Building & Construction Roundtable
- David Adkins, Eriks/EVCO
- Mike Alter, Kilgore Companies
- Jon Burbidge, Okland Construction
- John Cameron, Cameron Construction
- Paul Campbell, Wheeler Machinery
- Scott DeGraffenried, Holland & Hart
- John Fortuna, Jacobsen Construction
- Troy Gregory, Hunt Electric
- Paul Hammond, Jones Excavating
- Dave Hogan, Wadman Corporation
- Rob Moore, Big D Construction
- Davis Mullholand, CCI Mechanical
- Scott Okelberry, W.W. Clyde & Company
- Alan Rindlisbacher, Layton Construction
- David Tempest, Tempest Enterprises
- Carl Tippets, Jacobsen Construction
- John Tripi, Ames Construction
- Garrett Walker, Holland & Hart
- Philip Walter, Moreton & Company
- Guy Wollam, Wollam Construction
Of all the challenges the construction industry has faced, the difficulties that come along with a robust economy are probably the easiest to swallow. Here, industry leaders talk about those challenges, from labor shortages to over-committed subcontractors to an unleashed wave of pent-up demand in the market. With the economy humming smoothly, how long do construction veterans think the good times will continue?
A special thank you to Rich Thorn, president and CEO of Associated General Contractors, for moderating the discussion.
What is the state of the construction industry in Utah? What are you seeing from your particular segments of the industry?
MOORE: In the commercial market and a little bit of the industrial, we have probably some of the best backlog we’ve seen in the history of our companies. It’s very different from two or three years ago, when we were wondering where the next deal was coming from and doing leg and arm wrestles to try to get the deal. Today we are seeing some very, very nice projects throughout the Western U.S. It’s more backlog than we have seen in a long time.
CAMERON: We have picked up a number of accounts and, for the first time in our whole existence, we are working in probably eight states right now. It seems like 80 percent of our work is out of state.
HOGAN: The retail market seems strong. We do a lot of grocery business and that is strong with Kroger and WalMart. They have pretty aggressive plans to build and keep going forward. We backed off a little on the remodel and started to actually do a lot of ground-up things.
BURBIDGE: If you scan up and down the Wasatch Front, you are seeing a lot of projects under construction right now. Intermountain has a lot of projects that are out currently—a couple of major projects down in the St. George market as well as up here in the northern Utah area.
In the private sector, development is booming. There’s millions of square feet of new office that are surrounding us as we come around the Point of the Mountain and on up into the northern Utah area. In preconstruction, we are seeing a lot of activity across market sectors. It’s kind of surprising. All of a sudden there’s more and more and more projects that we are pursuing.
RINDLISBACHER: It’s good times, maybe the best of times. Maybe a little bit turbulent—in a good way. The recession challenged every one of us to go find work, and a number of us are finding more or as much success outside of the state. We are simply growing our markets in other states around the country, which is good for all of us as we spread that wealth and find opportunities which best suit us.
FORTUNA: There was a lot of pent-up demand in the recession. People couldn’t get loans to get their projects off the ground. But the demand was there and the need was there. This year has been the release of that pent-up demand, and people are building. They are building a lot and building quickly. Hopefully it will last.
WOLLAM: As an industrial contractor, I’m a little bit more pessimistic. The commodities, whether it be copper, coal, gold, silver, magnesium, oil and gas, all those commodities are down. And when they are down, the capital expenditure projects from these clients are down. We work in multiple states and we see it consistently.
MULLHOLAND: We are busy in commercial, in data, and food and distribution. Slower in industrial. But we are in a position where we are managing our backlog. We are being selective of the projects we are going after. We are finally in a position where we can look at the projects and make sure they are projects that fit within our strongest capability and where we can really help the client succeed.
HAMMOND: We have been reaping the rewards of all the positive things that have been happening with the general contractors, particularly in three sectors: higher ed, tech and health. The challenge now is diversifying and making sure that, as we see opportunities to grow, we are taking advantage of those things.
CAMPBELL: It’s a mixed bag for us. When you look at commercial and industrial, it’s booming. All you have to do is drive up and down I-15 to see that. Get into mining and energy development, and it’s flat on its back because of commodities prices.
Hopefully we have some infrastructure development as we go into 2016, with the highway bill. But you get out of the commercial industrial space, even housing still isn’t back to average when you look at housing starts. So it seems that the commercial/industrial is the bright spot right now. Other sectors are really struggling.
Let’s shift gears to the civil side. What are you seeing on the civil side?
