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skillful execution

Quarterly2009 issue 3

THIS QUARTER

Profit Through Execution 4

BY JERRY JACKSON

BUSINESS DEVELOPMENT

Prime Your Backlog for the Recovery 6

BY CYNTHIA PAUL

QUARTERLY INTERVIEW

Managing the Risk: Dan Murphy and Billy Miller of Zurich 10

BY GREGG SCHOPPMAN

Construction Materials Will Hill

Contractors Rick Reese

Engineers & Architects Lou MarinesMatt Godwin

Heavy Highway/Utilities Jay Bowman

International Steve Darnell

Private Equity George Reddin

Manufacturers & Distributors John Hughes

Owner Services Mark Bridgers

Surety Lanny Harer

Business Development Cynthia Paul

Leadership Peter Nielson

Mergers & Acquisitions Stuart Phoenix

Project Delivery Gregg Schoppman

Trade Contractors Randy StutzmanKen Roper

Strategy Briston Blair

Training Ken Wilson

Residential Construction Clark Ellis

CONTACT US AT:[email protected]

Board of Directors

Hank HarrisPresident andManaging Director

Robert (Chip) AndrewsWill HillScott KimplandRon MagnusStuart PhoenixHugh RiceLee SmitherCharles Thomsen

Copyright © 2009 FMI Corporation. All rights reserved. Published since 2003 by FMI Corporation, 5171 Glenwood Ave., Raleigh, North Carolina, 27612.

Printed in the United States of America.

Departmental EditorsPublisher & Senior EditorJerry Jackson

Editor &Project ManagerKelley Chisholm

Group ManagerTom Smith

Graphic DesignerMary Humphrey

Information GraphicsDebby Dunn

FEATURES

Keep Your Marketing and Sales on Track 24In today’s market, the difference between being selected solely on price versus being recognized as adding value, is the difference between making a profit this year and needing to lay off additional staff.

BY CYNTHIA PAUL AND HOYT LOWDER

Job Communication Plans 30The ripple costs of poor communication are difficult to measure but contribute a serious challenge to the construction industry. The time has come to tighten job communications with more formal communication plans.

BY RALPH E. JAMES, PH.D. AND MIKE CLANCY

Improving Construction Productivity 36Being more productive and efficient is no longer optional; it is and will continue to be required both while the economy is in a downturn and when it recovers.

BY SCOTT KIMPLAND AND PHIL WARNER

Is Power Construction the Silver Lining? 52In 2009–2010, the power generation, transmission and distribution construction markets will face the challenges that may shake the confidence of some contractors. However, there are a number of proactive strategies that successful contractors can pursue.

BY MARK BRIDGERS, DAN TRACEY, AND MIKE CHASE

Issue Resolution and Trust on Partnered Projects 66Organizations that are perceived as trusting will hold a distinct competitive advantage within their respective markets.

BY BILL SPRAGINS

Lucky to Work Here 74Leigh Branham, a noted authority and speaker on employee engagement and a member of Advanced Management Institute’s faculty, explores what is needed to re-energize the workforce and get companies heading back to profitability.

BY CYNTHIA PAUL

Incorporating Customer Perceptions in Strategy Development 84A successful competitive strategy includes a plan to increase the number of satisfied and loyal customers in your company’s portfolio.

BY JAY BOWMAN, CHUCK JONES, AND KEVIN HAYNES

Weathering the Storm: Navigating a Turbulent Market 90Despite the economic downturn, now is the time to take advantage of rare opportunities to refine your business model and your business.

BY SCOTT WINSTEAD, PHIL WARNER, AND BRISTON BLAIR

Laying the Foundation: Pre-construction and Lessons Learned 106Home builders face a great challenge to ensure the most profitable construction methods possible.

BY JIM SCHUG AND BRANDON HART

Can Optimism Shift the 2009–2010 Water Supply and Wastewater Market? 120The 2009–2010 water supply and wastewater construction markets will give the pessimist many reasons to worry and the optimist fuel for a sunny disposition.

BY MARK BRIDGERS, DAN TRACEY, AND MIKE CHASE

Dear Reader:

This issue focuses on something never out of fashion in the competitive construction marketplace: skillful execution of the work itself. While commonto hear in all markets, “That SOB is bidding below costs,” the reality is oftenconsiderably different. The rotten competitor may be demonstrating the ability of the low-cost producer to bid profitably at a lower price than the lesser performer. Not all competitors are created equal and even if theywere, competitors don’t stay equal for long. Usually, skillful execution andhigh productivity win the day … and the project.

Key articles underscoring our theme include Jim Shug and Brandon Hart’s,“Laying the Foundation,” which provides lessons learned in squeezing higher productivity from a well-executed pre-construction process. Talent’sattitudes toward management and management’s attitudes toward talent fuelproductivity within any business. AMI’s Leigh Branham gives perspective tothe productivity climate in his interview, “Lucky to Work Here.” Bill Spraginsbuilds upon his experience in years of helping project teams work moreeffectively together and links the climate of trust with the speed of issue resolution in “Issue Resolution and Trust.” Long-time contributor Ralph Jamesand more-recent collaborator Mike Clancy provide a short, punchy piece on “Job Communication Plans” and how that can boost productivity. ScottKimpland and his team have years of experience in helping work be executedsmarter, more productively and at lower cost, as evidenced in their treatiseon “Improving Construction Productivity.”

Not all our articles deal with project execution in this issue. For example, Jay Bowman, Chuck Jones and Kevin Haynes offer tips to improving yourcompetitive strategy development through greater understanding of

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This Quarter: Profit Through Execution

2009 issue 3 FMI QUARTERLY ■ 5

customer perceptions in their commentary, “Incorporating CustomerPerceptions in Strategy Development.” “Prime Your Backlog for the Recovery”is penned by FMI’s intrepid Cynthia Paul, giving our readers tools to refittheir methods for work acquisition. Cynthia joins old hand Hoyt Lowder tochallenge your marketing and sales processes in “Keep Your Marketing andSales on Track.” Frequent contributor Gregg Schoppman engages DanMurphy and Billy Miller of Zurich in a discussion to provide insight on thestate of risk management today.

Scott Winstead, Phil Warner and Briston Blair recommend strategies for navigating a turbulent market in their article “Weathering the Storm.” OurOwners Group brings us two important articles that deal with energy andutilities. First, Mark Bridgers, Dan Tracey and Mike Chase offer “Is PowerConstruction the Silver Lining?,” then this same team delivers “Can OptimismShift the 2009–2010 Water Supply and Wastewater Market?”

All in all, this is another jam-packed issue of FMI Quarterly. For our fourthQuarterly of the year, we’ll deal with a theme for all seasons, Leadership.Especially in turbulent times, great leadership is often the only ingredientseparating the winners from the also-rans. Stay tuned.

Sincerely,

Jerry JacksonFMI Quarterly Publisher and Senior Editor

6 ■ identifying text goes here

BUSINESS DEVELOPMENT Prime Your Backlog for the Recovery

Lately, reading the paper has been a bit like recovering from a nightmare.You wake disorientated with gloomy feelings remaining. Morning headlinesscream about continuing layoffs, falling company profits, unstable credit markets and waning consumer confidence. Recovery starts slowly, but we are already starting to see brighter spots in the construction market. Ofcourse, there are still headlines that would make any normal person want to run for cover.

Clients are telling us of projects, long on hold, starting to move ahead.There are a growing number of projects to chase in many parts of the country. Even the financial markets seem, at least on some days, to have stabilized from their months-long tumble.

Bright spots on the horizon are encouraging, though challenges exist to rebuilding a healthy backlog. Contractors, architects and engineers alikefind themselves with a smaller backlog compared to this time last year. Inaddition, many forecast lulls ahead that may compromise their ability to keep their staff busy and productive.

Anyone in your firm knows intellectually that it is everyone’s job to helpwin work and keep customers happy and loyal. The key is getting rid ofexcuses and arming co-workers with the tools, ideas and techniques theyneed in order to engage new and existing customers. Simply put, at this time customers have more choices than ever when looking for a contractor,architect or engineer. Construction is a buyer’s market, and that will continuefor the next six to 12 months. To win jobs faster than your competitors, youmust ensure that your people are working to find and keep customers committed and loyal to you.

Here are a few reminders, tips and devices to retool your “get-work”machine:

Put Feet on the Street. Guess who has been knocking on the door of yourbest customers? Competitors have! Now is the time to get your people outon the street, spending time with current and new customers. The best wayto stop competitors from knocking the door down is to make sure that you

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are delivering everything that you have promised a customer, in a way that really makes an imprinton the design and constructionprocess. Ask project managers, superintendents and estimators to join the ranks of business development, and get senior management out of the office or off the jobsite to meet with previouscustomers. While you are at it, call on a few new customers too.

Get Your Strategy Straight.Strategy answers the question of “how” you are going to achieveyour desired results. Business development needs to be clear onits strategy or you end up spendingtoo much time and money, while winning too few projects in exchange. Getyour team together to clearly spell out your winning strategy, define the rightcustomers and train those team members as to why customers should pickyou over all the other great contractors in the market. Do not be alarmed if ittakes time to define your strategy concisely. Lack of clarity on strategy andinability to convey it to customers are the key reasons many contractors findthemselves coming in second in today’s market.

Build Skills and Abilities. Operations people say they lack time to meetwith previous customers. That is one of the frequent excuses given for notpicking up the phone or stopping by customer offices. One result that comesout of building customer-focused skills is a significant increase in the numberof calls being made to previous customers. Somehow having the skills to startconversations, ask questions and find customer hot buttons helps operationalpeople find the time, and the comfort, to pick up the phone or schedule alunch meeting. Help your operational people brainstorm reasons to keep intouch and strategies for navigating the field inside the client’s organization.One of the best ways to keep past customers loyal to your organization is tomaintain the relationship they had with the project team during the priorbuild-out. Giving operational people these skills will help them find that theyhave the time to make more keep-in-touch calls.

Make Tough Choices. No company has all the money it would like to invest in business development. One tough choice lies in finding ways tostretch your business-development investments and still get the results you need to keep the company busy and profitable. You will have to maketough choices regarding what is worth current spending and what you mustput on hold. People are often tempted to put a little money into a variety of different ideas. In business development, this comes from not knowingwhat really adds value. Investing more money into fewer ideas tends to winmore projects than trying to spread the money too thin. Make the tough(right) choices and you will watch your backlog grow. Instead of bidding every

Lack of clarity on strategy and inability toconvey it to customersare the key reasonsmany contractors findthemselves coming insecond in today’s market.

8 ■ departments

project being let, dig deeper on a few — even one — and do sufficient homework in order to develop a specific strategy to win those few jobs. You will increase your hit rate substantially.

Find the White Space. The term “white space” comes from a graph showing the points of parity and points of difference between you and your key competitors. The similarities and differences need to be from the customer’s perspective. They are the ones with firsthand experience of bothyou and your key competitors. Compare the points of parity and differenceusing a changing axis on an X-Y graph. You might compare levels of customerservice (y-axis), which is a compilation of responses on a variety of questionsdealing with customer satisfaction, with relative pricing for projects (x-axis)(See Exhibit 1). Alternatively, you might compare pre-construction serviceswith perceived expertise in a specific market segment. You could evaluateunique knowledge of the customer’s systems against customer satisfaction.There might be 15 or 16 different graph pairings to consider. Analyze the location of your points of differentiation compared to the best competitionout there. Graphing the results helps these differences to stand out visually,making them much easier to see and digest. You are literally looking for“white space” on the graph where you can stand alone from the competition.Want to know how you are really different? Ask your customers; they havethe answers you need.

Get Competitive. Cheaper, better, faster is the mantra of customers in all types of consumer products. The mantra has permeated the servicebusiness too. Customers expect your business to be cheaper, better, fasterthan their last experience with your organization. Get internal teams workingon ideas to deliver to customers high-quality services that are cheaper, better, faster AND provide your company with the opportunity to earn aprofit. Focus on finding a few key activities to be 1% more effective ratherthan only looking for that one money-saving idea that will knock the ball out of the park. Smaller improvements are easier to implement since theyrequire a smaller amount of change for your people. Smaller changes are alsomore likely to continue in the future. Involve your people in finding ways for

Exhibit 1

White Space Graph

Relative PriceCompetitiveness

Customer Satisfaction

0 1 2 3 4 5 60

1

2

3

4

5


both you and your customers tobenefit by the push toward cheaper,better, faster.

Think Campaign. Few battles arewon on a single round of cannonfire. Most are won on a sustainedcampaign that incorporates a numberof smaller initiatives groupedtogether over a longer period oftime. Business development is thesame way. Do not spend all yourresources on creating one greatmailing for your corporate brochure;the result will be short-lived at best.If you spread your investmentacross sales calls, involvement in

customer groups, collateral and public relations, you can create sustainedresults. Focus your investment to build a campaign of customer touches thatgenerates tangible work opportunities.

Get Fingerprints. People are more likely to embrace a new idea and helpput it into practice if they have their fingerprints on it. Collaborate, and getmany fingerprints. Solicit contributions from a variety of people with different points of view. Their thinking will help craft a better idea, and youwill have their commitment when it comes time to roll up your sleeves anddo the hard work implementing the initiative. If an idea already exists, getinput on how it could be improved or what could potentially go wrong. If youknow what you need to be doing, then ask for input on the best tactics tosee it realized. Not all ideas need the involvement of others. However, havingvaried input increases the probability that the idea being put into action willstill be in action six months down the road.

Use these reminders, tips and tools to jump-start your get work results.Use them to communicate to your people that this economic market haschanged the reality of business. We all need to operate differently to be successful in the new landscape. There is nothing like a market downturn torefocus our thinking and systems for the better.

Use this market as an opportunity to get everyone engaged in keepingcustomers loyal. Use this market to help refine your business developmentmachine. Find and track the right long-term customer and the right projects.Leverage internal talents and skills to find the market ‘white space’ where yourunique message will yield customers and market share. Most of all, capitalizeon this soft market to improve your ability to target and win work. The skillsyou build will help you win in good markets as well as in bad ones. ■

Cynthia Paul is a managing director at FMI Corporation. She may be reached at 303.398.7206 or via e-mail

at [email protected].

Do not spend all yourresources on creatingone great mailing for your corporatebrochure; the result willbe short-lived at best.

Managing the Risk

Dan Murphy and Billy Miller ZURICH ON THE BEST PRACTICES

OF RISK MANAGEMENT

Quarterly Interview

“We can’t allow the economy to change what we’ve been doing, to limit programs, limit training, limit education because the last thing we ever want to see is an increase in fatalities and serious injuries out there.”

— DAN MURPHY

Schoppman: In terms of jobsite risk management, what does Zurich see asthe largest risk factor?

Murphy: I see a couple of things as the largest risk factors, especially withtoday’s economy. First, there are the shortcuts. We’ve had the luxury for along time of building into our budgets factors for job safety, health and quality. I would certainly hope that continues, but suspect that as we try to do more with less, we are going to see some shortcuts on the jobsite.In the spirit of “cost cutting,” we may not be putting management in placewhere we used to, and that’s very concerning to me. The nice part withZurich is we have an entire crew of risk engineers that are out there all thetime. We are helping our contractors should they have to lay off key safetyand health professionals. We help them get a consultant or by simply beingonly a phone call away. Another large risk factor is when the owner says, “I have no money and I have to shut the job down.” That’s happened on a couple of building projects already and our concern is what takes placewhen we go back and restart the job. Who is responsible for the site while


Construction firms must address risk daily, whether examining the

economic and financial maelstrom inherent in the business or the physical

danger crews encounter. In this era of uncertainty, contractors are finding

ways to eliminate cost and inefficiency. For some, the journey through

tumultuousness is grounded in a commitment to achieving margins through

safe and ethical means. For others, mitigation of risk, in all its forms,

becomes less of a

priority. For instance,

the management of

safety and quality

are forsaken as

“expendable costs.”

In this article, FMI and

Zurich discuss the state of risk management today. From safety management

to proactive practices employed by best-of-class contractors, two leaders from

Zurich provide their observations and commentary. Dan Murphy is the vice

president of construction services for Zurich North America. Billy Miller

is the assistant vice president for field operations/construction at Zurich

Services Corporation. Zurich is a leading commercial property-casualty

insurance provider serving the global corporate, large corporate, middle

market, small business, specialties and programs sectors.

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12 ■ quarterly interview: dan murphy and billy miller

the project is shut down, what does the contract language say, who isresponsible for security, etc.? What we are doing right now is developing awhite paper on procedures if these things occur.

Miller: It is more important than ever for the leaders to reaffirm the benefits of maintaining the risk-management practices, processes and/orprocedures to avoid the obvious pitfall of efficiency versus common sense.Driving the competitive edge too far in order to win the project may enticestaff members looking for efficiencies and project “quick wins” to question

established protocol and risk-management practices that havebeen part of the culture for manyyears. Questioning procedures andprotocol on a regular basis is ahealthy business activity; however,the team questioning the processmust have the knowledge, experienceand lessons learned established inthe company. As project team members take on multiple responsibilities for different roles, it will be increasingly important thatthey receive a follow-up from seniorleaders to reinforce expectationsand maintain the culture of proactive risk management at theproject level.

Schoppman: In this turbulent economy, do you see a rise ordecline in risky behaviors? To whatdo you attribute the rise or fall?

Murphy: I believe we will see anincrease in risky behavior, because we’re trying to do more with less. Wedon’t want to spend as much money as we maybe had available in the past.Hopefully this won’t happen, but we may see an increase in the losses.

Miller: Risky behaviors are quickly rising at projects experiencing the biggestpinch from the economy such as housing, small commercial buildings, etc.Recent downsizing in the industry has caused project leaders to increaseresponsibilities with multiple roles and tasks that may not get the attentionor focus needed in normal operational situations. Craft workers look forshortcuts to be more efficient and to demonstrate value to their boss in this tough time. Crew competition for positions on the “next” project will behigh, while typically inexperienced workers will shortcut safety or qualityprocesses to demonstrate efficiency with time. Overall, they will lose andcost everyone money.

Questioning proceduresand protocol on a regularbasis is a healthy businessactivity, however the teamquestioning the processmust have the knowledge,experience and lessonslearned established inthe company.

— BILLY MILLER


Schoppman: What recommendations do you make to your clients in terms ofmitigating risky jobsite behaviors?

Murphy: We have an entire array of things that we do to help mitigate riskybehaviors. In our risk engineering area alone we have 70 different serviceswe can offer to a contractor to solve issues. In our claims area, we can helpthe client with proactive programs, make recommendations and actually provide product and service to mitigate the risky situations at a jobsite.

