 million rehabilitation projects for the Whitestone and Verrazano Narrows bridges from the Metropolitan Transportation Authority.
The two remaining years of funding for the MTA’s capital plan, as well as billion-dollar capital programs at Columbia, Fordham, and New York universities, are clearly the backbone of the current market, says Louis Coletti, president and CEO of the Building Trades Employers’ Association. But public work has its limits. “While the city is continuing to fund its capital commitment on the civil side, the question becomes, when do they have to begin to scale that back?” he asks.
In Connecticut, a big chunk of the state transportation construction spending tab is on an ongoing project – the New Pearl Harbor Memorial Bridge project, a 10-lane extradosed structure that is among $2 billion in related improvements along Interstate 95 in New Haven, says John Butts, executive director of the AGC of Connecticut.
Likewise, the Dormitory Authority of the State of New York (DASNY) is spending at about the same rate this fiscal year as it did when spending nearly $1 billion last year, says Steve Curro, managing director of construction for the agency. Much of that is on big ongoing projects – such as the $700 million John Jay College of Criminal Justice and $300 million new patient pavilion at Harlem Hospital Center – but it drops off after the next fiscal year. “We don’t have a lot of large capital projects on the design boards right now,” he adds.
The drop may be less steep at institutions not reliant on public money, such as Princeton University, which shaved its planned $3.1 billion, 10-year capital plan by $1 billion but still is active with the $180 million, 248,000-sq-ft, two-building Neuroscience Institute and the Department of Psychology project that broke ground in 2010 and is set to open in 2013. Two more large projects are in design, including the 127,000-sq-ft Andlinger Center for Energy and the Environment set for 2012, says Anne St. Mauro, assistant v.p. for facilities, design, and construction.
And there may be little disruption to the active self-funded capital program that Montclair State University, thanks in part to a new law enacted in New Jersey in 2009, says Gregory Bressler, v.p. for university facilities. In addition to a new 130,000-sq-ft new business school and 100,000-sq-ft science research facility, both of which are set to go to bid next spring, the university is taking advantage of the new law to outsource the financing, design, construction, and operation of new facilities whose cost can be covered by future “revenue” streams.
For instance, it is leveraging future room and board charges to fund a 550,000-sq-ft, two-building dorm and dining hall project set to open next summer on campus, procuring the entire project through Capstone Development of Birmingham, Ala., which is leasing the site and building to Montclair State’s specifications. Capstone signed on Terminal Construction of Woodbridge, N.J., as its construction manager and launched the 2,000-bed project earlier this year. Next up is a similar turnkey process for a new heating, cooling, and cogeneration plant that would break ground on campus next year, Bressler says.
The prospects are thinner for private construction, says the Building Congress’s Anderson. “The traditional office, commercial, and residential is going to be the smallest fraction of the market it has been in many years,” he says.
One bright spot may be in project financing, which had dried up almost completely. Now, the last two months have seen banks finally unloading stalled developments at a loss, says Pfeffer, the attorney. “This is a great sign – it frees up more money for them to loan and gets bad assets off the books,” he adds. And he says some developers are winning financing to resuscitate scaled-back projects by converting condominiums to rentals.
A gauging of conversations with contractor associations, lenders, and others portends “some real construction activity” by the end of next year, says Gary LaBarbera, president of the Building and Construction Trades Council of New York City. “I don’t think anyone expects a boom like ’05, ‘06, but we think New York City is going to recover more quickly than the rest of the country,” he adds. [See labor sidebar].
Another hopeful marker is more new prequalification requests that Conti Enterprises is getting for site remediation projects – an early point in the new project development process, says Pat Hogan, its COO.
But any rebound won’t be rapid because the market still needs to absorb vacant office space and residential properties, Anderson cautions.
Shifting Tactics
Despite the chance for a thawing, the coming year will be a nest of challenges for contractors, says Turner’s Di Filippo. “If you have a blowout – one bad [materials] buy, a subcontractor who goes bust on you, an insurance premium that changes on you, a bonding company that pulls the number on you – any one of those things can really change the outcome,” he says.
Coletti says the last real estate market collapse in the 1990s thinned the herd of construction firms by about a quarter, and the pain of that process may not be done in the current downturn. [See subcontractors sidebar].
The tighter environment also has a clear impact on the bidding process, with contractors facing dozens of rivals for any project. It leaves a situation that is both friendlier and more volatile for owners, DASNY’s Curro says. “We’ve never seen [the pricing] any better,” he adds. “But it seems as though there are more low bidders backing away from their estimates and asking to withdraw their bids after we review the scope and details with them.”
It also leaves some public owners with more resources as bids come in under engineering estimates, Conti’s Hogan says. “So it’s creating a pool of money to put out more jobs,” he adds.
Another result of the leaner times is the slowdown of project progress, with owners moving in stages, AIA’s Harp Jones says. “They’re saying, ‘Let’s do a schematic design, and then let’s stop and take a breather and see where we are and if we have the money,” she adds.
Survival Staffing
Perhaps the most critical focus for construction firms in a year pegged to be slow – but also promising a possible rebound – is how they manage staff.
Various firms have bulked up on training, often focusing on green construction certification or building information management technology. BIM is likely to have wide penetration during the next building cycle, says DASNY’s Curro, noting that his agency expects to add its own BIM requirements next year.
Princeton University is also bullish on BIM. “We are trying to use it on every project we can,” St. Mauro says.
Firms are also exploring other avenues for training. Both Conti and Turner are using small projects as strong training grounds for staff. KBE is bulking up on leadership training, Kolakowski says. And Conti has been rotating field supervisory staff into the estimating, business development, marketing, and proposal departments to give them broader project management experience.
