Industry Outlook: Construction
Utah’s construction industry is faced with the challenge of plentiful work with no sign of slowing. Industry leaders discuss the hurdles that come with too much of a good thing—labor shortages, price increases and subcontractor woes—as well as their outlook for the future.
Keith Buswell, Wadman Construction
Jonathan Campbell, Wheeler Machinery
Dallis Christensen, Layton Construction
Scott DeGraffenried, Holland & Hart, LLP
Jim Gramoll, Gramoll Construction
Troy Gregory, Hunt Electric
Joe Hurst, Tri Hurst Construction
Jason Kilgore, Kilgore Companies
Jason Klaumann, Granite Construction
Mike Kurz, Stake Parson Construction
Rob Moore, Big-D Construction
Thomas Morgan, Morgan Asphalt
Brett Nielsen, Whitaker Construction
Matt Rich, Jacobsen Construction
Travis Richardson, Harris Mechanical
Nathan Schellenberg, Geneva Rock Products
Jim Slade, Komatsu Equipment
Doug Snow, Beehive Insurance Agency
Brandon Squire, Ralph L. Wadsworth Construction
David Tempest, Tempest Enterprises
A special thank you to Richard Thorn, president and CEO of the Associated General Contractors of Utah, for moderating the discussion.
I have heard it said it’s a good time to be in the construction industry. Is it really?
MOORE: We are moving into a market that’s pretty robust again. It seems like the backlog of work is very good right now. There are a lot of mega projects that many of us are involved in. Those mega projects should be a good baseline to take the construction industry through several years of pretty solid growth.
HURST: The rural areas generally lag a year or two behind what happens on the Wasatch Front. So we can look up here as a barometer for what we can expect. We were a little slower going into that 2008/2009 recession. But it’s coming back. It’s just unreal what’s going on in Moab with tourism industries. We are seeing some of that drift down into San Juan County. So we are very optimistic.
SNOW: It’s a strong backlog, and the balance sheets have been repaired among contractors from the great recession. I see healthy backlogs going into 2018, and hopefully that momentum will continue.
KILGORE: We’ve finally got this nice uptick from the low of the recession. And as we have got a gradual growth over the last several years, it really is sustainable. The highway stuff is behind a little from the residential and the commercial. Our residential side is going crazy. And the amount of ready mix we are delivering on a daily basis is at record highs.
SCHELLENBERG: The public funding is still looking pretty good. It’s not risen as far as the private funding. But UDOT has good plans, good funding that seems to be on a sustainable growth pattern. And even the cities and counties are catching up on work that needed to be done. But not overdone. I don’t think it’s heated up too much to where it is becoming a problem.
Are we in a bubble? I’m hearing “no end in sight.” I’m hearing “great backlog.” So “bubble” shouldn’t be part of our vocabulary; is that correct?
MOORE: I don’t think there’s too much overbuilding. Right now we have a lot of work in front of us. But we have to replenish what we work off every month. You’ve always got to be working it off, and then you always have to be bringing it back on again.
We have some great contractors in this Wasatch Front area especially. Both vertical and horizontal. And I think, “Will this be sustainable?” I see it getting to a point and leveling off a bit and hopefully easing a bit. I just don’t think, in my opinion, we are going to have a large increase.
NIELSEN: For the utility infrastructure, we are seeing probably a follow up to the mega projects that were described. You build the projects, you have to be able to service them. One project in particular, the prison, is creating quite a bit of upgrades to just the utilities that are needed to service that facility and the growth that’s happening out there. There’s several other areas that have massive sewer treatment plant upgrades.
One other trend I’m seeing is alternative delivery. It seems like it is starting to come into the utility segment on mostly the larger projects that the owner is looking to partner up with the contractors. And it’s bringing some fairly large projects our way.
KLAUMANN: As the vertical industry leads construction and residential, there’s a demand for infrastructure. And those of us that live on the highways look forward to the fact that there’s a boom on vertical and mega projects, because at some point it will require infrastructure to be built, whether it’s piping or highways to get to those facilities. So heavy civil is lagging slightly, but not much. There’s going to be a high demand.
We also have pretty fiscally responsible legislators. They have done well at funding the work here during down times. I don’t expect to see a huge boom from them, but you know the state legislature will be consistent with funding.
Commodities and oil are raising, and prices are going up, which means the facilities need more work done in them. But as those commodities rise, the cost to do the work is higher so they don’t get as much bang for their buck. So right now is a sweet spot for them because their money is going a long way to get the work done.