Miller: Recommendations are something we take seriously. One of our trademarks is to endeavor to get to know the contractor, the nature of thebusiness and its culture, prior to making recommendations. It is extremelyimportant to understand our customer’s business as much as possible beforerecommending how to improve practices or policies, and to provide practicalsolutions that match the current culture of the company.

In general, I would recommend that contractors stick to the basics of risk management. On causality exposures focus on falls, struck-by, caught in-between, soft tissue injuries (material handling exposures) and auto/fleetmanagement. Maintain and reinvigorate awareness campaignsand review with senior leaders the importance of vigilant support.Builder risk and general liabilityexposures should drive contractorsto focus on fire protection, housekeeping, public protection/site security, quality assurance/quality control, pre-qualification ofsubcontractors and subcontractormanagement.

The old Boy Scout motto “Be prepared” should be a themerepeated routinely by constructionleaders to the teams, in order toprotect reputations and relationshipswith customers. In light of recentlypublicized crane accidents, disastersand catastrophic events occurring on construction sites, contractorshaving a good business-continuityplan with good crisis-managementpractices in place is not just a luxury but also an expected basic service thatcustomers count on from the construction industry. If this is an area yourcompany needs to shore up or revisit, start taking action now, as it will betoo late once the situation occurs. Not being prepared to deal with projectinterruptions, disasters, serious injuries and/or fatalities can deteriorate

The old Boy Scout motto “Be prepared”should be a themerepeated routinely byconstruction leaders tothe teams, in order to protect reputations and relationships with customers.

— BILLY MILLER


reputations, reduce confidence ofbusiness partners and in extremesituations reduce credit lines andbonding capacity, which directlyaffects the future work pipeline.

Schoppman: What services doesZurich provide to help its clients tomanage jobsite risk better?

Miller: We have over 150 risk engineers dedicated to construction,averaging more than 15 years ofindustry experience. Zurich supportscontractors with a wide range ofservices, tools and solutions thatenable contractors to manage projects better than the competition.We may provide full-time, on-sitesafety and/or operational project

support staff on-site for specific projects, or deliver consultative servicesthat take a 360-degree view of risk with a customized approach to industrysolutions designed to improve predictive performance of profitability.

Customers following our risk-engineering recommendations have an advantage over the competition; the Recordable Incident Rate (RIR) for ourcustomers is 25% lower than the industry average.

Zurich is committed to helping contractors deliver outstanding service totheir owners. Samples of tools and seminar services include:

• Slip, Trip and Fall Reduction Program• X-Ray (Culture Alignment Tool)• Crane Management workshops• Soft Tissue Injury Prevention Program (STIPP)• Accident Scene Investigation (ASI)• Accident Investigation Techniques (AIT)• Virtual Fleet Manager• Virtual Consulting• National Construction Roundtable

Schoppman: From Zurich’s perspective, how has technology influenced jobsite risk management?

Murphy: The first thing in my mind is the use of handheld devices to monitorjobsites, and to provide reports back to the contractors to let them knowwhat we think is going on out there. For instance, if we visit a site we can usethe handheld device and report that we found five different situations where

Zurich supports contractors with a widerange of services, tools and solutions thatenable contractors tomanage projects betterthan the competition.

— BILLY MILLER


an individual was operating from an elevation without proper fall protection.This report goes directly to the contractor to be resolved. That is one waywe use technology to influence the jobsite.

One of the other things might include more updated equipment. Hopefullyas a result of what’s gone on in crane management, we have much bettertechnology on the use of cranes on-site. For example, we have computersmonitoring crane loads to provide instantaneous feedback. The computerwill tell you that if what you’re trying to pick up is too much, resulting in thecrane not allowing the load to be picked up.

Miller: Construction in general has been extremely slow to adopt technologyinto the construction process, but the opportunities and the potential benefitsfrom utilizing the right technology is astronomical, both from a financial andrisk-management viewpoint.

Two tools that Zurich has promoted in the past and is currently using onselect projects across North America are SafetyNet and QualityNet. Theywere created by Design Build Operate (DBO2) to assist contractors toimprove profitability and safety performance. Both of these tools promote communication, collaboration and benchmarking of informationfor all project and corporate team members. As teams use the systemswith existing operational methods,interactions and mitigation techniques, then compare benchmarks, the tools highlight and assist in prioritizing efforts tomaximize benefits from a qualityand safety perspective, therebypositively effecting profitability.

As the next generation of multitaskers matures into leaders of the construction industry, contractors will eventually embrace this method of informationmanagement. As a result, they willreap the benefits of faster and cheaper operational expense and better customer service to their owners, translating into more work at a larger marginthan the competition.

Schoppman: Define “best-of-class contractor” and the project-managementbehaviors most desirable from your perspectives?

Murphy: A best of class contractor understands the business of preventingloss. By doing really well in the area of risk management, a construction firm

By doing really well in the area of risk management, a construction firm hasthe ability to becomevery profitable.

— DAN MURPHY


has the ability to become very profitable. A great loss-preventionprogram will probably result in making dollars and causing the contractor to be high-performing aswell. They just don’t have the losses,and as a result they are looking atrisks other than casualties. They arelooking at who drives their pick-uptrucks, examining their drivingrecords and ensuring that it’s OK to give them a vehicle.

Additionally, when we are examining acontractor we ask, “What is your quality assurance program?” Contractors witha solid program are concerned about loss and that makes them best of class.

Miller: A desirable contractor is one that understands the value of strong relationships and cherishes partnership, loyalty, and has an unquenchabledesire to improve performance and compete ethically. Proactive preventionis valued over reactive mitigation.

Zurich is an active member of the Construction Industry Institute (CII), whichworks to conduct research for the construction industry. CII research clearlyidentifies practices and approaches to risk, safety, quality and productivity that

are unique to the best performers inthe industry. Zurich recently fundeda significant portion of the CII TargetSafety Program research, whichidentifies some of the most effectivesafety programs in North America.These programs were initiated,developed and implemented toreduce, and in some cases eliminate,injuries associated with particulartypes of jobsite hazards that typically are found on projects. Forinstance, fall protection and high-riseconstruction projects.

Schoppman: Contractors are dealingwith aging field supervision. Whatare Zurich’s observations, and whatare best-of-class contractors doing?

Murphy: We are trying to pass on theknowledge to the next generation.Sure, we have some issues with the

A desirable contractoris one that understandsthe value of strong relationships and cherishes partnership,loyalty, and has anunquenchable desire toimprove performanceand compete ethically.

— BILLY MILLER


aging supervision. However, we are keeping more and more people on our jobs who are 65 to 75 years old and are finding that our contractors are doing a much better job of training supervision than in the past. We are taking our senior folks who really understand the business, know how to control loss and to build a high-rise, and we’re sharing that knowledge with the peoplewho are coming up behind them. If knowledge is not being transferred, then I would suspectwe’re not seeing supervision that’sreceiving the training they need to be the best. One of the biggest things they need to be is great communicators.

Miller: Maintaining tacit knowledgeand age diversity is a hot topic withincreasing levels of importance to ourindustry. Contractors that leveragetheir ability to use the best practicesto retain tacit knowledge in theirorganization and better communicatewith multiple generations will have acompetitive advantage in the futureof the industry.

Schoppman: Change management is often attributable to “project risk.” What are best-of-class firms doing to deal with change due to design errors,omissions, etc.?

Murphy: They are being much more diligent in taking a look at exactly what’sbeing asked of them, by looking at the design and having staff that understandexactly what needs to happen, at the right time.

Contractors who deal well with change management are establishing stableand dependable communication channels and change systems that promotegood prioritization of critical issues, yet give all team members access andadequate voice in the process of construction. Establishing good detail scopefrom the very beginning of every project, and maintaining discipline aroundmanaging changing the scope during project execution, will alleviate headachesand lawsuits later. Successful contractors adapt and utilize a formal change-management process before the project begins, which has a pronouncedeffect on communication and protects relationships with key customers.

Schoppman: Is there a type of project (niche, discipline, etc.) that Zurichtends to view as more risky than other ones?

Successful contractorsadapt and utilize a formalchange managementprocess before the project begins, whichhas a pronounced effecton communication andprotects relationshipswith key customers.

— DAN MURPHY


Murphy: There are certain types of construction niches or disciplines wetend to be very cautious with, such as iron and steel erection, only becausewe know falls from elevations are a significant problem in the industry. Can I tell you that’s more risky? Yes. Can I tell you that it can be done without anyissues? Yes. Iron and steel erection is probably a little more concerning to methan drywall. So, we tend to look at those but if we have the right controls inplace we can deal with just about any type of contractor.

Miller: Projects executed without experienced staff and lack of planning areriskier than others are.

Schoppman: What advice would you give trade contractors in these turbulent times?

Murphy: What I would share with the trade contractors is to make sure that you understand the general contractor’s prequalifications. Know what’sexpected of you to get the work that you need, and how to develop youremployees to make sure that you are best in class or at the top of the heapso that you do get the work. I would also suggest the trade contractors havean extremely good risk-management and quality-control program in which the general contractor would see immense value. There is a need to recruit

high-quality people. As they movemore into new industries and niches,consider going to the colleges anduniversities that are educating in thefield of construction management.

Miller: Invest in your young leadersand work hard to transfer tacitknowledge across generations.

Schoppman: When examining failed projects, what are the mostcommon symptoms or “smokingguns” you see?

Murphy: Blow and go. It’s always suspected if we see a project that

specifically has liquidated damages (LDs). LDs can cause real concernsbecause we have the unqualified or the wrong people, seven days a week, 24 hours a day. How you define failure? Has the project failed monetarily? Didit fail because we had a significant loss? I mean, there are many ways we canlook at it and say, that job really didn’t meet our expectations. Other “smokingguns” — overtime, incentives to complete the job earlier, faster, quicker thananybody else can — that’s when I start to see failures at the jobsites.

Schoppman: That’s a good point. Failure can be defined by you differentlythan the actual contractors themselves, or even the customer for that

Invest in your youngleaders and work hard to transfer tacit knowledge across generations.

— BILLY MILLER


matter. I think what I’m gleaningfrom your comments in terms ofwhen we look at a project simplyfrom the standpoint of expediencyand speed and forsake things such as planning and safety. That’swhere we tend to make mistakes.We’re rushed and not following ourown processes.

Murphy: Contractors can also saythat a project failed if they poured abunch of concrete and then had tobreak it out due to an error. How dothey identify what failed means? Is itjust the fact that they lost $50,000on the job? Is that a failed project? I think a contractor would say yes.Zurich also looks at when the jobcomes to a close and everybodytells us, “Gee, it was a wonderful job and we made a million dollars in profit.” The first question I would

ask is, “OK, are all the claims closed on that job?” A successful project is successful on all fronts. Those are some of the areas we look at.

Miller: Ignorance and apathy are two of the most common root-cause links tofailure of construction projects. Having an experienced and conscientiousteam motivated to deliver a project on time and on budget does not guaranteea perfectly run project, but it removes the majority of major “rocks in the road.”

Schoppman: In terms of safety awareness, what is the most-common sourceof risk you observe?

Murphy: Craftspeople have the most opportunity for risk, regardless of the type.Although we have the training and 99% of the time we have the equipmentto protect people, somebodyjust decides that today is the day I’m going to take the shortcut, or today is the daythat I’m thinking about mydaughter who’s in the hospitaland I forgot to put my lanyardon properly. Contractors havedone a wonderful job of tryingto provide a safe and healthfulplace for folks to work. Usuallyit’s the shortcut that burns them.

Having an experiencedand conscientious teammotivated to deliver a project on time and on budget does not guarantee a perfectlyrun project, but itremoves the majority ofmajor “rocks in the road.”

— BILLY MILLER


Miller: Behavior management is a predominant source of risk with any construction project that transcends from the corporate office to the field.

Schoppman: Many contractors say, “You can be safe or you can have it onschedule — but not both.” What do you say to this?

Murphy: I totally disagree. You can have both. It’s how they put the jobtogether and whether they talked to the people to provide a safe environment

and have them work with the people that know the schedule. You can have both and you canmake a lot of money and haveabsolutely no loss on the job. Andwe could certainly, from an insuranceperspective, help them do that.

Miller: This is a statement typicallymade by a contractor who does not understand long-term effects ofindirect cost for risky behavior; orhe is keenly aware of the situationand is about to move that cost andresponsibility to someone else … it may be you.

Schoppman: Has the business acumen of contractors improved

over the last decade? What aspect of “business management” do you thinkcontractors should understand more than ever?

Murphy: I would suggest that reputation and customer perception are themost important areas. Reputation is everything. The contractors that get thejob done and done well, who don’t get their faces in the media but just complete it with a great-quality product — their reputation is golden andthat means a lot. I think owners will buy a contractor with that reputation and pay a few more dollars. And I think the second portion of the question— what aspect of business management should contractors understandmore than ever? — involves financial management and risk management.Understand the financial impacts of what they are about to get into and thekinds of risks they’re going to assume if they do the work.

Miller: Current economic pressures on contractors surviving in today’s market downturn demand an evolution of skills, knowledge and thinkingabout the business. A consolidation of roles and tasks will force leaders tojuggle priorities and make decisions about their own personal situation as wellas the organizations they lead. The way we look at backlogs and future worktoday is very different from the past. Company strategies and performanceare being carefully scrutinized on viability and perceived funding; understanding

Contractors have donea wonderful job of tryingto provide a safe andhealthful place for folksto work. Usually it’s theshortcut that burns them.

— DAN MURPHY


of financial perceptions for all business partners will serve future leaders wellin navigating challenging credit limits and funding considerations.

Schoppman: In this turbulent economy we are hearing many contractorsengage in projects “outside of their expertise.” What advice do you give yourclients that are trying to enter new markets yet lack experience? For example,a site contractor that has been in private development for the last 10–15 yearsis now considering entering DOT markets and that opportunity to, onceagain, keep people employed and keep the revenue stream there. What kindof advice do you give contractors that are looking at new markets?

Murphy: We’ve thought a lot about this. For certain markets and niches, we have consistently five bidders. For example, a DOT job may now have 15 bidders and we may have residential people bidding on a section of the interstate. I think if our contractors are trying to diversify, if they’re going toget into areas they haven’t been involved in before, then my suggestion tothem is to hire some brain matter or people with really good backgroundsthat have played in the arena that you want to enter into. If you play thegame and you don’t understand the business, you technically lose the game.

The other thing I’ve experiencedover the last 30-some-odd years iswhen you hire people who know thebusiness, that doesn’t mean theyunderstand the culture of XYZContractor. You must make them apart of your team first and then gettheir help to understand the heavy-highway business, because you wereonce a residential contractor.

Miller: Survival tactics that includeexpanding into projects unique to acompany’s culture or experience is a gamble in any economy that willhave some quick lessons learned.Unfortunately, the competition willnot have the same learning curves.Most contractors making this transition quickly hire the talent andexperience to help avoid the big pitfalls; however, making the righthire will have mixed results and risks

associated with the choices. It is important to remember when selecting thatperson to expand your company or scope capacity that work experiencedoes not guarantee successful experience or motivation.

Any senior leader past this experience of expanding the business can quickly identify a few key decisions that were linchpins to the overall success

Survival tactics thatinclude expanding intoprojects unique to acompany’s culture orexperience is a gamblein any economy that will have some quick lessons learned.

— BILLY MILLER


of expanding a company’s expertise; typically these highlight decisions over people choices and opportunities. Anyone expandingtheir company’s expertise shouldresearch the business well beforeexpanding with a focus on what the common mistakes others make performing this specialty. Invest thetime, select the right people and follow up on references (time in anindustry does not equal quality successful experience). Check inearly and often to see if the

business-strategy assumptions match the operational experience and if thepeople selections were good choices.

Schoppman: With the aforementioned influx of contractors doing work outside of their “sweet spot,” there is a general belief that competition willcull itself out. How is Zurich mitigating its risk when it comes to dealing withcontractors lacking bidding discipline?

Murphy: One of the things we’re doing is providing a great deal of educationand training to our underwriters so they have a clear, concise educationalbackground in the constructionindustry. They understand moreabout it than most constructioninsurance companies. And so, weget a lot of help when somebodysays, “Well, gee, we’re working outside of our sweet spot.”

Miller: Zurich is identifying andanticipating issues, ideas and symptoms of culture changes thathave an impact on decisions with the construction industry. It will beimportant that Zurich maintain awary eye toward companies that are quick to deviate from goodpractices and recognize companiesthat are maintaining disciplinearound the fundamental principlesof operation and risk management.We are proactively providing one-on-one consulting, seminars, hosting roundtables, newsletters; participatingwith industry research; and providing Senior Leaders Construction Summitsthat highlight the best practices utilized by industry leaders.

Zurich is identifying and anticipating issues,ideas and symptoms of culture changes that have an impact on decisions with the construction industry.

— BILLY MILLER


Schoppman: In conclusion, are there any other comments that you would like to add in terms of the state of the industry and Zurich’s perspective onthings we should be thinking about?

Murphy: I think now, more than ever, all of us that touch the constructionindustry have to be very vigilant and very smart about what we do in theindustry and how we do it, because we have literally spent years trying todrive down the bad stuff that happens in our industry. Overall we have hadgreat success. It’s getting better and better all the time. We can’t allow theeconomy to change what we’ve been doing, to limit programs, limit training,limit education because the last thing we ever want to see is an increase infatalities and serious injuries out there. That is what Zurich’s all about. We’rehelping our contractors to make sure that stuff doesn’t happen. ■

Gregg Schoppman is a principal with FMI Corporation. He may be reached at 813.636.1259 or via e-mail


W inning work and keeping customers loyal for life

are goals that most industry firms pursue. Today

it is the difference between maintaining a backlog

and having to lay off good people. The challenge is that there are

plenty of other firms in the market competing alongside you. What

you need to be successful is a winning advantage.

Customers award work to firms that have a winning project approach and sensible price. You can certainly compete on the basis of price. You can alsofind strategies to add value and create a winning project approach. If you cancombine both a winning approach and a sensible price, you will capture its customer’s attention.

The key to building value is to position your firm before the project opportunity hits the streets. That is when the customer is most open to exploringhow your organization is different and connecting the value you bring to itsfuture project(s).

In this article we will explore what it takes to move customers from notknowing who you are to being convinced that you are the right company for theproject. We will show you how to move them systematically down the “track” to becoming selected, and explore tools and strategies to educate the customers.

By Cynthia Paul and Hoyt Lowder

Keep Your Marketing and Sales on Track In today’s market, the difference between being selected solely on price versus being recognized as adding value, is the difference betweenmaking a profit this year and needing to lay off additional staff.

