Q&A: Industry Leaders Discuss State of the Market
By Bryce Hubner (03/03/2011)

The first quarter is nearly behind us and 2011 is taking shape. With that in mind, School Construction News recently interviewed executives from industry giants Turner, Gilbane, and McCarthy. We asked each about the industry’s current challenges and trends, and to share news about exciting projects under way.

The panel: Larry Bacher, Vice President for Higher Education at Gilbane Building Co. Bacher, oversees higher education work at each of Gilbane’s 30 offices across the country and currently has $2.6 billion of work under contract.

Joe Jouvenal, project director for McCarthy Building Cos. Southeast Division, is responsible for McCarthy’s regional science and technology projects in higher education.

Denny Humbel, is a vice president at Turner Construction Co. and director of K-12 construction for Turner’s Ohio business unit.

Q: What, are the greatest challenges for your company and the School Construction market in 2011?

Bacher: I think the greatest challenge anyone has in this market is providing financing. There are lots of projects out there wanting to be done: we’re tracking about $11.2 billion worth of higher education projects right now that are wanting to get started, and most are poised to go if you can figure out how the financing will work.

Other challenges — or maybe not challenges, but rather getting used to new way of doing things — have to do with how we all interact with each other right now. Integrated project delivery is changing how we’re all partnering and working together to share awards on projects.

Finally — though I wouldn’t call it a trend anymore, because it’s really become the norm and the standard — I have to mention that on university campuses, projects are absolutely expected to be sustainable.

Almost everybody expects that the project is going to be done LEED Silver. It’s really become the expectation, so all of our people are being trained to navigate these new demands.

Technology is essential, too. No matter what kind of facility — from culinary schools to technology schools — they’re all using a great deal more audio and visual technology, more computers, etc. Most existing school facilities really don’t have the infrastructure to support all the technology people are trying to employ, so particularly on renovation projects, making sure we can integrate those things is a challenge.

Jouvenal: I think across the marketplace most companies will answer this the same way: basically — though there are more projects this year than last — there is generally a lack of projects that can be financed right now. Because of that there’s intense competition. In some cases, I think that this means there are people who are stepping away from what they do best to chase business and industries they may not necessarily be able to deliver in. It means you might be going against people who are not as qualified, and who are being very aggressive with price at the expense of delivering quality.

Also, any of the economic reports you read on the construction industry show that inflation of construction materials have been very, very high the last three or four years. So prices are creeping up as bidding prices stay low, which means that contractors and subcontractors are absorbing that inflation. What that means for us is that we simply need to stay smart and stay within our business plan.

Humbel: Clearly, the biggest challenge is funding and getting support from communities to support bond referendums or bond issues by taxpayers, especially in the recession that we’re in. That’s driving not only Turner but also our peers in the industry to think of ways to assist school districts and help them to be positioned to get their bonds and issues passed. There’s a tremendous backlog of work where master plans have already been completed and yet work is not moving forward because bond issues are not passing. Just in the Ohio K-12 sector right now, there’s literally $4.7 billion of completed master plans that involve 118 school districts, which cannot move forward because local taxpayers have not given the approval to fund the work.

 

Q: The old platitude is that where there’s challenge, there’s also opportunity: In 2011, what are the greatest opportunities for your company and the industry?

Bacher: Of the roughly $11 billion in business that we’re tracking now, about $4 billion of it is classrooms. I would say that a lot of those classrooms are needed because existing spaces cannot accept the educational technology that schools feel is important now. So that’s a huge area of opportunity. There’s another $2 billion that’s all laboratories — both teaching and research laboratories. Also, though it’s down from recent years, I would say there’s a substantial volume of community college work out there — we’re tracking about $1.4 billion worth.

The market has been very subdued, but I think many of us feel that 2011 could be a real turning point. As I talk to our friends and partners who are architects, it seems that there are many institutions doing design and initial project planning. The Architecture Billings Index, put together by the American Institute of Architects, has been in positive territory since about November of last year, which means that architects’ offices are getting busier for the first time in two years. In other words, we’re fairly certain that as 2011 rolls on, some of this need for building construction will come to the market.

Jouvenal: The flip side of [the financing problem] is that there is a lot of pent-up demand. There’s definitely going to be a sort of comeback — not a huge spike, it will be gradual — but the rebound seems like it’s on the way.

One of the other real big opportunities out there is in the federal market. There’s been a decent amount of federal government projects — whether schools or hospitals or whatever — which is great. The downside of those projects is that they can be costly to pursue. Looking forward, the federal government nevertheless has the most projects out there right now of any single client.

Humbel: The new norm, I think, is less federal and state assistance for school infrastructure. Obviously, that puts more burden on the local taxpayer, which, I believe, is going to lead us to some opportunities for public-private partnerships. It’s going to lead us to more Construction Management At-Risk projects and agency contracts, it’s going to lead us to more IPD work, where you partner up with the architects and the owners in a manner to get things funded.

