Given the cyclical nature of building construction, riding out a down market is nothing new to most of the 75 contracting and 25 construction management firms in this year's Design/Construct Top 300. Not surprisingly, the majority of Giants on the list reported slight reductions in commercial, institutional, and industrial (CII) revenues in 2002 from the previous year. No. 1 Turner Construction Corp., Dallas, saw CII revenues drop 8% and No. 4 Skanska USA Building, Parsippany, N.J., took a 39% hit. Yet, both maintained their lofty status amid the top five contractors, while also making the construction managers list: Skanska at No. 13 and Turner at No. 24.
"It's the same for everyone," says Mike Healy, Skanska USA Building's president and CEO. "The corporate market is struggling. biopharma is not as strong as we'd like it. But education is doing very well across the country. Healthcare is strong, and government, with the procurement methods changing of late, is working for us."
Ten contractors reported double-digit revenue increases for 2002 (please see table). Bovis Lend Lease, New York, No. 3 in the contractor category, posted a 15% increase in CII revenues, while No. 15 The Walsh Group, Chicago, reported a staggering 54% increase.
"Institutional markets, such as education, increased significantly for us last year and multifamily residential is very strong, particularly in Chicago," says Patrick Donley, Walsh's vice president of business development. Another key to the company's success is its geographic diversity. "We have 12 offices across the county. If one area is down, another is up," says Donley.
The big gainers, as well as many who saw reduced revenues last year, are employing three strategies designed to give their customers what they need, and cost effectively:
Emphasis on preconstruction services on planned projects that are either in development or have not yet been given the go-ahead, especially in the private sector, because of the economy.
Development of skill-set groups within a company to leverage the firm's expertise in building segments, such as aviation, sports, or healthcare, where clients feel they need a contractor or CM with specific expertise in these areas.
Cost management within the construction firm: a basic tenet of any construction company, but one that is being mined for all it's worth in today's market, where margins are as thin as cheesecloth.
After the economy slowed in 2001 and 9/11 occurred, private-sector owners began placing projects in limbo. This, in combination with reduced project backlogs, motivated construction firms to more heavily promote their planning, preconstruction, and program management services. The struggling commercial office sector in New York and across the nation is the primary example.
"Prior to 9/11 there were a lot of starts that were anticipated, but they've been put on hold," says Peter Davoren, who, after 25 years with the company, became president of New York-based Turner Construction Co. six months ago. "We're still waiting for them to come back."
"The corporate market probably won't come back until the stock market comes back and corporate executives are willing to do some capital spending," says Skanska's Healy. "[Construction firms are] a lagging indicator when it comes to the private sector. When it's going down we're still working off of commitments that were made and when it's going up, it takes us a while to reflect that. We're not like General Motors, where you can give rebates to induce buyers to spend money — not with the margins we work on."
That's when construction firms look to give customers something more. "It's a really big business, with $2.5 trillion to $4 trillion put in place in a given year," says Craig Martin, president, Jacobs Engineering, St. Louis, No. 1 on the construction managers list and No. 7 on the contractors list. "Jacobs has about 1/10th of 1% of the market share. So we're in the business of taking market share away from competition. It's a business of being cost-competitive and having the highest-quality people."
"To gain work, you have to separate yourself from the competition, not by being the largest, but by offering the most," says Turner's Davoren. "Our preconstruction prowess has given us that ability to separate ourselves in markets such as commercial, healthcare, education, pharmaceutical, sports, residential, and public work."
On the West Coast, San Mateo-based Webcor Builders found success emphasizing its preconstruction services. Based in the Silicon Valley, where the dot-com bust and sagging economy put an abrupt end to the area's late '90s office building boom [BD&C, April 2002, p 32], the No. 13 contractor, managed to increase its CII revenues 16% last year. "It has been difficult in the San Francisco area," admits Carry Boyd, Webcor's director of marketing. "We have concentrated on bringing value to the project through the preconstruction phase. We can save owners millions of dollars up front."
A recent commercial building project, whose plans called for underground parking, illustrates Boyd's point. "Subterranean parking can be very costly," she says. "We worked with the owner to pull the parking out to a separate facility, which saved several million dollars on a $48 million project."