26 ■ keep your marketing and sales on track

MARKETING AND SELLING PROCESS Marketing and sales are terms that are used interchangeably in the industry, yet

the difference can mean closing a large number of projects or being the runner-upmore times than you care to count. Marketing, by definition, is everything a company does as seen by your customers or prospective customers. The industrytends to think of marketing solely as brochures, Web pages, public relations, customer events and so on. However, marketing also includes job signs, how your trucks look rolling down the highway, the accuracy of your invoices, the way customers are greeted over the phone, and even housekeeping on projects. Marketinghas two primary jobs. The first is to warm up a customer to buy on somethingmore than price. The second is to keep in touch with your existing customers—

the lifeblood of your company. Sales has a very different focus.

Sales is a psychological transaction thatinvolves more than price. It involvestargeting the right customer and projects, creating a win strategy and booking the project as backlog.Sales is more short-term focused than marketing. It concentrates on winningwork and building a consistent level of backlog. Sales is a natural extensionof an effective marketing approach.

As marketing and sales worktogether, customers and prospectivecustomers come to understand the valueyou bring to a project, over and aboveyour price. With a solid marketingand sales foundation, customers willtake the time to find out more aboutyour approach and give you a legitimate

shot at winning the work. To be most effective, marketing and sales need to focuson positioning the same overall message to the same customers.

In its simplest sense, marketing and sales encompass the process of movingyour potential customers along a railroad track of awareness. Prospective customershop on the train completely unaware of your company and what you do; customers get off the train being fully convinced of the value that you bring to the project. Some customers will even go on to become preferred or key customers.Preferred customers are looking for more than the lowest possible price. They arelooking for services and support that help their business succeed. After all, that isthe reason why they are building a construction project; they want to grow,expand and/or improve their business.

Imagine using different tools and techniques to get your customers furtherdown a railroad track. Each marketing and sales tool has a different objective.Each moves clients and prospective clients further down the track. Matching theright tool to the right position on the railroad track helps you get the customer on board and ready to do business with you. The further down the tracks you

As marketing and sales work together, customers and prospective customerscome to understand the value you bring to a project, over andabove your price.


go, the closer you become to reaching your final destination or goal of having acustomer for life.

Exhibit 1 shows the approximation of rails of a railroad track, with two parallel horizontal lines running across the page. The railroad track represents themarketing and sellingprocesses. We will bemoving from left to rightin segments.

The tracks alsoencompass your market.If you are an internationalplayer then the tracksinclude the world and all of the existing andpotential customers,regardless of where they are in the world. If you focus on Hillsborough County,Florida, then the box includes everybody who is an existing or potential customerwithin Hillsborough County, Florida.

MOVING DOWN THE TRACKSThe railroad tracks are the framework in which to envision the marketing

and selling processes taking place. Remember, marketing is everything as seenthrough the eyes of customers and prospective customers. If the customer sees it,it is marketing — intended or not. If the customer does not see it, then it has novalue regardless of the cost. Marketing is about creating perceptions in the mindsof customers and prospective customers.

Chosen correctly, marketing tools will effectively communicate your messageto the customer in an appropriate method, at the appropriate time. Marketing is atwo-way street — it is about your outbound communications with the marketplaceand the resulting revenue back inbound to you. It is about creating and deliveringvalue to your customer and receiving value back in return.

Exhibit 2 shows the railroad tracks closed-in on the ends, with five equal sections of the track. On the left-hand side are customers who are “unaware” ofyour company; on the right are “preferred” customers. Notice the heading to theleft of the track: Marketing Tools.

Let us look at the individual segments of the track. The first segment is“unaware.” It includes potential customers who do not know you exist. You mightnot know they exist at this stage either. The second segment is “aware.” The customersknow you exist and you know they exist. Nevertheless, it is not likely that any

sales will take place ineither of these first twosegments because thecustomers are still in anevaluation mode at best.

The third segmentof the track is “informed.”These customers are

Exhibit 1

Railroad Track

Exhibit 2

Marketing Tools

UnawareAdvertisingWebinarSales Call

Aware Informed Convinced Preferred

28 ■ keep your marketing and sales on track

familiar with your business; they know you are a certain type of contractor, they knowyour location and they may know some of the people within your organization. In turn, you know some of their people and something about their business as well.

The fourth track segment is “convinced.” If customers in this category have a need for the services that you provide, you will be considered as a primary candidate for the project. It is at this point that your salespeople need to establisha close relationship with the customer and their people.

“Convinced” is the ideal place to contact customers because they are startingto think about the project in concrete terms. With the beginning of beneficial discovery and evaluation of your capabilities, the customer will determine if thetwo of you should be doing business together.

One of the primary reasons the selling process is so important is because you are interacting person-to-person; you are putting a face to a relationship thatbegan after the customer moved from “unaware” to “aware,” to “informed,” andnow to “convinced.”

The last segment of track holds “preferred” customers. You are their preferredprovider of services. In fact, they are so convinced of your value that they will noteven ask for a comparison bid. They just call you and ask you to do the work, orthey tell you they have a need and you respond. That is what they expect you todo; it is a mutually beneficial relationship because you are providing value andmeeting their unique needs. You are so knowledgeable about their business thatthey get a better product when you are engaged on the project.

FMI’s Market Research Group has found that the “informed” customers will most likely do business with those companies that have an understanding ofthe way that they as customers operate. Intimate knowledge of the customer’sbusiness gives you an advantage over someone who has not been as diligent indeveloping the relationship. The key is systematically to build the group of “preferred” customers by digging in and finding their unique hot buttons andthen consistently delivering at a level that continues to exceed their expectations.The ultimate goal of any marketing or selling effort is finding the customers thatvalue what you do, to such a level that they become loyal and long-lasting.

MATCHING THE MARKETING TOOL TO THE SEGMENTNot all marketing tools are equal. Each tool has a specific objective. Each tool

has one or two purposes. One of the initial marketing tools might be advertising.The purpose of advertising is to take a group of people and inform them, moving

them from “unaware” to “aware.”The purpose of a Webinar is tomove a customer from “aware” to “informed.”

The objective of a sales call isto secure work from a customerwho is “convinced.” Using a salescall to move a customer from“unaware” to “aware” is not onlyexpensive, it is tough on yoursales team. Salespeople sell the


most effectively when customers are either “convinced” or “aware” of who you are and what your company does.

Sales calls work very effectively on moving a customer from “convinced” to “preferred.” Of course, operations also has a role in moving a customer from“convinced” to “preferred.” Customers that prefer your organization to the competition have had successful projects working with your team.

Other marketing tools might be presentations, participation in associations,direct sales, direct mail or radio advertising. List all of the possible tools and thinkthrough their potential impact. The key is touching a customer with multiplemarketing tools at the right time in its progression down the tracks. Choose thecorrect tools to achieve your desired objectives.

The most effective marketing takes place between two groups of people: the customer and the provider. Both groups need to have mutual respect for eachother’s capabilities and clearly believe that they will be better off as an organizationby doing business together. This enables a customer to understand its own needsand for you to see your ability to satisfy those needs. It creates good reasons fordoing business together. That is why waiting to educate a customer after a projecthits the table is so difficult. If you wait that long, the chance of being selectedsolely on price is extremely high.

The railroad tracks outline a marketing and selling process that gets the righttools to the right customer in order for you to achieve your vision as a firm. Ittakes a selective group of customers and moves them from “unaware” to “aware,”to “informed,” to “convinced.” It is a process of matching their needs with yourcapabilities. Not every customer or potential customer will make it all the waythrough the process, let alone in a time frame that fits your business plan. You needto ensure that you have sufficient customers that you are working down the tracks.

CONCLUSIONThe marketing and selling process is the systematic approach of taking all of

the targeted customers in your market down the track from “unaware” to being“convinced” that you are the best service provider around. Picking the right toolsfor the right segment of the track is critical. You need to be clear what you are trying to accomplish, and only then pick the marketing and selling tools that bestfit the objective. Too often companies fall in love with a tool and overuse it. Theyfrequently expect their sales or business development teams to call on people whohave never heard of them and find a project on which to compete. The best youcan hope for in such a situation is getting the chance to compete on price.

Effective use of tools will get customers and prospective customers to recognizeyour value and select you accordingly. Of course, you will still need to have a sensible price. In today’s market, the difference between being selected solely onprice versus being recognized as adding value, is the difference between making aprofit this year and needing to lay off additional staff. ■


at [email protected]. Hoyt Lowder is a senior vice president (retired) with FMI. He may be reached at

813.636.1242 or via e-mail at [email protected].

Picture superintendent Joe Brown’s surprise when a key

sub arrives three days early on his job site, throwing

everyone preparing for him into confusion. Joe storms

into his trailer and shouts at Jimmy Gregg, the project manager,

“Why are these sub people out here today?” Jimmy, red-faced, looks

at the schedule and immediately sees that he failed to tell the sub

about the schedule change. Jimmy apologizes and tries to calm Joe

down, but the damage has been done.

What could this failure to communicate cost?

• Joe, being upset, missed a materials arrival and mistakenly reordered. Cost: $38,000.

• The sub had to pay for an extra mobilization. Cost: $8,000.

• The existing workforce was distracted by the confusion and lost productivework time. Cost: $8,000.

By Ralph E. James, Ph.D., and Mike Clancy

Job Communication Plans

The ripple costs of poor communication are difficult to measure but contribute a seriouschallenge to the construction industry. The time has come to tighten job communications withmore formal communication plans.

32 ■ job communication plans

• The project manager skipped a key planning meeting to straighten out the confusion and missed an opportunity to value engineer an important job phase. Opportunity cost: $20,000.

• The job schedule slipped two days involving a liquidated damages clause.Cost: $10,000.

The ripple costs of poor communication are difficult to measure but contributea serious challenge to the construction industry. It has been estimated that in 50–75%of all construction project time extensions, cost overruns and contractor claimsmay have been mitigated or eliminated with better up-front communication. Inthe United Kingdom, the British Standards Institute, U.K.’s answer to ANSI,

estimates communication problemsaccount for most of the £20 billion inconstruction claims annually.1 Kuwait’sSpecial Projects Administration of the Public Works Ministry reported time-savings of over 80% by improvinginter-team communication during thedesign and engineering phases, using aweb-based integrated communicationssystem. This allowed them to addressdesign issues early, track adherence tothe engineering schedule and keep all interested parties informed on the status of the KD 220 million KuwaitUniversity project.2 In Boston’s Big Dig, a lack of transparency in communication among designers,engineers, contractors and the owner’sagents led to improper, insufficientlytested material being used (epoxy not designed for long-term use, bolts too short to hold up heavy concrete

ceiling panels, etc.) The failure has caused the death of one motorist, heavy costsof repair and countless hours as parts of the $14.6 billion project have closed foradditional testing and repairs.3

Inadequate communication of changes in scope and project cost on a new Birmingham, Ala., wastewater treatment plant contributed to turning a project that was estimated in the hundreds of millions into a $3.2 billion financingboondoggle. “Initial estimates placed construction costs anywhere from $250

million to $1.2 billion — in other words, the lack of scope clarity meant no onehad a definitive idea of what it would cost to build. An expensive example of thelack of communication was when drilling commenced under the Cahaba River, a prized scenic waterway. When the inevitable backlash occurred, the tunnel was stopped halfway through, and it cost the county $20 million to extract the tunneling machine. In the end, the multiple problems on this project (of

It has been estimatedthat in 50–75% of all construction projecttime extensions, costoverruns and contractorclaims may have beenmitigated or eliminatedwith better up-frontcommunication.


which communication issues were a significant portion) forced Birminghaminto default on its financing covenants,and eventually into bankruptcy.”4

Clearly, the time has come totighten job communications withmore formal communication plans.Development of these plans shouldstart during the pre-bidding process by adding the question, “What communication challenges would we have if we bid this job?” to our pre-bid qualifying checklist. For example, the job might be remotefrom the home office, involve

language barriers, require a line video feed or pose a host of other challenges to effective communication. Some of the potential communications issues to contemplate while planning to pursue a project are included in the sample “JobCommunication Checklist” (see Exhibit 1).

During the bidding phase, what communication costs should be estimated?FMI recommends that every estimating checklist should include a line item forcommunication costs (meetings, technology assets, etc.) because investment incommunication typically has a high return on investment (ROI.) It has been saidthat those who think education is expensive should compare the cost of ignorance.We could also say that those who believe the cost of a communication plan is tooexpensive should compare the cost of poor communication.

In the pre-job planning phase, you are ready to rough out the job-specificcommunication plan. This begins with answers to the question, “Who needs to

Exhibit 1

Job Communication Checklist

Job Communication Checklist

Stakeholder names, addresses, contact numbers

Pre-bid meeting

Bid meeting

Hand-off meeting (communication of special conditions)

Pre-job meeting (in-house)

Pre-con meeting (with customer)

Regular job progress meetings (schedules, logistics)

Closeout preparation “kick finish” meeting

Post-job lessons learned meeting

Schedule-related communication

Design-related communication

Customer communication plan

Supplier communication plan

Inspector communication plan

Safety communication plan

Daily field huddles

Financial communications (field/office, bonding, banking, job cost, etc.)

Materials communication plan

Tools communication plan

Equipment communication plan

Quality assurance and control communication

Staffing plan communication

34 ■ job communication plans

know what by when?” The rough-out starts with a list of all project stakeholders,complete with contact information (see Exhibit 2).

This list includes contact information of all suppliers, contractors, inspectors,owners (as appropriate) and relevant team members. Copies are distributed at the preconstruction meeting and updated on a regular basis, perhaps as a regularagenda item in job meetings.

The next step of the pre-job rough-out communication plan lists what needsto be communicated, by when and to whom (see Exhibit 3).

Pre-job communication plans provide an opportunity to get your communications act together before meeting with the customer. Pre-constructionmeetings allow you to have a “partnering-like” team meeting with the customer atwhich you invite the customer to preview the rough communication plan andthen to modify the plan according to his or her specific needs. For example, thecustomer may request a weekly one-page progress report.

All stakeholders help perfect the plan at the pre-construction meeting.Improvements are made throughout the job as circumstances change. For example,in a later job phase you might discover potential dust problems affecting a nearbyneighborhood. Update the plan to include communication with the neighborsabout your dust-control program.

At 90% complete, organize a special “kick-finish” meeting to ensure everyoneunderstands any closeout challenges and how you plan to mitigate them. For

Exhibit 3

Communication Plan — Rough Draft

Communication Plan

What

XYZ Schedule

ABC Milestone

By When

09/01/09

11/01/09

By Whom

Smith Company

Jones Incorporated

Exhibit 2

Project Stakeholders Contact Information

Project Stakeholders Contact Information

Stakeholder

Jones Construction

Mempis City Council

Greater Memphis Fire Department

Address

222 N. South StreetMemphis, TN

551 W. East LaneMemphis, TN

2211 Main StreetMemphis, TN

Phone/Radio

601.555.444

601.555.1221

601.555.9988

E-mail

[email protected]

[email protected]

[email protected]


example, you might discover that a local municipality is suffering from an inspection overload that could delay the project. The communication plan isextended to cover daily-inspection-schedule updates, etc.

Special actions might become part of the closeout plan. A factory seems to be continuously extending lead time on a key equipment installation. The communication plan might now include a weekly personal visit to the factory toinsure information is accurate and your needs have been clearly communicated.

After job completion, use your now open-communication channels to thankparticipants and invite improvement suggestions. For best results, conduct a brief survey with all stakeholders to seek their feedback on the effectiveness ofcommunication during the entire project duration and to incorporate their feedback in the improvement of future communication efforts (see Exhibit 4). In-house, review outside-stakeholder improvement ideas, add your own and institute the plan, appropriately adjusted, on all jobs. The positive effect of formalcommunication planning will remain difficult to quantify, but if you prevent onlyone major rework per year, you could easily realize a significant ROI. ■

Ralph E. James is a director with FMI Corporation. He may be reached at 919.785.9227 or via e-mail at

[email protected]. Mike Clancy is a consultant at FMI. He may be reached at 919.785.9299 or via e-mail at

[email protected].

1 Press release, BSI Group, “Poor Communication Costing UK Construction Industry,” 30 September 2003. 2 Al Reshaid, K. & Kartam, N. (1999). “Improving Construction Communication: The Impact of On-Line Technology.”

Department of Civil Engineering, Kuwait University.3 Taurasi, E. (2006). Boston’s Big Dig—One of Engineering’s Biggest Mistakes? Design News, July 28, 2006.4 Whitford, D. (2008). Birmingham on the brink (of bankruptcy). Fortune. October 15, 2008.

Exhibit 4

Survey for Measurement of Job Communications Example

Job Communication Survey

Overall communicationInformation flowed well among the participants.

Job meetings communicationsInformation was effectively shared in meetings.

Timeliness of communication Important information was shared in time to be useful.

Inclusiveness of communicationInformation was shared freely and was sufficient.

Effectiveness of communicationThe timing and methods of communication enhanced your satisfaction with the project.

Rate each aspect of communication on a scale of 1 to 5 (1 = poor, 3 = average, 5 = excellent)

The decline in construction industry productivity is so

often talked about, it appears to be a fact; however, there

is no common measure of productivity for the industry

that allows us to know if productivity is declining or improving. It is

difficult, if not impossible, to compare apples with apples for the

industry as a whole. Whether productivity is declining or improving

for the industry rests largely on opinion.

Nonetheless, when industry executives weigh in based on their experienceand measurements of productivity for their own companies, we get a betterunderstanding of general trends and practices, allowing us to make a reasonableprojection as to the state of productivity for the industry. Why is measuring productivity so important? Taking a broader view, it is a measurement of thenation’s wealth-generating power. If we can produce more for less, we are wealthier.At the level of individual companies, increased productivity not only goes to thebottom line, in a highly competitive economic environment it may be the difference between winning and losing the project itself.

In our latest biennial survey of construction-industry productivity, we foundfor 57% of survey participants, productivity was improving. This is a slight

By Scott Kimpland and Phil Warner

Improving ConstructionProductivity

Being more productive and efficient is no longer optional; it isand will continue to be requiredboth while the economy is in adownturn and when it recovers.

38 ■ improving construction productivity

improvement over our 2007 survey. The results of our surveys over the past eight years do not signal a rapid improvement in productivity; yet the trend ismoving in the right direction. We also found in the survey that there is muchmore room to raise the bar for productivity gains. Rather than look for a common measurement that compares all companies, we take a closer look at keymanagement practices that affect productivity and how companies compare intheir approach to these practices.

What anyone who undertakes a serious program to improve productivity learnsis that there is no silver-bullet solution. The use of new technologies has made iteasier to track inputs and outputs; but it takes trained personnel, better planning, acommon vocabulary, standardized metrics and excellent communications to realizethe real power of technology improvements. One technology that we asked aboutthis year is the use of Building Information Modeling (BIM), but few are trulyharnessing the power of this new tool, so it will take more training and experi-menting to make this an industry standard.

