The country's largest commercial construction firms are reaping the rewards of the strong U.S. economy, with nearly 95% of companies reporting a profit last year, according to data gathered for ENR’s recently released Top 400 list.
The 373 companies that submitted information generated a new record of $405 billion in 2018 contracting revenue, a roughly 8% increase over the prior year. As the economy continues an almost 10-year growth streak, contractors see few signs of slowing, ENR reported.
Despite the good news, construction executives are tracking a range of issues that will impact their bottom lines this year, according to presenters during an ENR webinar to announce the list last week. These include staff and labor shortages, rising wages and tariffs. The webinar panel, made up of leaders from three of the country’s biggest firms, explored how their companies are leveraging opportunities and bracing themselves for problems, including a possible economic slowdown. (Click here for a rundown of the list's top firms.)
“People keep glancing in the rearview mirror to see if the recession is gaining on them but few people see anything like that right now,” said moderator Gary Tulacz, ENR senior editor. “Contractors are focused on the opportunities and work that are in front of them.”
The panelists said most U.S. markets are experiencing favorable conditions for construction work, including Los Angeles, San Francisco, New York City, Chicago, Boston and South Florida. To capitalize on the steady flow of work, firms are exploring new ways to manage projects. For instance, Deron Brown, president and COO of PCL Construction, sees public-private partnership jobs taking on more importance this year, but cautioned that they are a double-edged sword.
“It’s one of those situations when owners, subs and consultants have to understand the risks,” he said.
Jay Badame, president and COO of AECOM's Building Construction division, agreed, saying that his company is "extremely cautious" about these types of jobs. “We don’t really see it as an opportunity because of the amount of money you have to put into a deal of this sort,” he said.
Mixed views on IPD
The presenters were divided on their views about integrated project delivery, which blends project teams in order to maximize a project's outcome. Under IPD, the owner, architect and construction firm are aligned by a single contract.
STO Building Group CEO Bob Mullen said his firm is implementing the concept on a project underway at the University of Pennsylvania Health System in Philadelphia. The health system required the project team — made up of STO, Balfour Beatty, Foster+Partners, HDR and others — to incorporate IPD into the design and construction of the $1.5 billion Penn Medicine Pavilion. Due to be completed in 2021, the 1.5 million-square-foot facility will include 500 patient rooms and 47 operating rooms.
To keep in close contact, team members work together in a rented “co-location space” that contains individual workstations, meeting areas and modeling and mock-up rooms, according to STO, formerly known as Structure Tone. The approach has worked well so far, said Mullen.
“We are all party to the same agreement,” he said. “It’s been very successful because the goal was to have everybody moving in the same direction and because success is well defined.”
Mullen said the firm's other customers have taken notice and “are becoming more receptive to delivery methods that are more collaborative and team oriented.”
“These days, you have to be a jack of all trades and a master of all trades.”
President and COO of AECOM's Building Construction division
But PCL's Brown said that although his company offers IPD he doesn’t see it as an emerging trend. “As with [STO's] project, the client has to want it, has to drive it,” he said. “We’re not seeing that with our current client base.”
A focus on health
STO is seeing rapid expansion in the renovation and consolidation of office space, said Mullen. “Our clients are focused on getting more employees into less space these days, but the work for these projects is still fairly robust because of interest in sustainable building and wellness.”
STO’s corporate headquarters building was the first project in New York City to receive certification under the International WELL Building Institute's WELL building standard. Designed by Gensler and opened in 2017, the 82,000-square-foot space earned the Silver designation under the standard by utilizing new and efficient mechanical systems, point-of-source water filters, access to healthy food on site, circadian rhythm lighting, discounts on fitness memberships, sit-stand desks for all employees and the optimization of noise levels.
Mullen said features like air and water quality, light and fitness “add another level of creature comforts for employees.”
While construction costs have escalated over the last two years — in part due to tariffs — none of the presenters has had to cancel a project because of them. They noted that for now they are adding a 2% to 3% escalation clause to long-term projects to help mitigate material and labor costs.
“Escalation is necessary right now and all contractors should be doing it,” said Brown.
Finding labor solutions
With the unemployment rate at historic lows in most areas of the country, keeping workers and subs happy is job No. 1 for most construction executives. (Click here to see how some top firms are using technology to keep employees safe and productive.)
“I can’t afford to lose one person," said Badame. "If I do, history has shown that it costs me $250,000 to replace that person in terms of recruitment and training. I have to make sure my competitors aren’t stealing my people.”
The executives offered creative ways to keep top employees happy and focused. Both AECOM and PCL have profit-sharing plans even though AECOM is not employee owned. PCL is employee owned, said Brown, and employees have the option to buy into the company. “People share in the success of the company, they stay with us and see it as a great benefit,” he said.
Retaining its culture as a family-owned business helps to keep STO’s 2,300 employees happy. Workers at the privately owned firm receive shares in the company as rewards for special accomplishments, Mullen said. They are also given opportunities for continuing education and training at institutions like Columbia University and the University of Oxford.
“We invest heavily in training our talent even though there’s a risk that people will leave,” he said. “There’s greater risk in not training them.”
Future-proofing for a downturn
The executives said that despite the current economic health of the country, they are on the lookout for signs of a slowdown. “We speak to a lot of architects and if they’re not drawing anything today it means that within six months we have to start turning over different rocks” to find more jobs, said Badame. He is also tracking the health of the residential market to see if a downturn is on the horizon.
Should demand for construction decline, the executives said they plan to divert employees from slow markets to others in the U.S. or abroad and stay strong through diversification. “If you’re a diverse company in different markets and different industries you can survive,” said Brown.
If a downturn does hit, the companies will rely on tactics that got them through the last recession such as ramping up acquisitions and launching internal projects that can keep top staff engaged. For instance, during the Great Recession STO implemented a new accounting system.
Summed up Badame: “These days, you have to be a jack of all trades and a master of all trades."