ALTER: Our revenue has been up substantially this last year. We have a reasonable backlog going into next year. In our industry, although it seems like there’s quite a bit of work going on, our margins have still been pretty thin. In civil work, with pipe and earth work and aggregates and concrete and asphalt, there’s a lot of companies here in the valley that have excess capacity. And we are one of those. Because of that, it seems like our margins haven’t ramped up like I thought they would. Although the work seems plentiful, it seems pretty aggressive from a market standpoint.
TRIPI: On the heavy civil side, particularly on oil and gas construction, we have had some pretty huge projects cancel last year. One at the beginning of this year. The mining sector is pretty much status quo downturn, nothing really big on the table.
But on the flip side, we have a big airport we are working on and getting ready to start in January. So there’s some new opportunity at the airport with the big program they have got going on.
On the highway side, UDOT’s budgets are pretty well fixed on what they are spending, and they have got a good plan for what they are doing in the future. Some added bonding to that program would help out a lot of contractors, because in our world there’s excess capacity for heavy civil work in the state.
OKELBERRY: There seems to be an OK amount of work. It’s not as bad as it’s ever been but it’s not as great as it’s ever been, either. UDOT doesn’t have some of the larger mega-projects out right now. They have a few medium-size projects that help a little bit. But there’s a strong overcapacity in the market, I would say, compared to the supply right now.
In the civil industry, we have a regular supply of out-of-state competitors, either through trying to bid on public projects but also for acquisition. You have seen over a number of years an ongoing acquisition of local companies by larger companies. And that causes some pressure on pricing and capacity because they want to pick up a business and increase its size and volume.
TEMPEST: I came into this work in 1989 with a four-generation company. So we know to be prepared for the ups and the downs. And we saw our down in my short history of 26, 27 years. We learned some great lessons during that downturn. And I’m enjoying the OK pace, the steady pace. It feels responsible.
wWe have had a lot of older guys retire who we leaned on for many years. And this decent pace has allowed us to get in and train some young talent to step up and become leaders.
ADKINS: The one thing that impresses me about today’s economy and our growth in the commercial and industrial side of construction is it indicates some long-term stability for us as a state as we move into the future.
Pre-2009, I would say 20 to 25 percent of our business was with small contractors with the residential boom. Now that’s down to about 8 percent of our business. What that indicates to me is that this group here is strengthening the infrastructure for a more sustainable long-term period.
Echoing what we’ve talked about with the oil and gas and drilling, I heard somebody say a couple weeks ago, “The last person in Vernal, please turn off the lights.” We are certainly seeing a lot continuing issues in that sector. The fields out in Echo and the coal mines up in Price—those are areas where we have to really look at diversification, getting into new product lines to be able to maintain the revenues and the profitability that we enjoyed pre 2009.
WALTER: All of us in this room have benefitted from the great stability of the Utah economy. There’s always been a significantly large project going on that has helped temper those ups and downs: the LDS Conference Center, the reconstruction of I-15, City Creek, all the work for the Olympics, the State Capitol, NSA Center, the airport, hospitals. Now we will be talking about the prison. Those mega-projects have really helped all of us and diversified the economy.
What is our greatest challenge? And how do we as an industry plan to address the challenge?
CAMPBELL: Skilled labor will be the biggest challenge—even just operatives, those you can bring off the street and put in the machine and have them do the kind of work that meets your quality and safety expectations. Lots of our customers tell us they would expand and buy more equipment if they could find operators to put in the seats.
CAMPBELL: Right now skilled labor is constricting our ability to do more work. We are having to go out and actively recruit, get the technical schools engaged, and find the people that can do the kind of technical work that we have to perform.
One thing that’s been interesting is the impact that technology is having on skilled positions. If you look at a motor grader from four years ago, it’s now an entirely different animal. A blade hand was a premium skilled position. Today, you put someone in the seat and the machine will do the work for you. Technology is taking the place where once skilled labor was.
So the vacuum that is being created by lack of skilled labor, technology is rushing in to take that place. When you look at the number of people employed in construction at the peak, we are off 20 percent. Twenty percent of the workers we had in 2007 are just gone. They have left the industry. So the challenge is how fast the technology takes their place or helps supplement that lack of skilled workers.
TRIPI: Ten, 15 years ago, we had a lot of high school kids coming into our office looking for jobs. Now we see a downturn in that. We don’t see a lot of applicants. It seems a lot of high schools are not promoting our industry. So we need to promote our industry in the high schools. Doing so will help us develop our workforce.