In response to the question, “Of the initiatives that you have taken toimprove productivity, which have given you the best results?” survey participantshave found many things that have worked to improve productivity:

• “Weekly status reports vs. budget incentives to field personnel to beat labor budgets”

• “All methods to improve our ability to communicate have helped toimprove productivity”

• “Improved explanation of expectations prior to the start of a project andthen regular inspection and reporting (required)”

• “Cost coding and productivity monitoring”• “Establishing baseline productivity and then measuring changes”• “Having supervisors measure productivity daily and report to PM”• “Establishing Key Performance Indicators and weekly reporting to our

field management. They have full access to instantaneous job cost and productivity information”

• “Being selective in building teams that work well together”• “Pre-construction coordination, including 3D modeling and commitments

of coordination for team members”• “Close planning of day-to-day activities”• “Formalize planning/schedule process and incorporate these activities into

site-specific safety and quality programs”• “Planning the work that you want to measure, establishing goals,

communicating the goals, measuring and providing feedback in a timely manner”

• “Superintendents and PMs developing manpower schedules for each project and following these schedules throughout”

• “Increased training at the project management and field management levels”

As this sample of comments indicates, there are many approaches to improvingproductivity. The real goal is to put them all together and make productivity astrategic priority for your company and a competitive edge in a changing economy.


PRODUCTIVITY AND LABORMANAGEMENT TRENDS

In this year’s survey, approximately14% of respondents indicated productivity in their companies hadimproved more than 5% over the pastfew years, and close to 43% reportedsmaller increases across the same period.At the other end of the spectrum, 16% of firms experienced a decrease in productivity. Heading into a tightmarket with increased competition,these firms will likely be challenged toremain competitive and profitable.

In spite of the improvements inproductivity that many firms wereexperiencing, 74% of the surveyrespondents indicated that they couldsave a minimum of 5% of their annualfield-labor costs through better management practices. For a companyspending $10 million a year on fieldlabor, this represents an opportunity to put an additional $500,000 or more directly toward the bottom line.Exhibits 1 and 2 summarize the dataon productivity trends and perceivedopportunities for field-labor savings.

With such a scope of potentialreturn, why do contractors invest so little in strategies and initiatives to improveproductivity? Only 56% of the respondents reported having a formal strategy orplan in place to improve productivity. On average, contractors reported that theyinvested about $75,000 a year on initiatives to improve productivity, comparedwith an average investment of about $90,000 to improve safety. These numbersare somewhat skewed by the larger contractors in the study, so Exhibit 3 is provided to show the average investment for various size contractors. The questioncontractors should be asking is, “What should we be willing to invest in order tosave 5% or more in annual field labor costs?”

When asked what portion of completed projects meet or beat their laborbudgets, about two-thirds of companies reported that they meet their labor budgetsless than 80% of the time. This is alarming considering that labor-intensive companies live and die by their ability to effectively manage and control laborcosts. Exhibit 4 provides details on the reported percentage of projects that meetor beat the labor budget.

While the survey did not collect fiscal data on total labor savings or overruns,FMI’s experience analyzing productivity with clients clearly informs us that the magnitude of labor-dollar overruns on a few bad projects far outweighs the

100% = All responses

14% Decreased by 1%–5%Decreased by >5%

Remains about the same

4%11%

28%43%

Improved 1%–5%

Exhibit 1

Productivity TrendsDescribe the productivity trend in your company over the past several years.

Improved >5%

Percentage of change in productivity


1%–4%

5%–10%

11%–15%

>21%16%–20%

Perceive very little opportunity to improve costs

24%

54%

14%

Exhibit 2

Labor Cost SavingsThe portion of annual field labor costs that could be saved through better management.Percentage of potential savings

3%3% 2%


labor savings experienced on a few good projects. Put differently, the upsideopportunity for labor-intensive contractors to save dollars on a good project isfinite, but the downside risks on a bad project are nearly limitless. For most contractors, eliminating the two bad projects a year is the difference between making a decent profit and breaking even or losing money.

WORKFORCE AND DEMOGRAPHICSDespite industry efforts to attract and develop a new generation of foremen

and superintendents, a look at the workforce makeup for this survey clearly indicates that the industry still struggles to attract a sufficient amount of youngsupervisors to replace retiring field managers. For the companies surveyed, 74% of field managers were over the age of 36; the population of field managers underthe age of 36 is insufficient to replace that of field managers currently over 45 yearsold and likely to retire in the next 10 to 15 years. In addition to replacing the field managers who will likely retire in the next decade, contractors also need to

consider how much their companywill grow over that same time frame.For many companies who are notproactive in attracting, developing and retaining this next generation offield managers, growth will be limitedand it will be difficult even to replacethe experience lost due to retirements(see Exhibit 5).

In addition to the prevalence ofaging field managers, the trend towarda more culturally diverse workforcealso appears to be gaining momentum.As expected, the companies employing

Exhibit 3

Comparison of Contractor Investments in 2008 to Improve Safety and Productivity

180,000

160,000

140,000

120,000

100,000

80,000

60,000

40,000

20,000

0

$ Thousands invested

<$15 Million

Annual company revenue

$16 Million –$25 Million




>$200 Million

SafetyProductivity

Exhibit 4

Labor Estimate/Budget


33%

33%

<20%

4% 8%

22%

20%–39%

Percentage of completed projects that meet or beat the labor estimate/budget

40%–59%

60%–79%

80%–100%


a largely Spanish-speaking workforce(>50%) are located primarily in theSouth, Southwest and California.However, the companies reporting upto a 24% Spanish-speaking workforceare scattered across the country. Itappears that a heavy reliance on aSpanish-speaking workforce is morepronounced today than two years ago,as indicated by our previous survey.FMI expects this trend to continue in the coming years as immigration figures increase. If this trend isreversed, many states could have significant problems replacing thislabor (see Exhibit 6).

PROJECT-PLANNING PROCESSESA lack of planning skills at

the field management level, a lack of communication skills at the field management level and poor communication between project managers (PMs) and field managersare three of the top-five internal challenges to improving productivity. All of these items are within the contractor’s control and can be improved significantlythrough the consistent use of project-planning processes. FMI has identified three specific levels of project planning which, if used consistently, will improve productivity and reduce labor costs. They include pre-job planning, short-intervalor look-ahead planning, and daily planning and goal setting.

The first level is pre-job planning, which should be driven by estimators and/orproject managers. The objectives of a good pre-job planning process should be to

facilitate the transfer of information to the field manager, involve the fieldmanager in developing the most productive approach to the projectand create buy-in to a common set ofgoals for the project team. As a generalrule of thumb, early and thoroughfield management involvement in thepre-job planning process will producelabor savings. Does your companyhave a defined process and tools forpre-job planning? If so, is the processused consistently on every project? Areall of your field managers thoroughlyknowledgeable of scope, budget,

Exhibit 5

Field Managers by Age Group


32%

13%

<25 years old

4%17%

34%

26–35 years old

36–45 years old

46–55 years old

>55 years old

Exhibit 6

Spanish as Primary Language


9%2%0%31%

58%

1%

50%–75%>75%

Percentage of current field work force with Spanish as their primary language

1%–24%

25%–49%


estimated production rates, plannedcrew sizes and the material procurementplan prior to starting work in the field?If not, you have a great opportunity to impact productivity.

The second level of planning necessary to optimize productivity iswhat FMI calls short-interval or look-ahead planning. This is formal planningthat needs to occur consistently (weekly) at the field-management level.When we asked contractors how farahead their field managers plan andcommunicate information aboutresources such as labor, tools, equipment and materials, 57% saidtheir field managers looked aheadmore than four days. That means that43% are flirting with inefficient last-minute fire drills to find and directresources toward getting the job done.For companies with a centralized shopor warehouse, simply monitoring thenumber of emergency or last-minutecalls from the field for materials, toolsor equipment is a great indicator ofthe quality of planning taking place atthe field-management level. If theshop experiences a number of calls

with short lead times, there is a good chance field managers are not planning andoperating at the level they should to optimize productivity. Frequent trips to thelocal supply house and a large number of small purchases from the field are alsogreat indicators you may have a field-planning problem (see Exhibit 7).

With so many respondents reporting that field managers fail to plan farenough in advance, it is no surprise that only 20% said that more than half of thetime their field managers communicate a quantifiable or measurable productiongoal with their crew prior to starting work every day (see Exhibit 8). The thirdcritical level of project planning required to optimize productivity is daily planningand goal setting. Simply stated, if the entire crew is not informed of the productiongoals for the day, field managers are not doing their jobs and are missing a greatopportunity to impact productivity. All too often, the crews know the activities for the day, but do not have a quantifiable or measurable target from which to monitor performance and provide feedback. While field managers may have a target in their mind, many do an unacceptable job of communicating the goaland creating buy-in from the crew.

Since construction people tend to be technical, it is unlikely that they havereceived much formal training on these three levels of project planning. Improving


18%

39%

Just beyond the end of their noses

2% 12%

29%

Several hours to one day

Exhibit 7

Project Planning: Resource InformationOn average, how far ahead do field managers plan and communicate information about resources such as manpower, tools, equipment, materials?

2–3 days

4–5 days

>5 days

Exhibit 8

Project Planning: Production Goals


26%

14%

0%3%6%

30%

20%

1%–10%

Percentage of field managers that communicate a quantifiable or measurable production goal with their crew prior to starting work every day

11%–25%

26%–50%

51%–75%

>75%


your company’s project-planningprocesses is not as easy as simplytelling employees they need to do a better job of planning. To improve on these three processes, you mustinvest effort and energy into the following steps.

1. Define and document how you expect to carry out each ofthe three project-planningprocesses, and standardize thetools you expect people to usefor each of the processes.

2. Provide hands-on training toteach everyone how each of theprocesses works. This might require sitting in on several pre-job planningsessions, visiting the job site on a periodic basis to help them develop theirshort-interval plan or meeting with a crew at 7 a.m. to participate in dailyplanning and goal setting.

3. Monitor and measure compliance to the processes. Inspect what it is you expect to happen if these processes are to become common practice inyour company.

4. Administer consequences (good and bad) for people who use the processesand for those who do not.

REVENUE PER PROJECT MANAGER AND PER FIELD MANAGERIn this year’s survey, the average revenue or amount of work managed per

project manager and field manager increased considerably above what we had foundin the two previous surveys, as illustrated inExhibit 9. This could beexplained in part as theresult of inflation, anincreasing average projectsize for the companies inthe survey, or the factthat revenue was growingat a faster pace than thenet addition of projectmanagers and field managers. In any event,an important question toask when comparing yourfirm’s averages against the survey results is, “Are you undermanaging

12,000

10,000

8,000

6,000

4,000

2,000

0

$ Thousands

Average annual revenue per

project manager

Average annual revenue per

field manager

Exhibit 9

Revenue Comparisons per Project Manager and Field Manager

2004 Survey2007 Survey2009 Survey


your projects?” Simply expecting project managers to manage more jobs or a larger volume of work canquickly lead to loss of control andmargin erosion. In today’s constructionenvironment, it is very easy to undermanage a project and almostimpossible to overmanage one. Inmany cases, the additional investmentin project management and/or fieldmanagement can yield a significantreturn on investment through a savings in field labor, particularly if it improves the quality and quantity of planning, ensures that the right materials are in the right place at theright time and adds needed support to the field to help remove obstacles.

MEASUREMENT AND FEEDBACKOne of the most important and

basic processes required to optimizeproductivity is a good system to measure, track and provide timely andmeaningful performance feedback tothe front-line field managers. Mostcontractors have significant investmentsin job-cost systems and the resources to

code, collect and enter time; yet FMI sees countless examples of superintendentsand foremen who are in the dark relative to the cost and productivity status of their projects. With most field managers controlling and spending millions ofdollars on field labor every year, this is a recipe for failure. If a company wants itsfield managers to impact and control labor costs and productivity, it must ensurethat it is giving them timely and meaningful feedback throughout the project. If they are uninformed, your project managers are not doing one of the mostimportant things that you pay them to do — manage costs.

While close to 74% of the respondents rated the quality of their job costinformation as very good to excellent, FMI challenges the perception that close to65% of field managers know where they stand on actual versus estimated productionon a weekly basis (see Exhibits 10 and 11). In many cases, even project managersdo not know where the job stands from a production and cost standpoint. This isparticularly true for the 46% of companies where completion percentage is basedentirely on a subjective estimate, and installed quantities are not reported ortracked in addition to time. Since productivity is typically defined as units perman-hour, or man-hours per unit, companies that are strategically focused on productivity find ways to quantify, measure and report installed quantities in addition to simply tracking time to a cost code or activity.


25%

Extremely high quality18%

54%Very good

Exhibit 10

Quality of Job Cost InformationField managers perceived quality of job cost information

Adequate

2% Poor 0% Extremely poor

Exhibit 11

Targeted Production Rates


30%

5%

65%

Not sure what field managers know about estimated costs compared to production rates

Do your field managers know how weekly progress measures up to estimated costs or targeted production rates?

Yes

No


IMPACT OF PROJECT MANAGERS ON PRODUCTIVITYThe project manager influences productivity by providing the field with the

right information, materials, equipment, tools and direction to perform the workas efficiently as possible. If the project manager is not capable of supporting the

field properly, any effortsto improve productivityare futile. The field teamcan only perform moreefficiently if it is giventhe opportunity andproper support.

Given the impactthat a project managerhas on productivity, it istroubling that 52% ofcompanies gave theirproject manager a field-support rating below70%, and less than 5%of companies gave theirproject managers a ratingof 100% support (seeExhibit 12).

We noted earlier that project managers

are responsible for larger volumes of work than in the past, at an average of $10.7

million dollars a year. Predictably, given increased responsibility, project managersare unable to spend as much time on each job site. Of the companies surveyed,49% reported that their project managers are on site less than 16 hours per month(see Exhibit 13). Companies who reported favorable job performance by projectmanagers also typically reported high productivity rates. Clearly, the beginning of any productivity-improvement initiative should startwith project managers.

INTERNAL VARIABLES AFFECTING PRODUCTIVITY

Controllable factors affecting productivity are considered internal variables. Topping the listagain this year was a lack of field-management-planning skills. The second internal variable impactingproductivity was a lack of communication skills at the field-management level (see Exhibit 14). Contractors have the ability to improve these areas of concern;however, it takes a commitment of time and resources from the organization to

Exhibit 12

Quality of Project-Management Support

0–20

21–30

31–40

41–50

51–60

61–70

71–80

81–90

91–100

Scale 0-100

100% = All responsesPerceived quality of project-management support for the field.

2%

4%

2%

9%

11%

24%

22%

21%

5%


39%

2%

28%

<2

Exhibit 13

Project Managers On-siteTime project managers spend on-site.Hours per month

9–16 17–40

20%12% 2–8

Full time


do so. Planning and communication skills, along with a cultural resistance tochange, can be overcome through personnel training, plan implementation andmonitoring of results. For the contractors surveyed, 75% of field employees and 62% of field managers received fewer than 16 hours of training annually (see Exhibit 15). If contractors expect to improve productivity and break througha cultural resistance to change, they will have to increase the amount of timespent on training.

EXTERNAL CHALLENGES TO IMPROVING PRODUCTIVITYThis category of response deals with barriers to productivity that are not

always in the contractor’s control. Though the ranking has changed from past surveys, the top external challenges to productivity have remained the same sincewe started these surveys, with poor quality of plans and specifications topping thelist (See Exhibit 16).

Exhibit 14

Five-Largest Internal Challenges to Improving Productivity

Lack of planning skills at the field-management level

Lack of communication skills at the field-management level

Cultural resistance to change

Poor communication between project managers and field managers

Lack of technical training at our craft level

Percentage of all responses

16%

14%

11%

11%

9%

Exhibit 15

Internal Variables Affecting Productivity: Annual Training Hours

40

35

30

25

20

15

10

5

0


No formal training

<8 hours 8–16 hours 17–24 hours 25–40 hours >40 hours

Project managersField managersField employees

Comparison of Annual Training Hours for Project Managers, Field Managers and Field Employees


Although externalchallenges are by definitionout of the contractor’s control, the contractor is not entirely helpless inthese areas. By creatingsolid and consistently used project-managementprocesses internally, companies create a cultureof communication that can lead to better coordination with ownersand contractors externally.Better pre-job planning can catch errors in plans and specifications earlier, andtraining programs can improve the quality of craft personnel and field managers.

INCENTIVES AND BONUSESWithin the construction industry we often look for the silver bullet when it

comes to improving productivity. This is most evident in the widespread notionthat by simply implementing a bonus or incentive program for the field, productionwill improve. This year’s survey results support the idea that incentives and bonusesare great tools to reinforce behavior and reward results, but are only one piece of the productivity puzzle.

FMI has found companies that try to improve productivity solely throughbonuses and incentives will not fix the real problems without focusing on improvingmanagement processes, The primary causes of poor productivity are typically nota lack of incentive, but poor management, leadership, planning, communicationand lack of good measurement and feedback processes. Implementing an incentive

Exhibit 16

Top External Challenges to Improving Productivity

Slow responses from other members of the team*

Poor quality of plans and specs

Poor coordination by owners, general contractors and/or construction managers

Unrealistic schedule demands from customers

Lack of available and qualified craft personnel

Lack of available and qualified field managers


18%

17%

15%

14%

12%

10%

* Designers, customers, general contractors and/or construction managers


system while failing to address these other root causes will only frustrate youremployees when they realize their hands are tied by the lack of good managementprocesses and tools. Without good planning and communication, even the mosthighly motivated people will underperform. While 91% of companies surveyedoffer bonuses or incentives to their field managers for things other than safety,only 23% said they were “very satisfied” with the result (see Exhibit 17).

A key differentiator between the effectiveness of bonus plans in improvingproductivity was whether the plan was based on objective or discretionary criteria(see Exhibit 18). Of the companies that do offer plans, 76% reported having a 1% or greater increase on productivity when the plan was based on objective criteria. Of those companies offering discretionary plans, only 54% reported havinga 1% or greater increase in productivity. It is evident that bonus plans based onobjective criteria outperformed discretionary plans in productivity improvement.

Bonus and incentiveplans can be easy leversto pull in an attempt toimprove productivity. Ofthe companies payingbonuses to field managers,82% are paying more than5% of the field manager’ssalary as a bonus (seeExhibit 19). Bonus andincentive plans can beeffective; however, theplans should also be part of a comprehensive productivity improvementstrategy that rewardsbehavior leading toimproved productivity.


