www.enr.com/articles/29116-federal-government-beckons-firms-to-star-spangled-market

Federal Government Beckons Firms To Star-Spangled Market

February 7, 2005
Threat reduction. Homeland security, now federally reorganized, will see spending boost.

The famous government poster with Uncle Sam saying, "I Want YOU for U.S. Army," has defined military recruiting back to World War I and may have new meaning 87 years later. New and changing missions in the U.S. Defense Dept. and other key sectors of the federal government are pushing Uncle Sam and the engineering and construction community closer together. The Bush administration’s plan for a more "outsourced" government and its tougher security priorities are generating new mutual interest. In turn, firms are revving up stakes in the federal market. The effort includes lots of high-profile ex-military and government hires.

"We dabbled in the federal market five years ago, but we were not a recognized name and it was a minuscule part of revenue," says Skip Homan, executive vice president of PBSJ, Miami. "It’s now about 9%. That doesn’t sound like much, but it’s been growing 15% per year. It’s a market that’s changing a lot."

The huge commitment of U.S. dollars to Iraq reconstruction and the needed rapid deployment of American engineers and contractors in the past two years have raised firms’ federal profile and financial return. DOD announced Jan. 27 that it awarded a total of $230.7 billion in prime contracts in fiscal 2004, up $21.7 billion from the previous fiscal year. This year’s list of the agency’s Top 100 contractors includes 13 E&C firms (see chart, right).

E&C Firms Among DOD Top 100 Contractors  
Firm
Fiscal 2004
Contracts*
(rank)
($ mil.)
Fiscal 2003
Contracts*
(rank)
($ mil.)
Halliburton Co. 7,996.8 (6) 1,742.5 (7)
Bechtel Group Inc. 1,742.5 (15) 910.4 (22)
Parsons Corp. 809.1 (34) 685.0 (32)
URS Corp. 803.8 (36) 577.7 (39)
Fluor Corp. 549.9 (52) 347.8 (66)
Shaw Group Inc. 499.4 (56) 461.7 (52)
Morrison Knudsen Corp. 458.4 (58) 404.8 (60)
Perini Corp. 444.6 (59) Not on list
Jacobs Engineering Group 742.5 (64) 557.2 (42)
Contrack International 444.6 (59) 206.0 (98)
Tetra Tech Inc. 261.8 (87) 395.9 (62)
Tyco International 252.5 (92) 285.7 (75)
CH2M Hill Cos. 244.5 (93) 281.4 (78)
*Total dollar value of DOD contracts awarded to each firm in the fiscal year listed. Numbers are rounded. Morrison Knudsen is now known as Washington Group. Tyco International includes Earth Tech.
Source: U.S. Dept. of Defense

But the plan by Defense Secretary Donald Rumsfeld to streamline and reinvent the military over the next 20 years is even more compelling to industry firms. The DOD "transformation" would involve major changes in troop location and strength, combining some service functions, massive integration of new technology throughout the military and greater reliance on the private sector to take over non-core base operations and logistics. "The department must develop a comprehensive divestiture strategy so that it can generate growth," says Arthur K. Cebrowski, director of DOD’s Office of Force Transformation. "We have to be willing to shed some things. There is a growing need for new business models."

Industry firms see much new potential in providing engineering and construction support as the military makes plans to rearrange its global basing strategy and redeploy thousands of troops and families to new locations.

McCaffrey

"We are going to take 70,000 troops out of Europe," says Barry McCaffrey, former commander-in-chief of the Armed Forces Southern Command, based in Miami. "It is going to be a $7-billion funding challenge for the Army just to restation them."

McCaffrey, who last month was named chairman of HNTB Federal Services Corp., says Korea-based U.S. troops who were sent to Iraq will be returning to Fort Carson, Colo., when their tour is up. "We have to get going on infrastructure so forces can deploy," he says. DOD’s Defense Global Basing Strategy is to be released shortly, but PBSJ’s Homan says the firm already is involved in base master planning in Europe and Asia. Moving large numbers of troops around will put further cost and schedule pressure on the military’s effort to expand and upgrade base housing, likely escalating its dependence on privatization approaches.

New horizons in the federal sector have enticed some to stick their toe farther into the water. HNTB’s federal venture began last year as the firm saw its mainstay transportation work slowed by the political battle over federal funding.

"Federal was always in our long-term plans," says Paul Yarossi, CEO of HNTB Corp. "What’s pushed it forward is simply the opportunity. It’s market diversification where we can use core skills. We can do for the federal government what we do for state highway departments."