KURZ: When you look at the growth that we have seen in the commercial and residential arenas, infrastructure is trailing a little bit. Even though it’s been fairly consistent and our local governments have done a good job of keeping a good, steady flow coming into it. There’s going to be a push on the infrastructure. When you look at the large mega projects, design/builds, lots of different areas along the Wasatch Front that need capacity additions, over the next few years we will see quite a few projects coming out. And we are all going to be busy as we do that. Not to mention we have to maintain the roads we are currently travelling on.
SQUIRE: As far as the heavy civil type of work, we are pretty steady, and that program is slated for several years to be on the same level. The number of projects may be going down because they are larger and larger projects. So it becomes more important to win the bigger projects.
KILGORE: One thing that UDOT has done a good job of is maintenance projects. They have maintained the roads well for a lot of years. But as the population continues to grow, the demand on the roads is going to be higher. Do we have enough money to sustain that maintenance and continue to stay in front of the growth that we see in our state? That’s a big concern that I have. Can we continue to increase our infrastructure so that we don’t have California highways?
MORGAN: We have seen a huge explosion of industrial projects in the last year or two. With that much new product coming online, you would think that vacancy rates would increase. But they have done just the opposite. Even with millions more square feet of product that’s been completed, the occupancy rate continues to climb. As long as that continues, developers will be anxious to build, lenders will be anxious to lend, and we will see more and more product come online until that trend takes a turn and goes the other way. Right now, everybody is just going hard and strong.
NIELSEN: On the heavy civil side, we’ve seen some fairly large projects, a couple in particular that would be considered stressed projects that took a downturn during the recession. And they are coming back online now. So the private money appears to be coming back in. And commercial drives everything—as these things follow along, the growth happens and you have to provide additional facilities and landfills and roads and different things.
BUSWELL: Retail is changing and it will continue to change. Instead of big boxes being built, now we are building warehouses to be able to ship big boxes. But that doesn’t mean retail will go away. We still have people that want to shop and smell and touch and feel. So the mixed-use and the destination places like City Creek that have entertainment and food—those still exist. But industrial warehousing is the growth that is going to support people as they buy commodities that get shipped. That will be a big challenge.
SLADE: Whether it’s vertical or horizontal, it seems to be growing and seems to be a steady growth. We up our inventory and keep adding. We predict next year will be the same. And two years out, actually.
CAMPBELL: We are up this year. This year we will have our highest delivery since before the recession. And we expect the next year will be similar, as well. There’s really not a sector that’s not firing on all cylinders right now.
RICHARDSON: For us, we hang on the coattails of the general contractors a little bit. So it’s good to hear they are thinking the future is going to be nice. Harris Mechanical is a national company. We have a branch in Minnesota that just finished the Viking stadium, and Minnesota was just booming. But for now, Utah is leading the industry for Harris Mechanical in the nation. So it has a positive outlook, and I hope it can sustain it a long time. I keep wondering how much longer can they fill these commercial buildings. But we keep building them and they keep filling them, so it looks good to me.
What are you seeing in the insurance and bonding industry?
SNOW: With respect to bonding, things have been running so red hot, the balance sheets are trying to keep pace with the backlogs. So contractors are trying to find ways to keep their balance sheets strong to be able to support and grow their backlogs. And sureties are trying to find creative ways to mitigate risks associated with those ever-increasing backlogs in such a great economy. So the opportunity for contractors is to work with their brokers and find creative ways to work with their respective surety company or insurance company to control costs and minimize those risks, or mitigate them.
MOORE: The insurance market has changed more in the last two years than I have seen in 42 years, especially in certain market segments—multifamily, for instance. Some of the large insurance companies, the big guys, are just saying, “If it’s a condo or apartments, I just don’t think I want to have that in a portfolio that we want to insure.”
And builders risk is a market that has been hit so hard with so many different things, especially with multifamily. Many large carriers are saying, “No, I don’t want to do that. And oh, by the way, not only do I not want to do it, but even if I did do it I only want maybe a third of that builders risk policy on a large apartment structure.” And then comes CCIP, Contractor Controlled Insurance Policies. That product has been viewed as maybe the way the insurance companies are going to go in the future, at least for companies like ours.
This is a time to be aware of what you can buy and what you can’t buy in the insurance marketplace. And it’s not necessarily that the policies are going up. They are peaking a little bit. But rather, they are being very picky. They have had some big hits in certain types of products. And insurance companies, the large carriers, are being careful right now on what they are going to insure and what they are not.