Exhibit 17

Level of Satisfaction with Current Bonus and Incentive System for Field Managers

Bonus based on objective criteriaBonus is discretionary

28

Very satisfied

17

Relatively satisfied

53 51

Slightly dissatisfied

17

26

Very dissatisfied

16


Exhibit 18

Impact on Productivity of Field Manager Bonus and Incentives


Improved productivity >5%

Has had a 1% to 5% positive impact on productivity

Has had no measurable positive impact on productivity

Has had a negative impact on productivity

33

17

44

38

24

43

0

1


THE IMPACT OF BUILDING INFORMATION MODELING ON PRODUCTIVITYBuilding Information Modeling, or BIM, is an emerging technology affecting

the construction industry. Through BIM, contractors, owners and constructionmanagers can use computer modeling to simulate the construction of a project.According to one respondent, the BIM process “is evolving quickly and positively.”For this survey, we only asked the commercial building trade contractors torespond to questions about their experience with BIM and how its use affectedproject productivity. That group represented about 30% of our overall sample, andof those, 38% had worked on a projectwhere BIM was used — predominantlymechanical, electrical and general contractors who self-perform someportion of the project (see Exhibit 20).

While those who had encounteredBIM comprised only a small part ofour sample, 24% said productivity hadimproved by up to 5%, and 30% saidproductivity had improved more than5%. One of the benefits of BIM largelyresponsible for these results is clashdetection, whereby the 3D computermodel generated by the process detectspotential interferences and scheduling problems before the material arrives andcrews start work on the job. Shop-drawing review and prefabrication managementwere also noted as beneficial to productivity improvement (see Exhibit 21).

We expect when we conduct our next survey of productivity that the numberof respondents who have used BIM will increase. The use of BIM provides oneworkable solution to the largest external threats to productivity improvement,such as poor quality of plans, specifications and poor communication with othermembers of the project team.

Field Manager Bonus and Incentives

5045

40

35

30

25

20

15

10

50


< 5% 5% to 10% 11% to 15% 16% to 20% 21% to 25% >25%


Range of the average bonus as a percentage of base wages or earnings

Exhibit 19


43%

Improved >5%30%

24%Improved 1%–5%

Exhibit 20

Impact of Building Information Modeling on Productivity

About the same

Worse

4%


SUMMARYIt is clear from our study of productivity, as well as our experience in the

field working with contractors, that improving productivity relies heavily onknowing what to measure and communicating goals to project and field managers.While there are some common measures that fit the needs of most labor-intensivecontractors, what matters will also depend on the type of work the company isengaged in and its goals for improvement. Productivity improvement starts at thetop and must be made part of an overall strategy to improve. Many companiesstart initiatives expecting productivity to improve overnight but find it takes along-term approach, and when one goal is reached, there is always another.Productivity improvement is an attitude backed by actions. Being more productiveand efficient is no longer optional; it is and will continue to be required bothwhile the economy is in a downturn and when it recovers. Too often there areexcuses for not being productive in a downturn because there are fewer projects in the backlog, and even when business is booming, there seems to be little timefor improving productivity. Therefore, the only right time to improve productivityis all the time. No excuses. ■

Scott Kimpland is a principal with FMI Corporation. He may be reached at 813.636.1263 or via e-mail

[email protected]. Phil Warner is a research consultant with FMI. He may be reached at 919.785.9357

or via e-mail at [email protected].

Exhibit 21

Building Information Modeling: Project Applications

Shop drawing review

Clash detection and interference management

Shop prefabrication management

Marketing/sales presentations

Safety analysis or management

Cost estimation

Percentage of all respondents

36%

18%

17%

15%

5%

4%


APPENDIX: SURVEY PARTICIPANT PROFILE

The 226 respondents to FMI’s “2009 Contractor Productivity Survey” consisted of industryCEOs, presidents, executive vice presidents and vice presidents (71%), as well as otheroperations and project-management executives. As in the past, we differentiated generalcontractors who self-perform a significant portion of their work from those who do not self-perform. Reflective of current industry-wide trends, the largest portions of trade contractors worked in mechanical/HVAC (15%) and electrical (13%). The “other” categoryconsists of a wide variety of specialties, including fire protection, steel-tank erection, painting and site development. The sample is intentionally focused on larger contractors ineach group, as they have the largest workforces and the biggest challenge to harness theproductive capacity of their organizations. Union and nonunion contractors are representedabout equally across all respondents. Exhibits 22–24 summarize the types and sizes of firms represented in the survey.

Exhibit 22

Type of Contractor

General (S/P)

Mechanical/HVAC

Electrical

General (no S/P)

Highway/Road Builder/Paver

Concrete

Utility

Masonry

Drywall

Roofing

Other

100% = 226 respondents

25%

15%

13%

9%

7%

6%

4%

2%

2%

1%

16%

Exhibit 23

Size of Organization by Annual Revenue


27%

19%

<$15 Million

21%4% 9%

20%

$16 Million– $25 Million

$26 Million–$50 Million



>$200 Million

Exhibit 24

Union or Non-Union Contractor


48% 52% UnionNon-Union

Credit crisis. Economic stimulus package. Housing slump.

Infrastructure spending. Recession. There is both

good and bad news on the horizon and unfortunately,

2009 will likely hold more bad than good for power utility-related

construction. What is not in doubt is that 2009 will be a year of change.

Contractors are optimistic and confident by nature, and because they are,they can continue to operate in a volatile market. In 2009–2010, the power generation, transmission and distribution construction markets will face challengesthat may shake the confidence of some contractors. These include financing availability, changing regulatory stance, very low new-housing growth, distributionpipeline integrity emphasis, transmission grid upgrade and infrastructure or stimulus package rollout. (See American Recovery and Reinvestment Act: TheStimulus Contractors Need? and Exhibit 1)

Perhaps the biggest short-term constraint is credit. While there is not yet hard evidence, many owners are slowing the release of both construction anddesign activities, according to FMI’s observations and discussions with utility,engineer and contractor professionals. We anticipate the 2009 spring bidding season, typically when large volumes of work are released for construction, to bereduced in both size and number of available projects. Currently, we expect therelease of work to improve in the back half of 2009, but this will still result in

By Mark Bridgers, Dan Tracey and Mike Chase

Is Power Construction the Silver Lining?In 2009–2010, the power generation, transmission and distribution construction markets will face the challenges that mayshake the confidence of some contractors. However, there are anumber of proactive strategies thatsuccessful contractors can pursue.

54 ■ is power construction the silver lining?

reduced volumes of work for many contractors from their record years in 2007

and 2008.While the credit crisis and economic recession weigh heavily on many utilities

as they consider how to expend their precious capital, there remains a silver lining.All of the change and constraints placed on the utility owners and buyers of power

construction services will result in softening growth that is a modestretraction from the blistering growthseen in the past five years, but notwholesale collapse. In addition, 2009

will exhibit a congressional shift towardeconomic investment to spur growth, asopposed to encouraging consumption.This equates to greater funding ofinfrastructure construction, which will buoy many of the utility markets.

The uncertain but optimistic legislative outlook supports FMI’sforecast of slow growth in the power generation, transmission and distribution segments for 2009. Thisgrowth is in part due to large, multi-yearprojects in which financing has been

secured, there is steadfast demand for service installations, or aging infrastructurereplacement and system enhancement are critical. All in all, regardless of whichutility segment a contractor operates within, change is the order of the day.

POWER GENERATIONChange. Financing availability and regulatory stance. One measure of the

financing challenge facing power generators can be found at Duke Energy, headquartered in Charlotte, N.C. Duke recently drew down its $1 billion creditline, in part due to concern over the turmoil in the financial markets and the potentialunavailability of that credit overthe term of its agreement.1 Theproblems in the financial arenaand broader economic slowdownwill lead to downward pressure onpower generation construction.In addition, third-quarter 2008

growth of U.S. Gross DomesticProduct (GDP) was preliminarily forecast at -0.3%. While the finalassessment is not yet in, manyeconomist believe the U.S. was in recession all of 2008.

“Change has considerable psychological impact on the humanmind. To the fearful it is threateningbecause it means that things may getworse. To the hopeful it is encouragingbecause things may get better. To the confident it is inspiring becausethe challenge exists to make thingsbetter. Obviously, then, one’s character and frame of mind determinehow readily he brings about changeand how he reacts to change that isimposed on him.”

— KING WHITNEY JR. PRESIDENT,

PERSONNEL LABORATORY INC.


Unlike the financial crisis, a recession offers both challenges and opportunitiesfor contractors. As a case in point, the stimulus bill will result in some pickup inthe power generation segment but is unlikely to affect significantly this market in the near term. Looking five to 10 years down the road, however, funds directedtoward developing clean-coal technologies and building an $800 million carbon-capture facility may create new subsectors in this utility construction segment.Additionally, the renewal of the production tax credit (as a part of the stimulus bill)will ensure wind, solar, geothermal and other renewable energy sources remainfinancially viable through at least 2012.

In 2009–2010, FMI predicts a slowing of growth in power generation construction spending, which will make contractor markets more competitive asbacklogs for many contractors fall throughout 2009 (Exhibit 2). Power generation

AMERICAN RECOVERY AND REINVESTMENT ACT: THE STIMULUS CONTRACTORS NEED?

On February 13, 2009, the United States Congress made history when it passed the $787 billion

American Recovery and Reinvestment Act. Political pundits predicted the massive bill would

create as many as 300,000 construction jobs. While the total bill value is unprecedented,

FMI predicts that only $94 billion is for new capital construction, with an additional $99 billion

indirectly related to construction.

So what does the stimulus bill mean to the utility construction market? The cash injection

should temper an overall decline in construction by a couple percentage points, but FMI has

concluded that a large percentage of the cash will be directed to accounts that are already

depleted due to decreased tax revenue and difficult municipal bond markets.

In the power generation and transmission and distribution market, the bulk of funding will be

focused on the tech-heavy initiatives like the “Smart Grid” and electric transmission efficiency/

conservation or alternatively distributed projects like home weatherization assistance.

Distribution construction for telecommunications, gas and electric will see some spill-over

work due to the need to move facilities for the planned highway and transportation spending.

Of real substance for power-generation and electric transmission-related construction is the

extension through 2012 of the production tax credit for renewable-energy generation.

Buildings

Residential

Water and Environmental

Highway and Transportation

Power

Total

3,787

985

2,690

16,192

620

24,274

6,077

2,341

5,861

26,550

1,110

41,939

4,450

1,500

4,693

4,950

1,000

16,593

1,750

3,445

100

1,000

6,295

1,000

2,715

1,000

4,715

2012201120102009Market

1st Quarter

2013

Exhibit 1

Construction Put in Place from the Stimulus BillMillions of Current Dollars

Note: Improvements, additions, alterations and major replacements are included. Maintenance and repairs are not included.


construction had seen rapid growth over the period of 2006–2008 due to additionalfacilities, higher construction costs, labor shortages, limited resource/materialavailability and legislative policy — all of which add to the growth in spending onthese facilities. The added pressure of difficult-to-obtain financing will exacerbatethe effects of an already competitive and expensive outlook for all power generatorsand their respective contractors. Several possible escape valves include the economicslowdown addressing labor availability in the short-term, rapidly falling constructionraw material prices, and a potential end to regulatory uncertainty with the inauguration of a new president and a Democrat-controlled Congress. Significant

political hurdles remain before a legislative consensus can be reached on a regulatory stance.

Fossil Power GenerationA number of converging factors led

to the rise in coal and natural gas powerplant construction cost, includingglobal competition for materials andthe growing shortage of craft labor.According to PowerAdvocate’s powerplant building index, the cost of building a 550MW combined-cyclenatural gas plant has risen by over 10%

in the 24 months ending November 2008 and begun to fall since that point due toeconomic conditions.2 This compares poorly to a consistent 3–7% increase seen incommercial-building construction costs over the same period. Common equipmentacross the heavy-industrial construction market (oil, gas, power, chemical and

35,000

30,000

25,000

55,000

45,000

50,000

40,000

20,000

$ Millions (current dollars)

15,000 –10

–20

–30

Percentage of change

10,000

5,0002001 02 03 04 05 06 07 08* 09* 11* 2012*

50

60

40

20

30

10

0

10*

Exhibit 2

Power Generation Construction Put in PlaceHistorical Figures and Forecasts

Power generationPower generation spending change

* FMI prepared forecasts for 2008-2012Source: Building permits, construction put in place and trade sources.

“We now find more owners are pushingwork out into the future, shelving projects that are marginal or choosingnot to expend their scarce financialand credit resources. This is primarilyaffecting the capital construction side but we are seeing some bleed overinto the O&M space … ”

— MIKE MCMAHON, PRESIDENT,

DAY & ZIMMERMANN POWER GROUP


heavy manufacturing) has driven up construction costs in all segments, even as demand and growth differ among the various industrial segments. Volatile

energy prices have also intensifiedthe competition for heavy-industrial materials common to both fields.Transportation, and until recently fuelcosts, comprised a higher percentageof the total bill of goods sent by thesuppliers of these materials and equipment components.

Coal-fired generation faces a different set of challenges than its fossil-fuel cousin, natural gas. Specifically,developers are having a difficult timesimply getting approval to build coal-fired power plants. Aside frommore stringent EnvironmentalProtection Agency (EPA) air-quality

standards mandated by the Air Quality Act of 2006, local objections to coal-firedplants have accelerated in the past year. As a reference, in 2007 the U.S.Department of Energy listed 151 coal-fired power plants in various stages of theplanning process. However, by 2008, 59 of the proposed plants had been refusedstate licenses or otherwise abandoned, with an additional 50 being contested incourt.3 Ray Kowalik, president of Burns & McDonnell’s Energy unit, describes thechallenges faced by utilities that are hoping to meet increasing consumer demandby adding coal-fired capacity. “Uncertainty in future potential carbon legislationand the inconsistent policies that states have arbitrarily instituted with regard toCO2 emissions have made building acoal plant more difficult.”

The virtual standstill on green field coal-fired power plant construction in many U.S. states haspushed developers to natural gas as a fuel source, thereby amplifying thebottleneck for materials and labor byreducing the options available. Instates such as Texas that are movingforward with new coal-fired plants,developers may experience their ownversion of sticker shock; all-in costs for standard pulverized-coal-firedpower plants have more than doubledfrom figures prepared as recently as2004, according to Engineering NewsRecord (ENR) and Eric Oldenhuis,director of proposals at Black &Veatch’s energy division.

Coal-fired generationfaces a different set of challenges than its fossil-fuel cousin, natural gas. Specifically, developers are having a difficult time simply getting approval to buildcoal-fired power plants.


Long lead time on materials will be crucial as many fabrication shops andequipment suppliers operate at or near capacity. Limited production materialssuch as high-nickel-alloy pipe have seen price escalation of 20–40% in the pastfour years, according to Oldenhuis.

Nuclear Power GenerationThe last decade has seen a revival of interest in the use of nuclear power

(Exhibits 3 and 4). Still, of the 36 reactors under construction worldwide, none arein the United States. According to the Department of Energy, the U.S. will needto add at least three new reactors per year starting in 2015, in order for nuclearenergy to maintain its current 20% share of U.S. electricity generation. The agingdomestic nuclear plants may buffet a downturn in new-facility construction since higher maintenance and operating costs are associated with aging plants.According to nuclear safety engineer David Lochbaum’s February 25, 2008, report,“The Future of Nuclear Power: Renewal or Re-run?” prepared for the Union of

AL Bellefonte AP1000 2FL Levy County AP1000 2 Turkey Point AP1000 2GA Vogtle AP1000 2ID Hammett EPR 1LA River Bend ESBWR 1MD Calvert Cliffs EPR 1MI Fermi ESBWR 1MO Callaway EPR 1MS Grand Gulf ESBWR 1NC William Lee AP1000 2

State Location DesignNumber of Units

NY Nine Mile Point EPR 1PA Bell Bend EPR 1SC V.C. Summer AP1000 2 Harns AP1000 2TX Amarillo EPR 2 Comanche Peak USAPWR 2 Victoria Country ESBWR 2 South Texas ABWR 2UT Blue Castle TBA TBAVA North Anna ESBWR 1

State Location DesignNumber of Units

WA

OR

NV

CA

AZ

UT

ID

MI

WY

CO

NM

TX

ND

SD

NE

KS

OK

LA

AR

MO

IA

MN

WI

ILOH

MI

KY

IN

TN NC

SC

GAALMS

FL

VAWV

PA

NY

ME

VTNH

MACT

NJMD

Source: Nuclear Regulatory Commission (NRC) Location of Projected New Nuclear Power Reactors. Prepared October 29, 2008 and downloaded from http://www.nrc.gov/reactors/new-reactors/col/new-reactor-map.html.

RI

DC

New Nuclear Units with NRC License Applications PendingExhibit 3

ESBWRUSAPWRDesign/Units–TBA

ABWRAP1000EPR


Concerned Scientists, the risk of equipment failure or breakdown rises significantlyand predictably as a nuclear reactor ages.

While nuclear-power generation is aligned with the new administration’s planto encourage carbon reduction and achieve energy independence, there is little actualpolicy support for nuclear generation. On the contrary, the new administrationwill likely reject any legislation enabling spent nuclear waste to be stored at theYucca Mountain site. Still, firms are moving forward with plans to construct newnuclear facilities. NRG Energy is optimistic as they plan to build two new nuclearreactors in the South Texas Project, though no ground is yet broken. The pair of new reactors, originally scheduled to come online in 2014 and 2015 at the very earliest, is now targeting 2016.5 Once constructed and in operation, the reactorswill generate 2,700 megawatts, or enough to power roughly 2 million homes.

As utilities focus on preservation of cash and liquidity, nonessential projectsare likely to be pushed out into the future. Lower-cost upgrades and routine

Illinois

Exhibit 4

Existing Nuclear Generation Capacity by State — 2008

11,379

6,472

4,985

9,305

5,156

4,975

Megawatts

4,860

4,390

Pennsylvania

South Carolina

New York

Alabama

North Carolina

Texas

California

Georgia

New Jersey

Michigan

Florida

Arizona

Virginia

Tennessee

Louisiana

Ohio

Connecticut

3,995

3,969

3,872

3,984

3,902

3,404

3,397

2,127

2,124

2,022

Source: Data prepared by Energy Information Administration from Capacity-EIA Survey Form 860, “Annual Electric Generator Report” and Generation-EIA Survey Form 906, “Power Plant Report.”


maintenance will continue in thenuclear sector, despite the tighteningof credit.

Renewable Power GenerationOne of the biggest constraints

to long-term renewable power generation growth and construction is the inability to transport the energy to the grid. Renewable power generation construction received a much-needed lifeline with the extension of the production tax creditas a component of the AmericanRecovery and Reinvestment Act. Thisnewest edition of the production tax credit extends tax credits for commercialwind generation through 2012, while extending a host of other renewable generationthrough 2013 (including solar, biomass and geothermal). Despite the passage ofthis bill, the limited availability of credit will hamper renewable-energy developersas nearly all of these facilities rely upon liquid-credit markets.