For example, 65 operators are going to retire from the union this year. There’s 13 trained apprentices that are going to be journeymen. So we are seeing a big change in that marketplace, because you have people retiring and nobody is coming back into it.
GREGORY: As an industry, we have got to be on top of our game of educating not only the high school kids, but their parents about what a good career path they can have in the construction industry. We put a lot of focus into this over the last three, four years and it’s bearing a lot of fruit. When we spend time with these kids and get in front of their parents and explain what the career path is and what they can do, it’s eye-opening to them. I don’t think they looked at it as a good solution for their children to have a good healthy career path.
A few years ago people were just happy to have a job. Now they are looking for an opportunity where they can grow. They look for a company that is going to invest in their future, give them a career path, help train and educate them. We try to excite them, too, with some of the newer technologies that we are using. Flip that around and use that to excite the youth to want to come do that job.
OKELBERRY: On the owner, designer, engineer, architect side, we see some of the same things. Where they are struggling with skilled labor and the quality of workforce, we start to see more challenges with poor designs. We see unskilled owner’s representatives who really add to the challenge that we have, because when you are working for somebody who doesn’t know what you are trying to build and how to resolve challenges, it becomes really difficult. And that puts pressure on owner/contractor relationships at times.
MOORE: Utah has more projects under construction right now and in front of us than I can remember in the history of my career. I’m talking in the $2 billion-plus range of projects. The skilled workforce is an issue, obviously. But for us, the biggest pressure is: are your opportunities overriding your talent with project managers and superintendents, the really skilled guys?
There’s many folks in the room that are working hard to bring folks into this marketplace. And you really can’t keep tapping the same well over and over again unless we are robbing people from each other. We are having to look out of state, from the East Coast to the West Coast, for talent.
It’s going to be really interesting, for the next three to five years, to see where we get leadership and talent. The superintendents are aging, they are getting grey stuff on them. And those opportunities, you just have to find folks that can backfill. And that’s difficult. Senior level management that can really get in front of our customers weighs on my mind, and making sure you are making your promises and keeping them. That’s a big thing for all of us—where do we find that next generation of leadership? And is there enough here to go around?
Is there anybody here that has not given their labor force a raise in the last year? We have been hanging on to our folks and provided incredible benefits in this industry, trying to attract folks into our business. So we are finally up. I would venture to say that everyone in this room has at least a 10 to 20 percent increase in their workforce.
From a worker’s perspective, the abundance of work is there. And it’s there at a very, very competitive wage that should attract young talent to this business. And going into the management side, we are paying six digits going into management folks. That’s pretty incredible. And our industry sometimes is looked at as a bunch of dumb contractors, right?
CAMERON: I’ve been on the Salt Lake Community College’s construction committee for a number of years. We’ve realized that high school counselors have a hard time understanding that construction has a real benefit to the economy. You take a person that goes after a four-year degree: They can come into the construction business with maybe two years of education in a related subject and be able to, if they have the ability, get in and earn a good living. The big problem we found is most counselors don’t have any understanding of what it’s like to be in the construction industry.
The people we find are best to talk to are the instructors that are doing the homes, the cabinetry or whatever, mainly because they get the kids, and the kids start relating to them. And we, as an industry, need to step in and assist them in promoting the programs that are offered, whether it be with the tech schools or Salt Lake Community College or UVU. I have been beating my head against the wall trying to talk to the high schools, trying to figure out what to do to get them to send kids our way.
TEMPEST: College isn’t the answer for everybody. A welder these days is making $100,000 a year. If we can communicate that, the market tends to take care of itself. Kids are smart and they are going to recognize there are great opportunities in the construction field. And I believe that pendulum will swing back in our direction. There are some great young people out there looking for great careers, and we are going to get our share of them as they recognize that this is an industry they can foster a career in.
How long are we going to expect to see the optimism? We have heard some sectors are down a little bit. Are we just going to keep plowing along with smiles on our faces, or is it going to last a year, six months, two years?
TIPPETS: I think a lot of the euphoria we feel is related to interest rates. I worry all the time. Everybody is racing to get projects done while interest is low. If interest rates go up, that hugely impacts the private sector, where it automatically starts to change a lot of that demand.
MOORE: How long did we think in 2007 or 2008 we were going to go through this? How many sitting in this room said, “Golly, in two years we will come out. In three years, we are coming out. In four years we might be going out of this,” right? How long was it? A long time.