CHRISTENSEN: Insurance companies are being very careful in certain areas where they have been burned, and certainly residential is one of those. I had a large carrier just recently switch their pendulum so fast on us. They said, “We don’t want to insure anything that has a bed in it, except possibly a prison.” Anything with a bed? That included hospitals, hotels. Now, not everyone is doing that. And we aren’t having major issues finding carriers. But when you have a large player doing things like that, it worries you on what others will follow. They are being very careful in areas where they have had some losses.
SNOW: Particularly with multifamily, the insurance companies are really concerned about construction defect claims gaining traction. We have tried to keep them out of Utah in particular, but in many areas of the country insurance companies struggle with construction defect claims. The changes in the insurance business in terms of the attractiveness of the CCIPs and the OCIPS have been the response of the insurers to try to deal with the contention that arises between generals and subs in the mitigation of risk and claims, particularly when construction defect claims arise. It becomes a monolithic path toward a settlement when it’s under a CCIP or an OCIP arrangement. And it’s helped in the treatment of the claims, versus the old way where you’ve got 15 subs and a general and your owner sitting around a table trying to find a solution to it. This method proceeds a monolithic arrangement to get to a solution.
For the past two years, the number one issue for the AGC board is workforce. There’s a lot of work going on in this area, but where is that future coming from?
GREGORY: Four or five years ago, we put a program together and a team to focus 100 percent on recruiting in high schools and workforce development, and I feel like we have a lot of traction there and we are making good headway. I know the AGC has done a lot for the industry in focusing, putting that same effort into it. But it’s not a silver bullet.
It’s on us as an industry to educate the next generation on what kind of career path they can have within the construction industry, because a lot of teachers and students, and even parents, don’t understand what is available there. The technology that is used today in construction—when you put that in front of some of these younger generations, they get excited about it.
It’s going to be worse next year than it was this year. You’ve got some of these mega projects that aren’t truly staffed yet. That’s going to add pressure. And there’s a lot of work coming up here in the next year or two. So it’s going to take all of us as an industry. It’s not a single person’s problem.
KURZ: So many students enroll in college and don’t finish. We need to make sure they are aware of what a great industry it is. When you think about the volumes that we have all talked about, we are doing as much volume as we were at the peak, with 15 or 20 percent less people. Yes, we are more efficient, but for us to continue to grow and develop on that, we really need to drop people into it and make them understand it.
RICH: It’s one thing to bring people into our companies, and another to keep them. The best job that I have to hire for is the one I don’t have to hire for, because I kept my people. That’s a micro issue, because I need to do that for my company. But we need to do that as an industry, as well. We can do everything we can as an individual company to create an experience for them. What engagement do they feel with my company? What engagement level do they have with my industry? We are not just losing people to competitors. We are losing them to other places and other industries. How do we keep them here?
Focusing on what we can do to provide not just salary increase and bonuses, but an experience, a progress. Fulfillment. Accomplishment. Stability. Those are base core needs that everybody wants. How do we find ways to provide that as companies, as an industry, so they don’t leave, so they stay right where they are and feel a part of something bigger?
MOORE: The message we need to get out there is we pay 5 percent higher than any other market segment. So construction pays great wages. And our benefit programs are robust. Our strategy is really getting the message out every time we can that this construction industry is a great place to take care of your family, it’s a great place for fulfillment.
GREGORY: Another advantage we have in the construction industry is a purpose. We build things. We leave legacy projects behind that you will see for a lot of years. We are trying to put focus into that being a part of it. They are building the skyline and the infrastructure of the place they live and their families are using every day.
GRAMOLL: We are in a robust market. We need the employees and we think about, “How do I keep my employees?” We need to be thinking about that in the down years—having a commitment to our employees in the lean years as well as the good years. And that’s what resonates with them. They know that this company has a commitment to them, and when things turn down we are still going to be taking care of them. That’s where we get loyalty within our organization.
TEMPEST: I had a unique opportunity this year because I wanted to understand at a very up-close level the challenges of our company. And workforce retention, finding new people is something that we were experiencing. So I literally put my boots back on and got my gloves out and dusted off some old hard hats and rain gear, and I spent a day with every single crew in our company. And I was sore. I was reacquainted with Advil. My calluses started coming back. But in the course of a month, I had a new understanding of my company that I didn’t have before. It was one of the most rewarding things I have ever done in my career, and I’m in my 29th year.
BUSWELL: One of the focuses we see throughout our state is the STEM focus on science, technology, engineering and math. Well, what we do in construction applies to all of those things. So somehow we need to sink ourselves into some of the STEM stuff. As people spend time and effort to get people educated for STEM, they need to understand that we can apply those same things in construction. We ought to have STEM with a construction orientation. When we look at the state and the STEM programs out there, we need to say, “Hey, we want to be part of this.”