In 2007 wind generated 32.1 billion kilowatt hours — a 21% increase — andenough to power roughly 2.9 million homes. Wind energy is expected to jump an additional 45% in 2008, edging total U.S. renewable generation to the 10%mark for the first time.6 According to the American Wind Energy Association, the U.S. surpassed Germany during 2008 to become the world leader in windgeneration (Exhibit 5).

TRANSMISSION AND DISTRIBUTIONChange. Very low new housing growth, distribution pipeline integrity emphasis,

transmission grid upgrade. Construction put in place for the electric, gas, and liquidtransmission and distribution market increased 9% to $29.6 billion in 2008 andFMI forecasts an additional increase of 5% in 2009 (Exhibit 6). This market is beinghurt by low new-housing growth, but the aging transmission infrastructure, alongwith the growth in U.S.-based gas and petroleum extraction and transportation, issupporting growth. Funding from the stimulus bill will eventually find its way intothis market, though largely in an indirect fashion–such as through the tax incentives

supporting new-home construction or through the necessary movement of facilities due to road, highway and transportation-related stimulus spending. FMI anticipates a continuedbut slowing growth throughout 2009

and then acceleration in 2010 and 2011

as large transmission projects continueto take place and distribution-orientedwork picks up with a rebound in thehousing markets.

“In my power plant construction management workshops over the last three months, attendance is very robust. It suggests to me that although there may be some postponements and cancellations ofmajor power industry projects, thereare still many others continuing forward. Gloom and doom it is not.”

— PETER HESSLER, AUTHOR

POWER PLANT CONSTRUCTION

MANAGEMENT: A SURVIVAL GUIDE


Electric Transmission and DistributionElectric power-related transmission and distribution, in comparison to

other utility infrastructure segments, is somewhat resistant to downward pressurefrom the financial markets due to the size, cash flow, regulated rate recovery andrelatively good credit standing of many utility owners that put in place this work. However, this market is not insulated from continuing political gridlock surrounding legislation to encourage investment in the nation’s rapidly aging infrastructure. FMI believes that the new administration will work to address the

50,000

100,000

40,000

Megawatts

01982 9284 86 88 9083 85 87 89 9391 95 97 9994 96 0498 00 01 05 060302

Exhibit 5

Global Wind Generation Capacity — 2007Rest of worldEuropeUnited States

10,000

30,000

20,000

90,000

80,000

70,000

60,000

Source: “Global Wind 2007 Report,” Global Wind Energy Council (GWEC), Second Edition, May 2008, p8.

1. Germany 22,247 2. U.S. 16,818 3. Spain 15,145 4. India 8,000 5. China 6,050

2007 Wind GenerationMegawattsCountry

30,000

35,000

40,000

25,000

20,000


15,000

0

–5

–10


10,0002001 02 03 04 05 06 07 08* 09* 2012*

30

25

20

15

10* 11*

Exhibit 6

Electric/Gas Transmission and Distribution Construction Put in Place Historical Figures and Forecasts

Electric/gas transmission/distributionElectric/gas transmission/distribution spending change

10

5



structural and regulatory flaws that make it harder and less financially rewardingto replace transmission and distribution infrastructure.

The recent signing of the omnibus economic stimulus bill into law carried withit a three-year extension of the production tax credit, which has been the primarydriver of wind power generation construction in the United States. Exhibit 7illustrates the complex challenge transmission poses for wind power, despite thefinancial incentives. John R. Colson, chairman and CEO of Quanta Services,explains the potential impact of additional transmission capacity, “Over the nextthree years we anticipate an uptick in transmission-related construction to supportthe buildout of wind generating capacity in remote areas. While tempered, thisgrowth should help electrical transmission and distribution contractors weatherthe economic slowdown.”

Investment in transmission projects will continue at an aggressive pace, inpart because of financial support from federal- and state-regulated rates of return;however, credit availability is a significant issue given the financial market turmoil.Electric transmission-related spending will be driven partly in the western states by renewable-energy generation as new transmission lines must be built to for interconnection to the grid. The Federal Energy Regulatory Commission(FERC) has offered higher rates of return for some larger projects as well, to spurtransmission construction.

According to the Edison Electric Institute, U.S. transmission capacity has not kept up with rising electricity demand, which has increased 20% over the last decade. Despite the social and political pressure for utilities to upgrade theirtransmission infrastructure, there is relatively little inherent financial incentive

100–300300–500500–1,0001,000–5,000>5,000

Wind (MW) used inside the Balancing Areas

Existing New100–200200–500500–1,000>1,000

Wind (MW) on transmission lines

New Transmission Lines Needed for 20% Wind Power Generation in 2030

Exhibit 7

Source: “20% Wind Energy by 2030: Increasing Wind Energy’s Contribution to U.S. Electricity Supply,” U.S. Department of Energy, May 2008, p160.

Total Between Balancing Areas Transfer >= 100 MW (all power classes, land-based and offshore) in 2030. Wind power can be used locally within a Balancing Area (BA), represented by purple shading, or transferred out of the area on new or existing transmission lines, represented by red or blue arrows. Arrows originate and terminate at the centroid of the BA for visualization purposes; they do not represent physical locations of transmission lines.


offered by such upgrades other thanFERC-guaranteed higher returns on certain projects. Nonetheless, many large utilities and the regional authorities that manage the flow of electric power have announced large capital campaigns. Several examples include:

• In Electric Reliability Councilof Texas’ (ERCOT) December 2008 report to the state regulatory body entitled “2008 Constraints and Needs Report: 5 Year TransmissionPlanning Report,” they propose nearly $3 billion over five years in potentialtransmission spending in Texas.

• American Electric Power (AEP) announced on December 2, 2008, that it is evaluating the feasibility of building a multistate, extra-high-voltage transmission project across the upper Midwest.

• Duke Power and AEP announced on August 8, 2008, the formation of ajoint venture to build and own new transmission lines.

Gas/Liquid Transmission and DistributionNatural gas production grew by 4.3% last year in the U.S. and was up 9%

in the first quarter of 2008, due in part to new technology that allows firms to tappreviously inaccessible gas trapped in existing coal and shale mines.7 In the U.S.,demand for natural gas continues and its availability in North America makes itattractive for drilling, exploration and ultimately, transmission-related projects tosupport getting the gas to market (Exhibit 8).

25Trillion cubic feet

162006 2010 2015 2020 2025 2030

Exhibit 8

Sources of Incremental U.S. Natural Gas Supply — 2004-2030

Growth in Alaskan production

Growth in liquefied natural gas imports

Growth in non-associated unconventional

Base production (all sources)

19

22

Source: Costello, Ken, “Key Issues Facing Gas Utilities and State Public Utility Commissions,” The National Regulatory Research Institutedelivered to the NARUC Subcommittee on Gas on July 20, 2008, p64. Compiled from data included in the Energy Information Administration (EIA), Annual Energy Outlook 2008.

“We have no time to experiment withvisionary energy sources; civilization isin imminent danger and has to usenuclear — the one safe, available energysource — now or suffer the pain soonto be inflicted by our outraged planet.”

— DR. JAMES LOVELOCK, SCIENTIST4


Though important to theglobal natural gas market,Liquefied Natural Gas (LNG) hasbeen slow to take hold in NorthAmerica due to three trends.First, North America’s alreadydominant local supply of naturalgas, as well as recent discoveriesof additional gas wells; secondNIMBY reaction to LNG terminal construction; and last,the higher pricing available forLNG in Japan and other marketsversus the U.S. Two notableexamples are the recent rejectionof the Broadwater LNG terminal

in Long Island Sound8 and the significant drop in the number of LNG shipmentsarriving at the Lake Charles terminal owned by BG Group, which fell from 48 inthe second quarter of 2007 to just one in the fourth quarter due to diversion toother markets where pricing was higher.9

Escalating and highly variable materials costs will continue to alter all sectors of utility construction in 2009, just as they did in 2008. According to theHandy-Whitman Index of Public Utility Construction Costs, transmission anddistribution costs have increased an average of 4.8% and 5.4% per year, respectively,since 2003. Just as copper prices peaked during 2007 and showed some signs ofsteadying in 2008, steel prices have become highly variable. From June to July of2008 for example, the price of steelsaw a 30 % rise and since that time an almost equal drop.

CONCLUSION“Change we can believe in.”

President Obama ran and won on atheme of change and it is what utilitycontractors will see in 2009. The disruption associated with the financialcrisis will eventually abate and newhousing growth will return. Old andaging electric power infrastructurealong with pipeline infrastructure for natural gas and petroleum products will allreceive attention and construction spending to begin their replacement. TheObama administration will eventually select and implement a regulatory stance.Last, the economic recession will resolve to the benefit of all surviving businesses.

It is the interim that will challenge utility contractors. The realities of the nextsix to 12 months do not require utility contractors to behave reactively. On thecontrary, there are a number of proactive strategies that FMI believes successfulcontractors will pursue:

“Nuclear has the power to move the needle in the fight against globalwarming. While the up-front costs of building new nuclear generation are not cheap, in the long run it’s one of the most economical ways to make electricity.”

— DAVID CRANE, PRESIDENT AND

CEO, NRG ENERGY


• Analyze your completed projects over the last three years and understandclearly what work you perform both well (profitably) and poorly.

• Use a bottom up budgeting approach that allows for “what-if” analysis onvarious volumes and work mixes for 2009 and 2010.

• Use FMI’s Dual Rate© overhead recovery method to ensure that you have clarity in your cost to perform work and the selection of an effectivepricing strategy.

• Vary overhead recovery based upon project size. Smaller projects require alarger age recovery of overhead cost than do large jobs.

• Target the right clients and customers that are aligned to your businessstrategy and strengths.

• Create “your” customer value proposition and know what you bring to the table — by the way, it is not meeting schedule, hitting budget or delivering quality — nearly all bring this or say they do!

Two additional tools that require some collaboration and support from ownersinclude aggressive cash management efforts and the use of more collaborative buying and contractor oversight methods. Both of these tools can yield significantshared savings for both owners and contractors.

King Whitney Jr. may have said it best “ … To the confident [change] isinspiring because the challenge exists to make things better. Obviously, then, one’scharacter and frame of mind determine how readily he brings about change andhow he reacts to change that is imposed on him.”

Select your own frame of mind for 2009 and make it an optimistic and confident one! ■

Mark Bridgers is a senior consultant with FMI Corporation. He may be reached at 919.785.9351 or via e-mail

at [email protected]. Dan Tracey is a business analyst at FMI. He may be reached at 919.785. 9298 or via

e-mail at [email protected]. Mike Chase is formerly with FMI.

1 “Blocked pipes: When banks find it hard to borrow, so do the rest of us,” The Economist, October 2, 2008, pg. 75.2 Press release, “PowerAdvocate Updates Electric Power Industry Cost Indices with 4Q2008 Results, Highlights 5% Fall in

Construction Costs”, February 3, 2009.3 Brown, Lester, “U.S. Moving Toward Ban on New Coal-Fired Power Plants,” Earth Policy Institute, February 14, 2008, pg 1

(www.earthpolicy.org).4 Dr James Ephraim Lovelock, CH, CBE, FRS (born 26 July 1919) is an independent scientist, author, researcher, environmentalist,

and futurist who lives in Devon, UK. He is known for proposing the Gaia hypothesis, in which he postulates that the Earth

functions as a kind of “superorganism”. Named after the Greek goddess Gaia, the hypothesis postulates that the biosphere has a

regulatory effect on the Earth’s environment that acts to sustain life. 5 Souder, Elizabeth, “NRG Energy could get license for two South Texas nuclear reactors in 2012,” The Dallas Morning News,

February 11, 2009. 6 “2008 Green Jobs Report: Current and Potential Green Jobs in the U.S. Economy,” The United States Conference of Mayors

Climate Protection Center, pg 2.7 “A more liquid market,” The Economist, October 2, 2008, pg. 70.8 “Idea for Long Island LNG terminal near death? Lawmaker calls Obama administration opposition a ‘final nail’ in coffin,”

Associated Press, Garden City, NY, April 14, 2009. 9 “A more liquid market,” The Economist, October 2, 2008, pg. 70.

Results of team evaluations FMI has performed on

partnered projects during the last seven years indicate

that trust and the timely resolution of issues are

linked in their impact on overall effectiveness of project teams.

The evaluations included more than 1,000 industry personnel on

31 ongoing projects of varying types since 2002.

The common thread among the projects is that all maintained consistent,ongoing partnering processes that included conducting these evaluations on atleast a quarterly basis through the life of the projects. More than 60% of the projects held quarterly executive-level sessions in addition to the evaluation process.The results suggest those project teams that invest more in the development ofthe building blocks of trust are more likely to be rewarded in cost savings as itrelates to the resolution of issues.

THE STATE OF TRUST IN AMERICA TODAYThe significance of these results can be further appreciated when viewed

in the context of the current state of trust within American society. In his book “The Speed of Trust,”1 Stephen Covey outlines just how far trust has eroded within our culture, including religion, media, big companies, political parties and

By Bill Spragins

Issue Resolution and Truston Partnered Projects

Organizations that are perceivedas trusting will hold a distinctcompetitive advantage withintheir respective markets.

68 ■ issue resolution and trust on partnered projects

in comparison to European countries. Additionally, the number of college graduatesadmitting to have cheated in an effort to gain acceptance to graduate schools isdisturbing (see Exhibit 1). Moreover, these studies were conducted before the collapse

of the economy in the fall of 2008!The implications of the trust

factor for construction organizationsand their projects are high, given theuncertain nature and varying conditionsassociated with most projects, theinterpretation of the contractual documents from multiple individuals,and the sheer number of differentorganizations involved with any givenproject. The economic impact of truston construction projects becomesapparent when one considers theamount of time and money that is loston projects where low levels of trustexist. The time project personnelspend on nonproductive activities, such as letter-writing and case building, only takes time away from the focusall team members should have — onbuilding the project. Additionally, theability to resolve the inevitable issuesthat will arise, whether they involveowner-initiated changes or field conditions, will impact cash flow of

the parties involved, as well as save on consulting and legal fees at the conclusionof the project if left unresolved. Therefore, the level of trust has a direct economicimpact on the viability of a construction project, which falls directly to the bottomline of owner, designer/engineer and contractor budgets.

Those organizations and individuals that can rise above current societal perceptions and are perceived as trusting will not only be viewed as true leaders,but also will hold a distinct competitive advantage within their respective markets.

THE TEAM EVALUATIONFMI measures trust and other key teamwork variables through a straightforward

survey that is administered and compiled online. This evaluation is initiated soonafter project-level staff have been assembled and participated in the partneringprocess. The surveys continue on a quarterly basis. The Team Evaluation has a simple1 to 5 scale applied to five key areas of team dynamics (see Exhibit 2). A score of “4”reflects “meeting expectations” in a given area. A score of “5” exceeds expectations,and any score of less than “4” is not meeting expectations with a “1” being the worst.Any area scored below a “4” requires a written comment to ensure participants do not give low ratings without a sound basis. While tracking the score trends isimportant, the highest value comes from the comments generated. These comments

27% Trust the government

22% Trust the media

12% Trust big companies

8% Trust political parties

Trends also down in healthcare and churches

In the United States

Only 51% of employees have trust and confidence in senior management

Only 36% of employees believe their leaders act with honesty and integrity

76% observed illegal or unethical conduct on the job

At the Organizational Level

43% Liberal arts students

52% Education students

63% Law and medical students

75% Business students

Students who have acknowledged that they cheated to improve their odds of getting into graduate school

Exhibit 1

Whom Do You Trust?

Source: Stephen M. R. Covey, Speed of Trust


provide senior and project leaders with input to develop tactical responses on any issues identified. The intent of the survey is to proactively identify potentialrelationship issues while still in a “brush-fire” mode and apply preventive measuresbefore the issues deteriorate toward a “forest-fire” level.

The results of the survey are based on the most-recent evaluation completed by agiven project. The movements of the scores in issue resolution and trust from projectto project remain consistent regardlessof a number of project characteristics(see Exhibits 4, 5 and 6) that include:

• Industry sector • Project size • Percent complete • Project delivery • Geography (projects included

those from the East Coast, West Coast and the centralUnited States)

Participants in the evaluation wereproject-management level and projectpersonnel. Senior off-site leaders didnot participate to ensure they played an objective role in reviewing the results ofthe evaluations and developing strategy to enhance team dynamics.

THE LINK BETWEEN ISSUE RESOLUTION AND TRUSTSince becoming involved with the partnering movement in the early 1990s,

FMI has suspected that issue resolution was at the heart of team dynamics ondesign and construction projects, as successful project teams who resolved theirissues on a timely basis normally had very high levels of trust. This has finallybeen confirmed through these evaluations.

The two lowest scoring areas based on the average of all projects and on any individual project areissue resolution and trust(see Exhibit 2). This is trueon the highest performingproject teams (those withan overall project averageabove 4.00) as well as the poorest performing project teams (those withscores less than 3.00). Asthese two areas rise andfall, so follow the averagesin other areas. The detrimental effect a majorunresolved issue can have

Communication

Timely resolution of issues

Cooperation

Morale

Trust

Average

3.87

3.63

3.92

3.93

3.77

3.82

Areas of Team Dynamics Score

Exhibit 2

Issue Resolution and TrustScale: 1–5

Highest-scoring project

Lowest-scoring project

4.53

2.69

31 Projects

Size

Project Delivery Method

% Complete

Response Rate

14 Wastewater

5 Highway

6 Railworks

1 Highway/Railworks

5 General Building

$9 million – $2.7 billion

24 Traditional Design-Bid-Build

5 Design-Build

2 CM/GC

From PE Phase to 100% Complete

1086 of 1448 (75%)

Exhibit 3

Types of Projects Included in Evaluation Results


on team trust and morale is immense. Senior leaders of the two lowest scoringprojects in this sample did not get the issues resolved, while their peers on the otherhigher scoring projects did get them resolved, ultimately bolstering confidence andtrust on those projects. Successful projects gear their partnering processes, regardlessof project type, toward resolving real project issues and providing a supportingprotocol to do so. FMI has always employed that approach.

OTHER CONCLUSIONSOther conclusions drawn from the results of the evaluations:

• Team dynamics have less to do with the specific type of project-deliverymethod utilized and more with how on-site project leaders and off-site seniormanagement lead their teams. It is they who set the working climate on the project and it is they who ultimately affect the behavior of their teams.Although project delivery methods such as design-build and CM-at-Riskhave obvious schedule, budget and quality benefits associated with them,design-bid-build projects outperformed them in this sample of projects interms of team dynamics (see Exhibit 4).

• Smaller projects (less than $50 million) performed the best (see Exhibit 5),indicating that sustained partnering efforts on these size projects can produce superior team efforts. The results indicate project leaders have awider span of control over team behavior the smaller the project is. As projects get larger, the project leaders’ span of control decreases and theyhave a bigger challenge in directing the behavior of their teams.