I also think building information modeling is a huge part of the future. That’s literally the designer designing a project in a three-dimensional model that can then be used by the contractors to see the final design product and identify everything from the mechanical and electrical work to the ductwork above the ceiling. I think contractors will take advantage of this and you’ll have more of a technology driven process that will lead to everything being done electronically, which will lead to a lot of prefabrication, which can save everyone money.

Q: What sets you apart from your biggest competitors? Why are you positioned to tackle the remainder of 2011 effectively?

Bacher: I would say what distinguishes us is that we really have a client-service focus. Academic institutions are different from other clients, there are a lot of stakeholders at universities. It’s not just the facilities people that get involved with construction projects. There’s a host of administrative people, financial people, and the faculty are even actively engaged in the design and construction of their buildings. So we’re very cognizant and aware of the process that a client needs to go through to define the process of constructing a building. We try very hard to make sure that the stakeholders are involved appropriately and have input.

Of course, the higher education building market is very diverse. There are many different building types — libraries, laboratories, business facilities, dining facilities, arenas. All of these different types of buildings require different types of technical expertise. One of the things we do very well is grow and develop employees with technical expertise in all of these different areas so that we can service our clients’ needs.

Jouvenal: I think some of the things that set McCarthy apart are that our business model includes self-performing work and that we are — at our core — a builder and not just a broker of construction. We fully understand an owner’s project, and because we do some work ourselves we know how to be more assertive on schedule and quality. To boil it down, we are not paper pushers. We are a company that has been around for almost 150 years, and we are 100 percent employee-owned. You just don’t have this at a lot of companies, you have people working for other people and there’s not as much investment in what they’re doing each day because it’s not affecting them as owners.

Humbel: I think the area that we are focused on, and of course Turner is known as a very good builder, is our total cost of ownership approach. Basically, that means that as we go through the design process we work very closely with our owners in modeling how decisions should be made. It’s no longer acceptable to build a school that is based on a first cost. There are many high-efficiency, sustainable designs that incorporate everything from geothermal to solar energies that may require higher first costs but save money over the life of the building. That means we’ve got to be creative and competent in articulating the value of some things that might be higher first cost to build into their systems, but things that will save money over the life of the building.

Q: What exciting projects are you working on?

Bacher: One project we’re just starting is at the California Polytechnic State University at San Louis Obispo. It’s a new science facility that will be replacing their old science facility and it’s been a long time coming for the college.

It’s a huge deal because a couple years ago — as you probably know — the California legislature cut all funding to state universities by 20 percent and put a freeze on construction. I believe this is the first project that came out of the freeze in the Cal State system. This will be a model of what university science buildings can be going forward. It’s a 195,000-square-foot, $85 million facility. It’s under construction and should finish in 2012.

We’re also building a state-of-the-art nanotechnology research facility at the University of Pennsylvania, a 75,000-square-foot, $51 million building. Construction is just starting and should finish in 2013.

Jouvenal: We’re currently wrapping up a 10-story, 350,000-square-foot lab project at Georgia State University.

Another project we started at the end of 2010 is a specialized laboratory for Georgia Institute of Technology, I can’t really go into any detail about that project at this point, but I can say that it’s exciting. It’s our first project with the school. It’s a very fast-paced project and it’s off to a great start.

We should actually be able to finish it up in the second half of the year. In terms of size, it’s much smaller than what we are doing at Georgia State, but it’s an important step in building a relationship with the Georgia Institute of Technology for us.

We’re also building another science facility for Clayton State University. We’re in pre-construction, and we’re hoping to get started in the fourth quarter of 2011 with the construction. The state cut funding for this by about 25 percent a few months ago, so we had to go back to the drawing board with the university and the design team; despite the challenge, it’s been rewarding because we’ve still found a way to get the best result for the university given the cost limitations.

Humbel: We have two anchor projects, one in Cincinnati and one in Toledo. They’re both public school projects. The Cincinnati project is about $1.2 billion in business and the Toledo project is about $750 million in business.

The exciting thing about K-12, whether it’s a billion-dollar project or something closer to the average of $30-$50 million project, is that it’s really the process that’s exciting. It’s a soup to nuts kind of thing and we don’t look at ourselves as just builders. We really look at ourselves as managers of the process.

Back in the 1990s when we started this work, there was a $35 billion school infrastructure problem in Ohio — crumbling facilities, not enough space — and there’s still about $21 billion worth of school infrastructure that needs to be built, so we’re not even halfway there. We’re managing about 15 percent of the $500 million that the state is spending each year, and there are many more exciting projects still to look forward to.

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