Better Roads Digital Magazine
Issue link: https://read.dmtmag.com/i/85902
HighwayContractor Opportunity Contractors do have some choices this year, says FMI's Hank Harris, which may be accessible with an entrepre- neurial or innovative mindset. Two possibilities in par- ticular that Harris mentions stand out to Better Roads: partnering and unsolicited bidding. "If you have private jobs," Harris asks, "how do you get to the markets where the spending stream is likely to be healthier and get yourself participating? We're not out of the woods in heavy highway. Clients tell us it's very, very tough, but the good ones are getting through it and doing okay. Margins are not good, and there are very sig- nificant challenges. It's tough, but they are finding work and staying in the black. The key is to avoid taking impru- dent risk because you get panicked about your market. Manage your risk and be ready to hit it when things get better, as we think they will. Labor and equipment are the two biggest risks to manage; costs here must be man- aged and controlled. It's blocking and tackling, but that's what isnecessary now. "But also be ready for growth. And opportunity." For example: "There is a lot of partnering opportunity in this industry; some domestic, some with international firms trying to enter the U.S. market. And you can also work for smaller partners," says Harris. "There are some gigantic jobs out there so big that they need more than one bonding company, let alone one contractor." A lot of contractors responding to our survey (48.6 percent) indicate that part- nering is one of the tactics they intend to pursue this year. Harris also sees opportunities in 2012 for companies that approach the market without their usual routines and methods. "Companies all have their own culture; engi- neering firms tend to be analytically oriented and look at how they may project themselves into certain markets." If contracting companies want to respond to private mar- kets, says Harris, their culture in many cases needs to be more market driven. "Companies that do [transportation infrastructure] work are heavy on equipment and heavy on labor, and, by necessity, very operationally driven cultures. Compound that by them trying to be the low bid on any given day, the mindset of the companies can become a little insular and they can think that that is the only way to work. But there are companies that can do a very good job getting out there and making opportunities and getting in the way of opportunities." For example: "We have clients that do unsolicited proposals. Basically that's going, unasked, to a public entity and saying, 'Okay there's been no bids coming from you in while, but you need to do something and you know it, so here's our design-build, design-build-operate, design-co-own, or whatever structure they present, and it would solve your problem.' There are mixed reactions, yes. It's successful in Canada and we are seeing more companies in the United States look into it." An Expert Opinion: Ken Simonson, chief economist, Associated General Contractors of America Construction should finally reverse its five-year slide in 2012. How- ever, the overall increase will be modest and very unevenly distributed among project types. Rental apartment construction may be the biggest winner. By late 2011, rents were rising and vacancy rates falling in nearly every metro- politan area. Permits and starts were up sharply. These indicators virtu- ally guarantee a strong rate of spending on new rental construction in 2012. In contrast, the much larger single-family market appears to have bottomed out, but has yet to post any sure signs of improvement. Private nonresidential construction will be led by power and energy projects; manufacturing plants; and warehouse, distribution, trucking and rail facilities. Hospital and private higher-education construction may also rebound modestly. But the once-large retail and office catego- ries are likely to remain in the doldrums, driven by remodeling rather than new stores, shopping centers or office buildings. Two developments will have a particularly strong influence on the types and locations of construction activity in 2012 and beyond. First, the exploitation of shale-based natural gas and oil formations in Penn- sylvania, eastern Ohio, North Dakota, several parts of Texas and other states is generating demand for construction in those regions and "downstream." Downstream activities include new interstate pipelines and storage facilities, factories that will use the gas as a feedstock or fuel and export terminals. Second, the widening of the Panama Canal is leading ports, distributors, railroads and truckers to improve capacity and efficiency along the East and West Coasts, and also inland destina- tions. Unlike the generally improving private segments, public construction appears headed for a third consecutive year of decline. Federal govern- ment programs that kept some contractors afloat in 2009-2011, such as military base realignment and stimulus projects, have largely ended, and Congress is holding down regular appropriations for both building and infrastructure spending. State tax revenues have been increasing, but not enough to restore funding for most construction. School districts and local governments, which depend heavily on still-shrinking property tax receipts, are cutting construction budgets even more deeply. Combining these pluses and minuses suggests that construction spending will grow enough in 2012 to overcome the 2- to 3-percent decrease expected for 2011 when the year's figures are finalized. But the total will remain as much as 30 percent below the peak reached in 2006. Better Roads January 2012 19