• As projects draw closer to completion, scores trend higher (see Exhibit 6).Humans are uncomfortable with uncertainty. Projects at an early phase

represent a high level of uncertainty as to thepotential outcome, given all of the issuesthat are certain to come.Industry personnel tendto score lower until theend is in sight.

The TeamEvaluation has been apart of partnering sincethe concept’s introductionto the industry in the late 1980s. Yet few projectteams have used this consistently as a truemanagement tool to track

trends and identify and monitor open issues toward closure. The methodology toget the best, most honest results is to administer and compile the survey in ananonymous forum, allowing participants to provide frank comments without fear



4.53

2.69

4.23

3.28

4.00

3.65

Exhibit 4

Project Delivery MethodScale: 1–5

Score

Communication

Timely resolution

Cooperation

Morale

Trust

Average

3.88

3.64

3.91

3.92

3.77

3.82

3.89

3.63

3.92

3.98

3.77

3.82

3.82

3.45

3.93

3.92

3.79

3.83

Design/Bid/Build

Score

Design/BuildScore

CM/GCScore

Number of Projects 24 5 2


of reprisal from peers or senior managers. Enlightened senior managers use thetool to develop actions and communicate with project personnel to improve relationships and project performance.

Since written comments are required on the evaluation for any rating of anarea below “4,” some participants may rate all areas a “4” just to avoid writing thecomments, thus giving the appearance of an artificially inflated score. Even withthis possible effect, the analysis is comparing apples to apples across all projects,and a clear range has developed from the highest-performing projects (4.00–4.53)to the lowest-performing projects (2.60–3.00) as follows:

• Scores higher than 4.00 are great projects and perceived by some individualsas a career-best project.

• Scores trending just above 3.50 and less than 3.75 are projects that are heading in the right direction but typically have lingering issues to address.

Score

Communication

Timely resolution

Cooperation

Morale

Trust

Average

4.14

4.01

4.30

4.21

4.10

4.15

3.72

3.39

3.72

3.83

3.60

3.67

3.94

3.69

3.97

4.02

3.85

3.86

<$50 MillionScore

$500 Million – $1 Billion

Score>$1 Billion

Score

3.81

3.54

3.82

3.84

3.68

3.74

$50 Million – $500 Million

Score

Number of Projects 6 19 33



4.31

3.87

3.91

3.44

4.16

3.34

Exhibit 5

Project Size — ValueScale: 1–5

4.53

2.69

Score

Communication

Timely resolution

Cooperation

Morale

Trust

Average

3.57

3.21

3.62

3.65

3.42

3.50



3.65

3.34

3.84

3.52

3.85

3.87

3.80

3.80

4.23

3.44

3.95

3.71

4.00

4.00

3.84

3.89

Pre-ConstructionScore

51 – 85%Score

100%Score

4.53

2.69

Areas of Team Dynamics

3.72

3.57

3.74

3.78

3.56

3.68

4.23

3.17

0 – 50%Score

2 4 205

Exhibit 6

Percent CompleteScale: 1–5

Number of Projects


• Scores trending above 3.25 and less than 3.50 are projects that have majorissues unaddressed and are in danger of going to claim unless resolved.

• Scores less than 3.00 are projects where senior and project leaders havefailed to resolve issues, causing undue stress on the project team and verylikely headed toward legal options to resolve the issues.

STRATEGIES TO IMPROVE TRUSTSo which comes first? Results indicate that resolving issues will promote

trusting environments, but what methods of developing trust will translate intogetting those first major issues resolved? The following is a starter list of both individual and corporate methods to enhance trust on projects.

Individuals• Talk straight and create transparency in how you communicate with your

counterparts from other organizations. This means minimizing surprisesand bringing no hidden agendas to the table in meetings.

• Clarify expectations. Trust breaks down when expectations are not met.Unless you ask what the expectations of others are, you will not know ifyou can meet them.

• Deliver results, and exceed the expectations set. • Right wrongs. If you made a mistake, admit it and fix it.• Practice accountability, not just of yourself, but of others you work with.• Keep commitments. One of the strongest statements you can make about

your character is doing what you say you are going to do.

OrganizationsAll organizations should keep the intended outcome of the contract in mind

when resolving issues and avoid the use of selective contract language only to their own benefit. All parties have contractual rights that if implemented may ormay not be the best thing for trust, the relationship and the project. Enlightenedleaders who keep the big picture in mind when resolving issues build the mosttrusting business climates on projects. The following are other items specificorganizations can do to build trust.

Owners• Select a project-delivery method most suitable for the given project and

then shape the contracts with the other parties to drive behavior that allowsthe delivery method to flourish.

• Provide reasonable dollar authority to field leaders to keep the project moving as inevitable field issues arise.

• Recognize how important the construction-administration phase is for thearchitect/engineer’s interaction with the contractors and ensure there is adequate budget to increase one-on-one face time and properly generateanswers and solutions to issues that arise.

• Recognize that issues are not like fine wine. They do not get better with ageand are best dealt with earlier than later in the project so the team can stayfocused on building the project to successful completion.


Architects• Plan with and coach the owner as to how the most efficient construction-

administration process can be established for the selected project deliverymethod.

• Work with the team to establish clear expectations for submissions, RFIsand other key information exchange.

• Engage and work with the contractor to develop big-picture solutions thatwill be of benefit to the client.

• Be open to ideas from the contractors on items that will preserve orenhance the quality of the project and will positively impact either theschedule or budget of the project.

Contractors• Develop big-picture solutions that will help the owner save time and money

and further enhance quality, as you enter the project. Develop value-addedchanges, not just cost-added changes.

• Do not put the architect/engineer on the immediate defensive by questioning the quality of the documents outright. Remember, you choseto bid/propose on the project based on the documents presented and nowyou need to become part of the solution.

• Own up to and be responsible for your own errors, particularly as they relateto schedule. Prematurely defaulting to “impact” and contiguous circumstancesas a defense against your own mistakes is an automatic trust buster.

• Understand your responsibilities in the Quality Assurance/Quality Controlarena and do them.

SUMMARYIn order to produce a high-performing team environment, senior off-site

leaders and on-site project leaders must develop solid relationships with theircounterparts from the other contractual entities. Optimum relationships areachieved when friendships are developed at these levels of management. Whenthis exists at the senior level, a trusting business environment is more easily transferable to project and field supervision.

The high degree of uncertainty that exists on any project given the constantvariable conditions in design and construction is a stressor on trust. Unresolvedissues are the major source of uncertainty; as major issues are resolved, trust andscores tend to move upwards. Therefore, partnering processes, particularly on largerprojects, should be focused initially on organizational development, supportingissue resolution protocol, and setting clear expectations for all. ■

Bill Spragins is a director at FMI Corporation. He may be reached at 303.377.4740 or via e-mail at

[email protected].

1 Covey, S. (2006). The Speed of Trust: The One Thing That Changes Everything. New York: Free Press.

I ’m lucky to be working here” is a phrase bouncing around the

halls of offices, schools, manufacturing plants and stores today.

Companies have been restructuring and downsizing to meet

new economic realities. Today’s survival depends on making hard

decisions regarding people and getting the firm positioned to win in

the current market.

Companies coming through downsizing are counting on their employees to dig in and be productive. Yet, how the restructuring is handled will be a big determining factor as to how engaged, scared or demoralized the survivingemployees are going to be. Engaging survivors is important for the newly restructured company to achieve its productive potential.

“Lucky to Work Here” is also the name of Leigh Branham’s newest book.Leigh and his co-author, Mark Hirschfeld, have analyzed 2.1 million employeesurveys submitted to the American Cities Business Journal’s Best-Place-to-Workawards. The lessons they have learned will help you engage your current workforceand position your company to win when the coming expansion occurs.

The following interview with Leigh Branham, a noted authority and speaker on employee engagement and a member of Advanced ManagementInstitute’s1 faculty, explores what is needed to re-energize the workforce and getcompanies heading back to profitability. Leigh has more than 25 years in corporate

By Cynthia Paul

Lucky to Work Here

Leigh Branham, a noted authorityand speaker on employee engagement and a member ofAdvanced Management Institute’sfaculty, explores what is needed to re-energize the workforce and get companies heading backto profitability.

“

76 ■ lucky to work here

talent management consulting and is the author of “The 7 Hidden ReasonsEmployees Leave” and “Keeping the People Who Keep You in Business,” bothpublished by AMACOM Books.

Paul: What are the “brutal facts” about what is happening with talent today?Branham: Talent is a huge term. There’s high-performing talent. There’s low-

performing talent. One way to look at talent is to ask, “How much is there andwhat is the supply and demand of talent in the workplace?” One place to start is to look at it by generation.We know that there are 78 million babyboomers in the American workforceand 44 million Xers. If you do themath, with the economy being theway it is right now, many of theboomers are hanging on because they can’t afford to retire. So there’s a postponement of the retirement of the boomers who are at the leadingedge — those who are in the 60–65 agegroup right now are probably going to delay retiring and are going to be in the workforce a little longer. But, in

about five years, assuming the economy gets better and we get out of this troughthat we’re in right now, boomers will start retiring or retiring to part-time jobs andwithdraw from the workforce. We won’t have as many people in line to replacethem, and most of the experts are predicting a severe shortage in the workforce,which is probably going to kick into high gear between 2012 and 2015. I thinkcompanies that are not dealing with succession management, recruitment planning,employment branding and becoming a great place to work are going to be left outin the cold when that happens.

Paul: What should employers and employees be thinking about to get readyfor 2010–2011 when the market comes back?

Branham: They should be thinking about being successful, first of all, as businesses. Survival is the number-one thing right now for many companies, andthat means that some of them have to lay off a few people. However, you don’twant to go overboard and start cutting staff with a meat cleaver because what youoften do is cut the people that you wish you hadn’t as things pick up again. Mostlayoffs have a demoralizing effect on the remaining workforce, so how you goabout downsizing is important. Survival of the business is one thing, but at whatcost? If you start cutting a lot of people, you risk the disengagement of your surviving workforce. When that happens, you destroy your morale and your abilityto serve customers and compete. It’s a fine line to be navigated.

Paul: Do you see some common mistakes that senior leaders make whenthey’re in the process of cost cutting in companies?


Branham: Much of it has to do with saying we’re just going to get rid of this business unit and that department. A year ago, a company might have said afunction or unit was vital to their survival and now a year later, they’re cutting it.Most employees understand that things change, but credibility can be damaged in the absence of a clearly stated new vision. Many firms start cutting wholedepartments without evaluating the talent in those units who could be transferredor moved elsewhere. The wholesale cutting of people by level or by salary or, Godforbid, by age, reflects a disregard for individual human assets within the company.That’s one mistake.

Another mistake is not being open with information about what’s happeningwith the company and why the company needs to do this from a business standpoint. When senior leaders withhold that kind of information, employeesstart imagining the worst. They make up their own information and the rumormill starts. When they don’t hear from senior leaders about what’s going on, it justgets worse and snowballs into a toxic situation. Sometimes senior leaders are notopen because they say they don’t want to burden their employees. They don’t wantto be negative or create more uncertainty. That’s understandable. However, youcan actually have a more negative outcome by not being transparent.

A third mistake is not inviting the ideas of employees when it comes to surviving and dealing with disruptions and the loss of customers and revenue.Companies that handle these changes the best actually have open two-way communication sessions where they say, “Listen, we’re only going to get throughthis period successfully if we get your input, so we want to hear your ideas. Infact, we’re going to reward people who submit workable ideas.” Best Buy is anexample of that. Because consumer purchasing fell off so drastically, it had to close a few stores and lay off some people. In the midst of that, in December of 2008, it began a program where they asked their employees, “What are your ideas of how we can retain customers and how we can make money?” Employeessubmitted 900 ideas on the company’s wiki and Best Buy spent more than a million dollars paying out bonuses to these employees. It knew it could afford to

do that because the ideas themselvesare creating new revenue or saving orcutting costs. That’s an example ofwhat I’m talking about.

Paul: What is typically goingthrough the minds of people who have survived the first round or two of layoffs?

Branham: They’re afraid. Theywonder, “Am I going to be next?When is the other shoe going todrop?” Suddenly they’re thinking, “I thought I had a secure situationhere but, I guess if my friends in thenext office have lost their jobs, then I could be next.” So they’re immediately

The wholesale cutting of people by level or bysalary or, God forbid, by age, reflects a disregard for individualhuman assets within the company.


fearful. In many cases they feel betrayed and distrustful. They become anxious.They start getting on the Internet and updating their résumés and visiting Web sitessuch as Monster® and CareerBuilder.® I had lunch yesterday with a gentleman whojust lost his job and now spends more time at home with his wife, who worksfrom home for a large company. She’s normally very productive. However, heremployer has started laying off people, and her husband listens to her on the phoneand hears her complaining to her co-workers — spending vast amounts of time justtalking to co-workers and complaining and consoling each other about what’s goingon in the company. That’s time that should be spent working with customers and

being productive, but it’s not beingspent that way. So there’s a tremendousloss of morale and productivity, especially when the company’s notcommunicating honestly why they’redoing this, where they’re going long-term, what they expect to happenafter they’ve gone through this periodand a positive scenario for where theywill be after they’ve done all this.

Paul: What warning signs shouldsenior managers watch for in readinghow employees are reacting?

Branham: First, they simply haveto pay attention to their direct reports.In too many organizations, seniorleaders are cliquish and insular. Theytalk to each other, but they’re isolatedfrom employees and don’t reallyunderstand how they see things. Often,you see surveys about how employees

are feeling about a given situation compared with how managers are feeling. Weoften see gaps in the engagement surveys we conduct. The percentage of managerswho say there is opportunity for advancement may be 85%, while only 45% ofemployees agree. There are tremendous gaps in perception about what’s going on.Many times it’s just that the managers and/or senior leaders are not paying attentionto what the typical employee is feeling or thinking. Much of it has to do with abelief system that says if you announce a change then all people have to do is acceptit, get past it, and understand that things are moving on — the train’s leaving, geton the train, and deal with it. It’s not the actual change that’s the issue — it’s thetransition. People need time to go through a transition process of grieving for whatthe company used to be and what they may be losing personally. So there are thenormal phases of denial, anger, bargaining, depression and acceptance. I thinkmany leaders don’t understand the human and emotional processes that people gothrough because they’re so focused on the numbers and if it makes sense to dosomething from an economic standpoint. They end up communicating to people,“You’re just a number.” They’re just not seeing the human dimension.

In too many organizations, seniorleaders are cliquish and insular. They talk to each other, butthey’re isolated from employees and don’treally understand howthey see things.


Paul: Are most people who survivea layoff impacted by the negative emotions that you’re talking about?

Branham: I think so. There are some employees who are fairlysecure. They know they’re importantto the organization, and they may notbe as concerned because they feelsomewhat protected. Many of theseare your senior leaders, managers andvery high performers. On the otherhand, they are going to have outsidecareer options. However, most otheremployees are going to start speculatingand worrying.

Paul: Is there anything specifically a company should be doing to reassuretheir star talent when the company is going through a layoff?

Branham: Absolutely. Each manager should sit down with them and say,“Here’s where we’re going as a company. Here’s our plan for surviving the situationthat we’re in right now. Here’s where you fit in that plan. We want to keep you,and I just want to know how you’re feeling about the situation.” The key is to listen, not just tell. Don’t just say, “Here’s the situation, here’s what we need fromyou, here’s what you have to do.” The key is asking your people, “How are youperceiving things? We’ve gone through a lot of change right now; how are youdoing with all this? Feel free to tell me what’s going on in your head. Let’s talkabout it.” Initiate a frank two-way discussion, but be prepared to say to those people, “Here’s the plan. Here’s where we’re going. Here’s why we’re doing this.”Many middle managers aren’t prepared to do that because they haven’t been toldabout the plan themselves, and many of them are very anxious and disengaged.

Paul: What correlation do you see between a company’s culture andhow well they will survive the economic storm?

Branham: Very high. That was thepoint of a recent newsletter I wroteand the Webinar we just did. Wereported that companies that are thebest places to work as measured by thesurveys that we conduct have actuallygained in employee-engagement scoresduring the downsizing. By contrast,companies that received the lowestscores on our employee-engagementsurvey were losing ground at abouttwice the rate.


Paul: In your book “Keeping thePeople Who Keep You in Business,”you list characteristics of employeeswhom companies want to keep. Whatcharacteristics make employees valuable to organizations?

Branham: It varies from companyto company. One of the questions Iask companies is, “Who are the 20%of people in your company who arecontributing 80% of the value?” For example, in a start-up fast-foodchain that is just opening its first few franchise stores, the key person in that situation might be a strategic marketing executive or a real estateexecutive trying to identify the rightavailable properties. Therefore, thosetwo positions might have priority during that phase of growth. But,when the fast-food organization startsbranching out and creating 15 or 20

locations, then the talent most criticalfor success during that period ofgrowth becomes the individual restaurant manager. It depends onwhat the market position is for eachcompany. In a bank, the retention oftellers is a priority because that is yourcustomer interface.

Paul: The same is true for construction-industry firms.Determining which employees havecharacteristics that are the most valuabledepends on the company’s situation. If the company is actively chasing a key project,then the project executive and business-development person are the most valuable.If the project is on the design boards, then the designers are the most valuable.

Branham: The characteristics change based on the company’s situation—regarding winning, designing and building work. The key is to identify thosecharacteristics for the company’s immediate and future situation. Simply put, notevery engineer is going to make a great project manager. If you are going to needgreat project managers in the future, it makes sense to identify the characteristicsthat engineers need today to be engineers and those necessary to be a project manager in the future.

When you are facing a restructuring, focus on the skills sets and abilities you will need in the future. Keep the people who best fit those skills and abilities.

LEADERSHIP DIFFERENTIATORS

IN TOUGH TIMES

Down economic times do not have

to mean a decrease in the overall

engagement of employees. In an

analysis of surveys gained from the

Best-Place-to-Work competitions, the

following are leadership practices that

either increase (or erode) employee

engagement in tough economic times.*

Here are five practices on which

gainers scored significantly higher

and losers scored significantly lower:

• Setting a clear, compelling direction

that empowers each employee,

• Open and honest communication,

• Continued focus on career growth

and development,

• Recognizing and rewarding high

performance, and

• Employee benefits that

demonstrate a strong commitment

to employee well being.

*An except from “Keeping the People Report”

written by Leigh Branham and Mark

Hirschfield. The full article —describing

engagement score gaps between high-and

low-scoring employers based on employee

surveys conducted by Quantum Workplace

before and after October 2008 — can be

found at www.keepingthepeople.com


If you want more of operations peoplecommitted to finding additional workopportunities from clients, hire thosecharacteristics into the company when recruiting and keep them in the company during a restructure.