SCHELLENBERG: One really untapped potential for our industry is women. If you look around this table, most of our companies probably look about the same as this group. And leadership in our company and some of our HR groups have become champions of that. We need to make our companies a place where the atmosphere is more attractive to them, where the flexibility or work/life balance works better.
HURST: Part of the dynamic in rural Utah is we depend heavily on the Wasatch Front, the bigger markets, for a lot of our specialty contractors. We love it when the general contractors are busy, because they leave us alone down there. The other side of that coin is we have a hard time getting subcontractors to come down. They are telling us, “We have all the work we can handle with the crew we have. We are not interested in coming down there.”
Is the subcontractor segment of our industry maxed out now to the point where the primes are saying, “Man, I’m going to have to subperform or do other things,” or, “I’m only going to work for my favorite folks”? Are we seeing that now?
RICHARDSON: Yes. We select who we want to work with and what jobs, because we can’t handle everything.
MOORE: We are spending an enormous amount of time prequalifying our subcontractors. It used to be financially, right? But now we are asking the question like, “Could you really handle this job? What’s your workforce? What projects do you have in front of you?” It’s more robust today than we have ever been in the history of our company. It’s just trying to get subcontractors to look us in the eye and say, “I can really take care of this, and I can really manage your project.”
In the large commercial world it’s just not an option to do what I used to call the buddy bid system. We have to make sure our subcontractors can perform and we have to help them not fail.
KURZ: We function as a subcontractor, as well as a general contractor, so we are in both arenas. And that prequalification—really talking to subs and making sure they have got the manpower—is critical to our success. Because everything has a tight schedule on it. In Utah, we are doing things quicker than most places across the country. So it’s very challenging, and prequalifying is important.
RICH: There has to be an owner education to it, as well. So often we have owners who have a procurement system that doesn’t allow that, and it all goes to the bottom line and to the lowest-dollar sub you’ve got out there. Because I need to hit my bottom line, and I have to hit my pro forma, so you need to take this sub.
We need to educate our owners that there’s a better way to do it, that there’s value in a qualified subcontractor. But the big picture of educating them about the value that goes into qualified subcontractors has to be there, otherwise the insurance companies are still going to be asking those questions. Bonding is still going to be relying on the risk mitigation of having great subcontractors. But if our owners don’t allow it, then our hands are tied anyway.
GREGORY: From a subcontractor perspective, we appreciate hearing that you guys are going to vet out the subcontractor base further down than just on the surface of “can you do this or not.” You have all different sizes of subcontractor bases, and sometimes you’re protecting them and they don’t know it. We have some really good subcontractors who are in a smaller area and maybe don’t have their arms around the amount of work they are taking on or what that is going to look like to them. So I appreciate hearing from you guys that you’re going to help those guys save themselves, right? Because they affect us. We are all working together and tied together. There are some really good subcontractor bases that are a smaller group, but they need that oversight and need that help. We all do, at some point.
GRAMOLL: We certainly want the best contractor that would minimize our risk on the project. In the market we are in, the reality of the situation is that’s not always practical. Troy has a backlog into 2020. I’m sure he and Travis look at projects and say, “I can’t man that project. I can’t propose on that project.” So we are being left on some projects with subcontractors that may not be as good as the ones that you want. So now it becomes a risk analysis. We sit down with the owners and say, “How much risk are we willing to take on this project?” Those subs may not be the best qualified but they may be the best that’s available for the project. And that puts a burden on us as contractors to manage that subcontractor and that risk. And it’s a cost to manage less than well-qualified subcontractors. But it’s a position we get put in when we are in a strong economy.
Is now a good time to be building something?
KLAUMANN: Right now owners are getting competitive prices, so their dollars are going a long ways with the workforce capacity. If we get a material shortage, obviously that will affect that. Prices are on the rise, subcontractors are harder to find—all of that will cause prices to rise. The distance they get out of their dollar will be down. But right now they are getting a lot of benefit for their buck.
MORGAN: Land is becoming expensive and that could have a detrimental effect on projects going forward. People want to build, it’s a good time to build, and they can build relatively inexpensively. But land just keeps skyrocketing. That has long-term effects on residential and commercial development.
RICH: The price of land is going up. But when does it go down? It does sometimes, right, when we get into those big dips. But if you’re looking for an opportunity to build and you are worried about the price of land and you see it go up, if you are going to do something, do it now.