RINDLISBACHER: It was that three-year rolling cycle. Every year was three more years. The next year it was three years. The next year it was three years.
MOORE: So my crystal ball says it is a nice ride for three to five years.
MULLHOLAND: When we talk to our peer group on the coasts, and we tend to trail our peer group a little bit, it feels like it is at least a two- to three-year run to go. As a specialty contractor, I can’t see much further than that. My eyes don’t go that far.
CAMPBELL: We are a bit of an island on an island. When you look at the global economy and what’s going on in Latin America, China, Europe, they are all struggling. The reason commodity prices are where they are is because they are really struggling. The dollar is very strong. Our ability to export is impacted. We felt it in our industry, and equipment manufacturers are really hurting right now because the global demand is so soft, particularly in mining and energy.
So when you look at a small piece on a big island, the U.S. is doing OK. But it’s based on consumer spending and it’s based on the fact that commodity prices made people feel better about themselves, and our gross domestic product is driven by consumer spending. So it’s a mixed bag. And mixed bags tend to make people nervous. As long as we keep producing jobs, as long as interest rates don’t go through the roof—and we don’t expect that to happen but you know the Feds are saber rattling—we think it will go for a little while. We are cautiously optimistic but keeping our powder dry at the same time.
If you go in and build a ton of fixed costs and have infrastructure in your business right now, that may come back to haunt you. We have had a long run, seven years without a recession. It hasn’t been a great seven years, but if we can get two to three years out of this cycle that would be great. But at the same time, we need commodity prices and everything else to start kicking in. Kennecott and big energy producers put a lot of money into this economy and when they are struggling, it affects things down the road.
ALTER: Bonding companies have been extremely profitable during this recession. That was kind of a surprise, truly. The insurance rates are down. People are aggressive, they are looking for business, so their attitudes are that things are looking very positive for the next several years. That’s what I’m feeling.
How concerned are you, from a general contractor’s point of view, about your subcontractors getting stretched too thin?
WOLLAM: We are creatures of habit and when we have two or three subcontractors that have worked for us in the past, we go the extra mile to work with those guys again. Loyalty is huge, and we try to be loyal to our subs. And we want them to be successful. We do not want them to lose money on our jobs.
ALTER: We actually track our subcontractors and how much work they have backlogged with us. We do that just to see how busy we are keeping them. And then we will interact with them. I might take a guy to lunch just to see how he is doing with his backlog and if we have scheduling issues. All of us in this room know our success is vitally important with respect to suppliers and subcontractors. In order for us to win as a whole, we have to have a subcontractor that is successful on the project as well. Often internally we are fighting over a guy that might be on two of our projects. But it’s important that we recognize our success is dependent on theirs and we help manage that and not stretch them to the limits that they can’t perform. And all of us have had situations where, in some cases, we maybe helped them fail.
MOORE: Sometimes, when there’s a downturn and then opportunities start coming up again, the subcontractors haven’t quite prepared themselves for that next level. They may not have the estimating team, they may not have superintendents, they may not have the labor to really put on the projects. They price a lot of projects, they are awarded many projects, and they can’t perform.
We are doing an enormous amount of prequalification. It’s been a real concern of ours to make sure we are choosing the right subcontractors. The past year we had many subcontractors in landscape, painting, some electricians, that did not have the manpower to put on the project. It puts an enormous amount of pressure on schedules.
One of our concerns at Big D is are we attracting the subs that want to work with us? Are we doing the right things that allow them to make a profit? There’s only a certain amount of folks in the labor market that can work on our projects. And we have to be real careful. Guys aren’t ready to go into a big boom.
TIPPETS: When you start dealing with B-tier subs, they don’t necessarily have the sophistication to manage their backlog at the level they should. You can get to the point where you can consume their backlog; or if you don’t, they are going to find work someplace else and you are competing with that job. So do we compete with ourselves or do we compete with our competition?
If you’ve got a problem subcontractor, you’ve got three choices: You can go with the status quo and ride it out and get the consequences of that; you can replace them; or you can supplement them. Supplementing them sometimes becomes a better way of trying to manage that. And they usually are amenable to supplementation. They know they are behind and they don’t want the pressure and they don’t want to work the overtime.
HOGAN: For a contract over a certain size, we want to bring our superintendent in, and their foreman, and we want to have an interview before they go on the job site. We want to see how they are going to collaborate. How are those two people going to work together? We have eliminated quite a few subcontractors by having that meeting prior to the job starting.