HNTB Corp., Kansas City, Mo., did not skimp on well-connected talent, hiring former Clinton-era federal drug czar and current NBC commentator McCaffrey, as well as retired Corps of Engineers commander Robert B. Flowers, as the federal unit’s...



...CEO. "We hired these two people for their leadership skills," says Yarossi. "Our first conversations were about leadership, not the federal market."

Goodrich

Similarly, contractor BE&K Inc., Birmingham, decided to shore up sagging industrial construction markets by starting a federal unit and hiring retired Rear Adm. David J. Nash as president. "We’ve done some [federal] work in the past, but we felt it was necessary to consolidate and get a critical mass," says BE&K Chairman Michael Goodrich. "The market is big and counter-recessionary to our more traditional markets, industrial and buildings."

Almost as soon as Nash took the job, the country asked him to lead emergency reconstruction in Iraq. But Nash’s year-long absence likely has enhanced his reputation and BE&K’s networking.

Nash still is operating under federal "anti-lobbying" rules that bar dealings with DOD, but he already is targeting other agencies such as the Energy Dept. and NASA. He says BE&K’s design-build expertise will be valuable to federal project managers. "We want to see if we’re competitive in this marketplace," says Nash.

McCaffrey’s restrictions on dealing with former peers are long over, but "I don’t intend to be a lobbyist," he insists. He says federal work is not for the faint of heart,

beset by unknown risks, congressional scrutiny and contract protests. "It can be Byzantine," says McCaffrey. "When there’s a problem, they just add another layer of restrictions." He views his role as less door-opening, and more supportive. "I understand we have to make money, but government people also want their programs to work," says McCaffrey.

But not all ex-government rainmakers work out. One Midwest engineering firm CEO says the ex-Corps colonel he hired "went to meetings and tried to take charge. He never left his rank behind."

New Digs. Base housing will expand, opening the door for private firms.

But federal sector veterans are hardly standing around waiting for the newcomers to steal market share. "It doesn’t surprise me that people are getting into it," says Ken Smith, senior vice president of business development for Fluor Corp.’s government group. "But there are barriers to entry. It takes commitment." Fluor has seen its federal contract backlog, primarily for DOE, DOD and the Federal Emergency Management Agency, grow significantly. Federal revenue was $1.7 billion through third quarter 2004, up from $952 million in 2002.

IAP Worldwide Services, Irmo, S.C., a $250-million-a-year DOD logistics contractor, wants to capitalize on the federal outsourcing boom by buying a unit of Johnson Controls that does similar work, says David Myers, IAP chairman and ex-president of Fluor’s industrial unit. He says a stock purchase will close this month, creating a $1-billion-a-year entity.

"For military bases, there’s a significant move to outsource everything other than combat," says Myers. Last month, Al Neffgen, former COO of Kellogg Brown & Root’s government unit, was named IAP’s CEO. The board includes Dan Quayle and retired Air Force Maj. Gen. Gene Lupia.

Toronto-based AMEC is positioning for more DOE and DOD environmental work in the U.S., particularly related to the next round of military base closings, which will be unveiled by May. "Looking at the past four rounds, you can anticipate a 20 to 30% increase in environmental work," says Paul Parker, director of the Air Force Center for Environmental Excellence in Texas.

But one source says this list could include as many bases as were in all previous rounds. "There will be a big increase in project cleanups and more use of fixed-price remediation," says Paul Pettit, senior vice president of AMEC Americas’ new federal programs unit. Signaling its intent to be close to clients, AMEC Americas now has its U.S. headquarters in Washington, D.C.

Federal market players also are closely watching the new Dept. of Homeland Security as it settles down from its mammoth reorganization. The American Association of Engineering Societies says it will cost $1.7 trillion over five years "to effectively secure threats to the public."

HNTB’s Yarossi expects DHS to beef up grants for vulnerability studies and bridge and airport hardening. "We wondered if this market was a flash in the pan, but we decided the U.S. will learn to live with far greater attention to security," says PBSJ’s Homan. Ambrose Schwallie, president of Washington Group’s defense unit, hopes to take its security technology to protect nuclear weapons "and use it for critical DOD infrastructure."

Cuttino

McCaffrey and others also want to inject more design into the growing U.S. embassy and consulate construction market around the world. "We don’t think they need to look like concrete fortresses," he says.

Sandy Cuttino, a veteran of military work who was just named president of federal programs for Earth Tech, Long Beach, Calif., says she’s "pretty passionate" about the federal sector. Cuttino says federal officials "are sophisticated purchasers, and we like working with a sophisticated buyer. We can perform well and attract and retain staff. They are a relationship customer."