In the end, "good management practice benefits project delivery and transcends building type," says Kevin C. Schiedel, senior vice president, business development manager of the eastern region of Washington, D.C.-based 3D/International, No. 6 on the CMs list.
Though its CII revenues were down slightly last year, Turner's skill-set market segment groups have softened the blow of the down cycle and established the company as an expert in several unique building types, such as aviation, pharmaceutical, and sports. "We read the market upswing in these areas four years ago and created the market segments about three-and-a-half years ago," says Davoren. "We realized that clients wanted a special skill set for these types of structures. Pharma, for instance, wants a company to have skill sets for process piping."
Similarly, Skanska is nationalizing its biopharma, healthcare, aviation, and sports sectors, says Healy. "We have various degrees of expertise in offices around the country and a strong national force to compete for any project in those market sectors. Before, some of our local market offices were at a disadvantage in these areas. These projects tend to be very large and take a lot of technical expertise and financial resources."
A case in point is Skanska's on-going installation of the outbound baggage security system at the Tampa International Airport, a design-build project performed in conjunction with designer HOK, St. Louis. Baggage will be routed through a central location for screening and then distributed to the appropriate airlines. "The logistics are unbelievable and the team has done a great job of keeping the public from being inconvenienced while working in every nook and cranny of the airport, and in an ultra-secure environment," Healy says. The project is to be completed next year.
Jacobs is targeting high-tech clients. "We focus on buildings that contain sophisticated technical content," says Martin. "Schools and labs — particularly government energy labs — these buildings have a complexity to them that enables Jacobs to deliver expertise that others can't."
Diversification of markets, establishing new offices in geographic areas where certain markets are doing well, and acquiring companies with expertise in specific sectors are more traditional, but still effective, ways for companies to expand their presence.
The Haskell Co., a Jacksonville, Fla.-based design-builder, and No. 42 in the contractors list, maintains 15 different divisions. In industrial, food had a banner year last year, and is having another good year this year, says Lamar Nash, Haskell's vice president of corporate marketing. "There's also a lot of interest in design-build, especially in the government/institutional sector," he says.
Webcor, whose revenues were 98% commercial last year, found additional success in developing skills typically thought of as subcontractor specialties, such as concrete construction. Boyd credits the concrete division for opening doors for the company to enter the public and university markets, recalling that on a recent university project the concrete portion alone was $30 million.
As the market slowdown continues and the competition for the fewer projects being bid increases, construction companies are placing even greater emphasis on cost management. Skanska's Healy says the company reduced its overhead costs by reducing back-of-house services and streamlining its accounting, telecom, and IT departments to keep profitability up.
Managing costs is fundamental to Jacobs' culture, says Martin. "We put a great deal of energy into mining costs. When the economy is difficult, then you're in a better position to deal with it than other companies."
Bull market for some contractors, a bear for others
(Largest percentage increases and decreases reported in 2002
CII revenues, contractor category)
|1. The Walsh Group, Chicago||54%||1. Perini, Framingham, Mass.||-40%|
|2. S.M. Wilson & Co., St. Louis||36%||2. Skanska USA Building, Parsippany, N.J.||-39%|
|3. Dick Corp., Pittsburgh||29%||3. Clancy & Theys Construction Co., Raleigh, N.C.||-36%|
|4. Swinerton, San Francisco||28%||4. JPI, Irving, Texas||-32%|
|5. The Haskell Co., Jacksonville, Fla.||20%||5. Hoffman Corp., Portland, Ore.||-28%|
|6. Hensel Phelps, Greeley, Colo.||18%||6. The Beck Group, Dallas||-28%|
|7. Webcor Builders, San Mateo, Calif.||16%||7. The Whiting-Turner Contracting Co., Baltimore||-26%|
|8. Bovis Lend Lease, New York||15%||8. Hardin Construction Co. LLC, Atlanta||-25%|
|9. James McHugh Const., Chicago||14%||9. Kitchell Corp., Phoenix||-21%|
|10. Manhattan, Houston||13%||10. Lockwood Greene, Spartanburg, S.C.||-17%|