WALTER: The biggest change I have seen over the last 15 years is general contractors hiring people to specifically vet and pre-qualify subcontractors. This process is a remarkable change and involves obtaining financial statements of subcontractors, doing pre-qualifications, calling references, and really sitting down and having those planning meetings ahead of time.
THORN: Have there been a lot of surety claims?
WALTER: A lot of chasing after money claims, where the subcontractors are not performing, they have been supplemented or they have defaulted on the jobs, but yet they are making claims against the general builder’s payment bonds and creating a nuisance and a problem for everyone. They are chasing after money that they don’t deserve, and they are just creating havoc.
DEGRAFFENRIED: On the legal side, where I often get involved, it’s either on the supplementation side or the termination side. And inevitably what comes along with that are back-charges against your subcontractors, right? It all comes down to communication with your subcontractors. If you intend to supplement or terminate them, if you think you are OK to supplement them unilaterally, without that proper communication, and you can rely on your back-charges and the evidence you have to assert those back-charges, you are destined for litigation. There’s no two ways about it. You’re going to head down that litigation path and that’s going to cost you time. And there’s also the hidden cost of litigation: pulling your project managers off the job so they can go through depositions and work with your attorney and so on. So I just emphasize the communication at that supplementation and/or termination phase. Negotiate with them as best you can. Work that out up front, because when you get into that back-charge phase where there hasn’t been a meeting of the minds, you are in for a fight.
HAMMOND: Everything that everybody is saying as a general, we would agree with as a subcontractor. We frankly try to vet the contractors ourselves, as well. We try to approach a relationship in a way that we have similar cultures. That way everything is taken care of up front. We have seen over the last six months some circumstances where some of the contractors are stretched so thin and so broadly that we have seen three separate superintendents just going from one job to the next, just trying to block and tackle.
MULLHOLAND: We love the prequalification process, and we certainly encourage it. Something we try to talk about with our clients is labor projections on projects. We manage our backlog according to our labor. So we continuously have a track of, “When we’ve peaked, how many guys do we have? And how many guys do we have today? Where do we think we will be three, six, nine, 12 months from now?” When you look at that graph, it makes it obvious where you can take on work and where you can’t. And the sophisticated specialty contractors have the ability to do that. And that’s really it—not whether you are going to do $60 million or $20 million this year. It’s whether you are going to have 100 guys or 300 guys working for you at one time.
When you look at that, we are still at two-thirds of the workforce that we had seven years ago. Yeah, we’re busy, but we’re not even close to it when it comes to labor, without reducing any of our staff over the last seven years.
HAMMOND: Whether we are working for a large contractor or a small one, there may be an emergency. And we feel great that there’s a trust factor that individuals can call us, “We’ve got this problem. Can you be there tomorrow?” And the reason we can be there tomorrow is we have gone through the vetting process, that trust factor. We use that word all the time.
We are trying to transition so that most of the information, most of the trust factor is built at the beginning as opposed to finding it out after the fact. Nothing screws up a great conversation like the facts. We don’t want to find out what the facts are at the end as opposed to the beginning.
Are there any areas you’re worried about as far as product availability or pricing? Are you seeing any challenges from a supply side to help you run your businesses?
MOORE: There’s a lot of office product under construction right now. There’s a lot of high-rise product. A lot of the glass companies closed shop during the recession. Not just the installers but the suppliers of glass. That one is on our mind a lot, and we watch it very, very carefully.
We haven’t talked about commodity pricing much. We’re not seeing large increases in steel or in a lot of the commodities that owners should be concerned about as far as, “Should I move forward with my project or not? Is it going to cost more or not?” Ready-mix concrete is pretty stable, and rebar and structural steel is pretty stable. As we go into the future, we’re not seeing a big price spike anywhere. Even with the demand from the large projects out there right now, we’re not seeing any spikes.
GREGORY: Mining and related industries I would say are going to be down for three to four years. A lot of that ties back to China and its economy. For us copper, metal and oil products, those are going to stay pretty consistent. All the other products, fixtures and things like that, have been pretty steady. So if you are guessing, we will be three to five years good on the economy.
ADKINS: This is a big battle for distributors such as me, because the manufacturers of a lot of these products, a lot of our rubber products, are continuing to pass along price increases. The major rubber manufacturer for us is trying to pass along a 5.5 percent increase in rubber. And we are in constant battles with these manufacturers to keep them in check, knowing that their raw materials, and a lot of their commodity products, the pricing is very favorable.