The Garrison Report - November 2008

"It’s a Time of Opportunity"

I doubt there is anyone who is not aware of the worldwide financial crisis. However, Peter Drucker would argue that crisis is the time of opportunities. Therefore, I would venture to say the construction industry is in the middle of an outstanding opportunity.

Regardless of whether your company works primarily in the private or public sector, there are outstanding opportunities. While not all potential clients will agree on how contractors can best pursue this opportunity, there are certainly more than enough for the smart contractors. Studies have indicated that 17 percent of consumers care about only value; in other words, they simply want the best. In contrast, 27 percent are totally priced focused.

These prospects make terrible clients because they are never loyal to the contractor; they are loyal to only the low price. These are the nonbelievers, and smart contractors try to ignore this group because they offer little or no opportunities. This leaves 56 percent in the middle who will buy based on price or value. They base their decisions on price when they can’t differentiate the value. Therefore, it is up to the contractor to clearly identify the value it delivers that sets it apart from its competitors. When contractors do this, potentially 73 percent of prospects will buy based on value.

The key to selling value is to understand which clients are value driven. One roofing contractor in Wyoming and Colorado gets 90-plus percent of his bids accepted, and he is not the areas’ lowest-priced contractor. If the prospect focuses on price, then this contractor doesn’t waste its time turning in a bid. This approach isn’t hurting the contractor’s volume; in fact he is actually forced to turn down work because he can’t handle all that it is offered.

However, opportunity doesn’t come in the form of a gift from the government. Unfortunately, too many companies today are looking for handouts from the government. It is easy to understand that people want to resolve the problems as quickly as possible. Unfortunately, government aid is like losing weight using liposuction instead of diet and exercise. While liposuction will get you to thinned down faster, unless your eating and exercising habits change, liposuction will produce only a temporary solution. Therefore, if the industry doesn’t address its underlying problems, the government aid will not solve the problems because the apparent need for change will be masked. It’s time the industry addresses its underlying problems in order to trim down and make itself more profitable.

I’m not suggesting the government doesn’t have a role in the process. In the infrastructure area, people talk about private-public partnerships. What the industry needs is greater collaboration among all the stakeholders, but there is a difference between collaboration and handouts or bailouts! For example, in a recent interview with Steve Forbes, he said that instead of a tax credit of up $22,000 for new home buyers, the government should use Freddy Mac and Fanny Mae to reduce mortgage rates to approximately 4 percent, which would do a better job of stimulating the housing market.

In the commercial niche, the government must provide a stable banking industry so funds are available to borrow. The construction industry can’t survive very long without capital. However, the industry must work with owners to reduce the cost of construction. It has been estimated that up to 40 percent of construction costs are wasted. It’s not that someone is ripping someone off; it’s just that the process is not efficient. In contrast, when Toyota shifted from an assembly-line approach to lean manufacturing, they doubled productivity. The construction industry needs a similar revolution.

Ken Simonson, AGC’s chief economist, reported in mid November, 2008 that the inflation rate from 2003 to 2008 for all goods was 18 percent, while it was 41 percent in construction. This was due in part to a rapid increase in commodity prices that are impacted by worldwide demand. Many goods are produced in cheaper labor markets, allowing decreases in labor costs to offset materials cost increases. In construction this isn’t possible since the labor must be done in the United States. This means the only way to offset the rapidly increasing materials price increases is through greater efficiency and productivity.

Infrastructure contractors need to find ways to assist their government partners. It was recently reported that 31 states are in the red. Maryland and Virginia have already reported layoffs and reductions in their capital infrastructure budgets. Contractors must work with government agencies to reduce the cost so available funds accomplish more. They have to accept the reality that they need to help them find new sources of funds. It’s time government and the construction industry accepted the idea that public-private partnerships will be critical to our nation’s future.

Some argue that a large infusion of funds from the federal government as promised by President-elect Obama will take at least 18 months to ramp up. I don’t agree. In Minneapolis they replaced the St. Anthony Falls bridge in 13.5 months from the date of its collapse. Of course, rapid schedules like this aren’t possible on every project, but this example clearly demonstrates it doesn’t take 18 months to ramp up. When I asked Jay Hietpas, MNDOT’s manager of design-build, why they went with a design-build approach, he responded, “Because if we had used the conventional design-bid-build approach, we would have been going out for bids when we opened the bridge.” Obviously, work will need to be phased. Contractors working on large projects have a backlog, but the design funnel has already started to dry up, so starting new projects would provide work for the designers and keep contractors busy when current projects wind down. Also, smaller projects certainly don’t need 18 months to get started, and contractors that work on smaller projects have already been impacted by the crisis.

Unleashing the industry’s forces on new sources of energy would also provide opportunities. We need to explore all areas of energy development: more oil wells, more nuclear power plants, and all types of renewable energy sources. Those with expertise in these areas need to step forward with solutions.

Overall, the future of the construction industry is bright. As long as the population continues to grow, the demand for construction will remain strong, not to mention the continuous need for replacement of existing facilities as they wear out. Opportunities will be outstanding for contractors and designers that step up to the table with solutions—not just for them, but for the nation, their community, and their clients. The industry must escape the confrontational approach to business that has been so prevalent throughout the industry and begin using its vast resources of knowledge to offer solutions facing the nation. The American public desperately wants solutions, not more self-serving performances.

I’m not suggesting the industry forfeit profits. In fact, I think the industry needs to increase its profit margins so it can invest in technology and developing its people to meet the challenges of the 21st century. I’m sure Flatiron-Manson made an outstanding profit on the I 35W bridge, but no one is complaining since their aggressive schedule saved the community more than the cost of the entire construction of the bridge.

The opportunities are there. The advantage of the current crisis is that it will force government agencies and private clients to look for new solutions. Our industry has been known for thousands of years for some amazing projects; the pyramids, the great cathedrals of Europe, the Great Wall of China and Hoover Dam are just a few. It’s time as an industry and as individuals we step up and provide solutions, not only for innovative structures, but for innovative construction processes. Those that do will see their fortunes rise. Instead of just being the second largest industry in the United States, it’s time we became the best industry.