Another aspect of staffing, however, has been layoffs, with nearly all companies cutting back at some level. Di Filippo says Turner is “busy in our new size,” after cuts since 2008 to focus on skill sets still in demand. But he adds that Turner has also been hiring selectively for projects, in some cases bringing back laid-off staff.
Staying lean is also critical because of the uncertain timing of a rebound. “If the economy doesn’t turn, we’ve got to be ready,” Conti’s Hogan says.
And companies also have to keep staff morale strong to avoid losing employees to rivals when a recovery begins, Di Filippo says. “You want to make sure they see the opportunities you offer, that you’ve been training them all along, that you’ve been making them feel appreciated even though there are economic challenges,” he says.
And companies also have to keep staff morale strong to avoid losing employees to rivals when a recovery begins, Di Filippo says. “You want to make sure they see the opportunities you offer, that you’ve been training them all along, that you’ve been making them feel appreciated even though there are economic challenges,” he says.
Labor Contract Showdown
Few construction industry leaders believe they’ll see a turnaround in the first half of 2011 in the New York region. But they may see one an important milestone by midyear when 30 New York City labor-contractor collective bargaining agreements are set to expire on July 1.
The current crop includes some of the biggest unions, including the steamfitters, operating engineers, carpenters, and laborers. And a standoff looms over costs, says Louis Coletti, president and CEO of the Building Trades Employers’ Association.
Coletti says contractors are getting pressure from owners’ groups, such as the Real Estate Board of New York and hospital associations, all of which want to build with union labor because of its advantages in skill, project coordination, quality, and safety. But he says they are telling his contractors that the cost differential between labor and nonunion construction is too wide. “They all want the same thing,” Coletti says. “There was a 30% cost differential between union and nonunion at the height of the market in 2007, and we have been able to reduce it to about 20% through the project labor agreements and cuts the contractors have made in their own profit margins and overhead.”
And while he says unionized construction has “not done a good enough job” at marketing its value, he says the “differential” owners are willing to pay for union expertise is lower than the current level, requiring fundamental work rule changes – and not just temporary pay adjustments – to make project sites more efficient.
“I believe we have reached a potentially transformational moment in the New York City unionized construction industry,” Coletti says. “What the industry will look like moving forward will be determined on the success or failure of changes to reduce the costs of construction that are agreed to in those collective bargaining agreements.”
But Coletti acknowledges labor has a different view. “The contracting community believes that the financial crisis has created a permanent change in the structure of real estate financing,” he says. “We’re not so sure that labor agrees with that.”
And indeed, labor unions don’t agree the market has structurally changed, says Gary LaBarbera, president of the Building and Construction Trades Council of New York City. “There’s no doubt the economy has created very difficult scenarios, and the project labor agreements were designed to mitigate those problems,” he says. “We’ve been in a very bad recession, the worst since the Great Depression. But I think where the views tend to split is that we don’t necessarily share the same long-term view the contractors do. We think the work opportunities are going to pick up at the end of next year going into 2012.”
LaBarbera says those divergent views are going to color the negotiation process. “We’re all ultimately negotiating with the market, but we think when negotiations start next spring, we’ll have a more clear view of the economic outlook for next year,” he adds. “Everyone intends to go to the bargaining table in good faith and reach agreements that work for everybody.”
Coletti says the contractors are making efforts to show this round is different, such as pushing up the negotiating timetable, possibly into January. Another is to cancel the annual Florida winter retreat that both sides have used as an informal negotiations starting point. And the last is to not plan a replacement for the “Economic Recovery” PLA that expires in March, a deal that had lowered rates for private developers during the recession. “We haven’t talked about it because what we’re really looking for is permanent change in the contracts,” Coletti says.
Subcontractors in Distress
Among the darkest clouds looming over 2011 for the New York region’s construction industry is the state of subcontractors – and how many of them may falter this year.
“The subcontractor community is starting to see the wear and tear of this recession,” says Joe Hogan, v.p. for building services at the Associated General Contractors of New York in Albany. “The risk of subs defaulting on projects is getting greater, and [general] contractors now have to look for signs of stress.”
Contractors and subcontractors generally aren’t the best judges of their own limits, says Mike Kolakowski, CEO of KBE Building, a contractor based in Farmington, Conn. “Some guys are just trying to hang on and really taking on work a whole lot cheaper than they should,” he says. “These are subs that had been profitable and had big backlogs of work in the past, but the concern in this market is will they be around to complete projects of long duration?”
Subcontractors – all across the marketplace, regardless of trade – are indeed taking jobs just to keep their crews together and funding work out of their reserves, says Ron Berger, executive director of the Subcontractors Trade Association of New York City. And the ones in the most dire shape are filing for Chapter 7 or Chapter 11 bankruptcy, with more than a half dozen at the end of the year and more to follow in 2011, he adds.
The biggest problem they all face is cash flow – and the inability to get paid on time from contractors and owners, Berger says, citing examples of projects on which subcontractors haven’t been paid for more than a year and a half. “There is so little work out there, and we’re laying out large sums of money for materials and labor but waiting unreasonable amounts of time to get reimbursed,” he says. “It’s just not fair.”
Berger says the public sector, where most of the work is today, is actually worse on payments than the private sector, noting that the N.Y.C. School Construction Authority has thousands of unresolved change orders running into the hundreds of millions of dollars.
AGC’s Hogan says anything that contactors can do to help the subcontractors on their jobs is bound to reduce project risk. He says some subcontractors have begun to not pay their own bills to suppliers and labor funds, but if they go under, the contractor in some cases could find itself on the hook for the unpaid balances. “Make sure that the money is flowing,” he adds.
But contractors should also seek transparency about finances from their subcontractors, he adds. “They have to watch for the signs,” Hogan says. “Ask the sub to be open about the books, or consider issuing joint checks or making other adjustments. It’s a time of real caution.”