Paul: What strategies do you havefor employees in dealing with theirlevel of stress and overwork in the current economic environment?

Branham: Individuals ultimatelyhave the responsibility for their ownhealth and stress levels. Many peopleare just not good at managing stress,so some companies are providing stress-management seminars. I seemore of that going on. Going through downsizing and staff-cutting meansasking employees to do more with less. That puts a stress on employees,especially when there’s little or notraining for employees who have totake on new responsibilities. That’sanother mistake that companies make in those situations. I remember coaching aCOO who was under so much stress that he was always red-faced and overreactingto things. He would walk down the hall and jangle the change in his pocket soloud that it made the other employees nervous. They would watch him leave onFriday afternoons — he had a dolly and would take boxes of work and load theminto the trunk of his car. He was putting incredible pressure on himself and partof it was because he was in the wrong job. That’s what we discovered when we didour assessments with him. Employees have to make a choice at some point. Manyemployees feel victimized by the company in these situations and actually need to be confronted. Leaders should say to them, “Manage your own stress and if youfeel like you’re overworked, come to us and let us know and we’ll see if we can get you help.” The consulting firm Booz Allen Hamilton has what it calls “the

red zone,” a term that describes whenan employee around you is under extreme stress or approaching burnout. When a coworker notices that, he or she is supposed to point it out tothe employee’s manager and plan an intervention with the employee.Often, they insist the employee take avacation, and in order to help withthat, they dole out the work and makesure it gets done while the employee is

Going through downsizing and staff-cutting means askingemployees to do morewith less. That puts astress on employees,especially when there’slittle or no training for employees who have to take on new responsibilities.


gone. This kind of practice has to be part of the culture. It takes a high degree ofcaring and commitment to have a policy like that because you can’t just announceyou’re going to do it and then not do it. You must follow through on it.

Paul: In your book “The 7 Hidden Reasons Employees Leave,” you mentionthis concept that employees are not necessarily “pulled” out the door by betteropportunities; they are also “pushed” in a sense, by unsatisfying factors in theircurrent jobs and workplaces. Would you tell us more about that?

Branham: Both the push and the pull are at work in most cases. But whichone comes first? That’s the key. What usually comes first is the push — there’s aburr under their saddle, and employees become loose in the saddle because there’ssomething about the work environment that has become unbearable. Many

people bear it anyway. They stay andput up with a boss they don’t likebecause they don’t know if they canfind a job that has benefits as good as what they have. There are manyemployees who are in this netherworldof not being engaged and not beingactively disengaged. Gallup says 60%of the workforce is not engaged, that25% are engaged and 15% are activelydisengaged — meaning they’re angryand resentful and wanting somebodyto pay for it. And so they’re real troublemakers in the organization. But it’s this middle group of 60%non-engaged employees we should beworried about. Why aren’t they moreengaged? Maybe it’s because their senior leaders are not inspiring, their

managers think they are too busy to spend any time with them, they don’t getcoaching, feedback, career guidance, see any opportunities for themselves in the organization or they’re in the wrong jobs. When any of these conditions exist,these employees are susceptible to outside offers. You have to have both a pushand a pull in most cases. But the pull is what people talk about when they leave.When you do an exit interview and you ask, “Why did you leave?” they say theygot a better job offer or a better opportunity. But it’s not that simple. Usually,there’s a hidden root cause — a weasel in the woodpile, I call it.

Paul: This economic downturn is not going to last forever. What should companies be doing now to get ready for the coming turnaround?

Branham: Many companies are interviewing people who have been let go by other firms. There is some incredible talent in the market right now. Manycompanies are cherry picking and looking at people who are not performing andreplacing them with people who are better fits. It’s a good time to do what we call a “talent review,” which is to evaluate your key positions in the organization,

When you do an exitinterview and you ask,“Why did you leave?” they say they got a better job offer or a better opportunity. But it’s not that simple.


think about where you are going to be in two years, think about the scenarios for growth and what talentwill be needed. It involves successionmanagement, which is a key issue formany architecture and engineeringfirms. When the boomers start retiringand the owners and the principals startleaving, who will take their places?With most of our clients, that is a real issue. They need to start talking to the younger engineers and projectmanagers and ask, “What do you want to do and where do you want tobe in the future? Where do you seeyourself going?” They need to engage

in dialogues with those people and ask, “What will it take for you to want to stickaround? If things work out for us in this market and we move into this new line of business — here’s an option. And here’s what has to happen for that to happen.And here are the skills we will need.” They simply need to communicate, becausein the absence of communication, people will start thinking about leaving.

CONCLUSION The market is showing signs of improvement, but it is likely to continue to

challenge industry firms’ ability to win work and make money. Fully engagingemployees is critical to winning in the market and ensuring no further restructuringis required. Too many firms fall into the trap of fully understanding the strugglestheir people are facing after the fact. Too often they look back and say, “If only we would have….”

Leigh Branham outlines a path forward for companies to follow when facing tough economic times. He outlines strategies you can use to get all yourpeople focused and engaged on the company’s new vision. Check out Leigh’sbooks or Web site (www.keepingthepeople.com) for more of his research. Or go to www.fminet.com for more ideas of what industry firms are doing to win intoday’s marketplace. ■



1 American Management Institute is a wholly owned subsidiary of FMI Corp.

Fully engaging employees is critical towinning in the marketand ensuring no further restructuring is required.

Let’s face it, for many of us the outlook for the U.S.

construction industry is just “plain ugly.” Across the nation,

the number of project cancellations and delays continues

to creep upward. Nonresidential construction spending will continue

its downward slide this year that will likely be followed by at least a

three-year protraction. An abundant supply of existing buildings,

coupled with rising vacancy rates and tight lending markets, further

compounds the issue. As a result, competition for available work has

and will continue to intensify.

Most of our contractor clients report that the average number of bidders hasincreased by more than 100%, and it is not uncommon to find these bid lists adozen or more deep. When game-changing events such as these occur, previouslysound business strategies may no longer be appropriate.

Successful business strategies are born from a series of fact-based analyses,often addressing four areas of investigation: your business climate, your customers,your competitors and your company. The conditions previously described are

By Jay Bowman, Chuck Jones and Kevin Haynes

Incorporating CustomerPerceptions in StrategyDevelopmentA successful competitive strategy includes a plan toincrease the number of satisfied and loyal customers inyour company’s portfolio.

86 ■ incorporating customer perceptions in strategy development

perhaps most acute among businessclimate and competitors. Serious consideration should also be given tohow your customers are reacting tocurrent events and where you fit intheir go-forward plans. “Conventionalwisdom” about your customers mayno longer be valid as the context within which they operate changes.No downturn lasts forever, and contractors that have included “thevoice of the customer” in their strategicplanning efforts have historically had

high survival rates and some have even thrived during the lean years, further accelerating their businesses when the upturn occurred.

Customer investigation, as we use the term here, should not be confused withtraditional customer-satisfaction research. Customer satisfaction is important, butsatisfaction derives from strategy as a measurement of how well customers areresponding to that strategy. Instead, this investigation is directed at understandingyour customers’ behaviors and their perceptions of the value and benefits thatyour company brings. This customer understanding requires answering threeimportant questions.

• What drives customers to your door?• How unique is the value associated with your service offerings?• Is there anything you can do to influence either of the preceding two

in your favor?

The answers to these questions will determine whether or not a chosen orpreferred strategy is viable. Let’s assume your primary construction segment, suchas new condominium construction in Dade County, is essentially nonexistent.Consequently, you have decided to expand into a new segment or geography. Will these new clients accept you? Considering the current intensity of competition, are you in a vulnerable position if customers do not associate anyparticular value with yourservices except when youprovide the lowest bid?Eventually the answers to these questions will become obvious.However, knowing theseanswers before embarkingon a new strategic direction may provemuch less costly.

There is a tacticalelement as well that

Exhibit 1

Example Inputs and Outputs

Fact-Based Anaylses (Strategy Inputs)

* Customer Perception Research

Success Measurements

Climate

Customers*

Competitors

Company

ROI

Customer Satisfaction

Market Share

Employee Satisfaction

StrategyDevelopment


allows the contractor to identify areas that can be changed immediately.Ultimately, the answers to these questions will result in stronger customer connections (think customer loyalty and retention) that may reduce costs and

increase revenue opportunities. Youwant your customers invested in youto the greatest extent possible. Why?Because it may lead to exclusive orsemi-exclusive relationships thatincrease the customer’s switching cost.You may receive “first looks” at newproject opportunities and gain insideknowledge of the things that will mostlikely influence the contractor selection.

Highly successful contractorsunderstand why client retention is farmore important to company successthan client acquisition. The mostimportant reason for investing in theretention of your customers is the cost of acquiring new customers compared with the cost of retainingexisting customers. Research showsthat a 6% increase in customer retention can increase profits up to100%, and on average a business

spends six times more to attract new customers than it does to keep old ones.Companies with a loyal customer base enjoy greater profitability during the goodtimes and can depend on these customers to help trusted suppliers to survive during the bad times. The fact is your existing customers are one secret to stickingout the downturn.

We believe Robert Moment summarized this best in his 2006 article, “Keepingin Touch: The Surefire Client Retention Strategy,” when he wrote, “When yourclients go through difficult times offer support, because out of difficulties grownew opportunities to serve. Eventually,when their businesses turn around,these clients will remember who wasthere for them and who was not.”

So what does this mean for yourstrategic-planning efforts? Ultimately,you need to build intelligence aroundyour business climate, your customers,your competitors and your companyin order to make smart decisionsabout your intended strategy.Customers provide a very importantpiece to the puzzle that requires your attention. For most contractors,

Research shows that a 6% increase in customer retention canincrease profits up to100%, and on averagea business spends sixtimes more to attractnew customers than itdoes to keep old ones.

88 ■ incorporating customer perceptions in strategy development

FMI recommends that in-depth interviews with 20 to 30 customers (those happywith you and those not so happy with you) are sufficient to develop the type offeedback necessary to serve as a valid input to your strategy development. Budget30 minutes to an hour for each interview to allow time to understandwhy your customers answer your questions the way they do. Your questions should cover topic areassuch as the current and future state of your customer relationships, yourcompany’s reputation and competitiveposition, how customers make theircontractor selections and whatimprovements (including added services) your customers would like to see. A mix of qualitative and quantitative responses is also a goodidea. Quantitative feedback allows youto establish benchmarks that future actions may be measured. FMI uses this typeof feedback extensively, and our clients receive the additional benefit of learning iftheir scores are better or worse than other similar contractors.

Some contractors will find this time commitment to be too great to performinternally. In fact, there are several advantages to hiring a third party to conductthese interviews. First, the research can be conducted much more expediently.Second, customers are more likely to provide candid and perhaps negative feedback to a third party. Our experience has proven this true over and over. A

common response from our clients is something akin to, “I didn’t expectso-and-so to say that about us. Ithought he really liked us.” Unmetneeds of customers — if heard — can create new opportunities as well.Almost all contractors in the countrywill say they listen to their customers,but they may not always take the time (or have the skills/inclination) to hear what the customer is actuallysaying. A knowledgeable but disinterested third party will perhapshear things your customers are sayingthat you may not hear.

In a competitive constructionenvironment, customers have more

than one choice when selecting a contractor. When service offerings are comparable,having strong customer relationships is critical and a real competitive advantage.In our subsequent articles, we will discuss each of the three questions in greaterdetail, including how to develop the answers you need. In the next issue of

When service offeringsare comparable, having strong customer relationships is criticaland a real competitiveadvantage.


FMI Quarterly, we will explore the question, “What drives customers to yourdoor?” and what several of our clients learned in the process. You may be surprised … as were they.

A successful competitive strategy includes a plan to increase the number ofsatisfied and loyal customers in your company’s portfolio. This insight will help youdefend your market position and share and pursue future opportunities with lowercosts and greater chances of success, which is of extreme importance given currentmarket conditions. Focusing on the customer during these difficult times willallow your company to not only survive the downturn, but also to thrive in it. ■

Jay Bowman is a senior consultant with FMI Corporation. He may be reached at 919.795.9336 or via e-mail at

[email protected]. Chuck Jones is a consultant with FMI. He may be reached at 919.785.9229 or via e-mail

at [email protected]. Kevin Haynes is a senior research analyst with FMI. He may be reached at 919.785.9275

or via email at [email protected].

1 LeBoeuf, M. (2000 rev.) How to Win Customers and Keep Them for Life. New York: Berkley.

Stocks falling, banks failing, projects being delayed and

cancelled. Bailouts have come and are still coming, but

are they enough? The headlines constantly blast bad

news like a Klaxon call to raise the alarm of declining confidence.

However, once there is a crisis, it is a good idea to shut off the

alarms, find a quiet corner and start taking care of business. In

crisis, there is opportunity. Panic yields little profit. Now is the time

to take advantage of rare opportunities to refine your business

model and your business.

The construction industry is facing a downturn that it has not felt in more than 25 years. Having enjoyed an extended period of economic prosperity,many industry executives find themselves unprepared for a deep recession, andsome will go out of business either because they ran out of cash or just to avoidlosing any more money than they have already. For those willing to weather thestorm, it is time to shorten sail and focus on fundamentals.

By Scott Winstead, Phil Warner and Briston Blair

Despite the economic downturn,now is the time to take advantageof rare opportunities to refine yourbusiness model and your business.

Weathering the Storm:Navigating a Turbulent Market

92 ■ weathering the storm: navigating a turbulent market

“THE PERFECT STORM” — A METAPHOR FOR OUR TIMES

The perfect storm is one of thoseextremely rare meteorological events,driven by a confluence of factors. Suchevents are generally unforeseen andinvolve the collision of several weatherpatterns to create maximum forcegales, rising seas, driving rain and massive destruction of property. Whenreviewing the events causing globaleconomic uncertainty, the perfectstorm provides a ready metaphor todescribe the economic disruptions thatunleashed a global typhoon aroundSeptember 2008.

WHAT JUST HAPPENED?The perfect storm is not the only

metaphor used to describe the ongoingupset in the economy. Forecasters,economists and pundits have produceda litany of phrases to describe whatjust happened to our once-boomingeconomy such as slowdown, bubbleburst, correction, recession, crash,panic, crisis and even the word thatfew dare speak: depression. Whatappeared to be no-money-down, pay-me-later, low-risk and high-rewardturned into a banking crisis felt aroundthe world. The resulting crisis of lossof investor confidence reached deeplyinto the wallets and retirement fundsof everyone.

As stocks plummeted (see Exhibit 1), loans between banks froze,consumers lost jobs, investors lost confidence and banks tightened lending standards to avoid any risk atall. As market values for real propertydropped, loan securitization wasimpacted. The government opened upthe printing presses, but the moneydid not flow quickly to the homebuyer, homeowner or retail consumer.Add to that chaos the uncertainty of

Source: Bloomberg, January 20, 2009 and Reuters UK 2009

Exhibit 1

Market Value ComparisonJanuary 1, 2007January 15, 2009

Morgan Stanley

Credit Suisse

Deutsche Bank

Goldman Sachs

UBS

RBS

JP Morgan

Bank of America

HSBC

Citigroup

1649

2775

10.376

35100

35116

4.5120

90.8166.2

53.2238.3

97215

20.9274.5


the change in the legislative landscape driven by the national election. The forcesconverged; the perfect economic storm on a global scale was underway.

The crisis on Wall Street and throughout the financial sector will generate abooming business as unemployed financial executives write their memoirs or starttheir own businesses to help all those who lost money. Victims will not be hard tofind, but the heroes are still in hiding. If you are not ready to write your memoirs,it is a good time to consider the future or multiple possible futures that will shapethe next economic cycle, along with the repercussions for your business and theconstruction industry.

FORECAST FOR 2009After a bad storm, it is often popular to say the forecasters got it wrong; but

a review of history reveals that many forecasters got it right, or partially right, but no one wanted to listen at the time. Most industry economists in 2006 whosaid the buildup of potential mortgage defaults due to subprime mortgage lendingwas about to cause the economy to crash were labeled alarmists and promptlyignored. After all, everyone’s backlogs were growing, home sales were brisk andeveryone seemed to be making money. Bull markets would rather not hear suchpredictions for fear fiction would become fact and bring down the bull. When oneis responsible for running a multi-million dollar business employinghundreds of people and servingnumerous customers, there is a continual need to make plans for the future of the business. Therefore,with appreciation for the perils of prediction, we offer a brief look attoday’s forecast for the constructionindustry in 2009.

Residential Construction Currently, we expect

residential construction will fall to$339,295,000,000 of total constructionput in place, another 7% drop overthe 27% decline of 2008. Positivegrowth for residential construction willreturn in 2011 when we expect 10% growth. Still, dramatic as that growth ratesounds, 2011 may only represent a return to 2008 levels, not accounting for inflation. The inventory of new homes has decreased to just over a 10-month supply,but as this market starts to show signs of life again, the new homes will be muchsmaller and energy-efficient than the models of the last housing boom.

Nonresidential ConstructionNonresidential construction managed about 11% growth in 2008 for a total of

$513,369,000,000; however, as of the end of the first quarter of 2009, nonresidentialconstruction is expected to decrease by 12% (see Exhibit 2).


FMI’s “Nonresidential Construction Index” for the 1st quarter 2009 stood at35.6 on a scale where score of above 50 signals growth and one below 50 indicatesdecline (see Exhibit 3). Backlogs are expected to drop sharply in 2009 with panelists reporting a median of nine months in current backlog, hoping that willbe enough to sustain them until markets recover. At the same time, panelists areexperiencing project delays of 20%, or four times what they consider a normalrate. Cancellations due to owner financing problems were running at 10% onaverage, five times what panelists estimated as a normal project cancellation rate.Even education and health care markets are expected to decline until the first quarter of 2010. While many are pinning their hopes on new stimulus packages to boost construction, it is already apparent that, in the near term, it will help

1,400,000

1,000,000

800,000

600,000

Millions of current dollars

400,000

01993 00 08 09

Source: FMI U.S. Construction Overview First Quarter 2009

94 95 96 97 98 99 07 11 12 20131001 02 03 04 05 06

200,000

Exhibit 2

U.S. Construction Put in Place – 1Q2009Total Put in PlaceTotal Residential

Total Nonresidential BuildingsTotal Nonbuilding Structures

1,200,000

4Q2007 1Q2008

46.1 46.5 44.7

34.1 35.6

2Q2008 3Q2008 4Q2008 1Q2009

Exhibit 3

FMI Nonresidential Construction Index (NRCI) Scores Since Inception of NRCI — 4Q2007 to 1Q2009

Source: FMI Nonresidential Construction Index First Quarter 2009

52.6

<50Indicates

Contraction

>50Indicates

Expansion


mostly infrastructure projects, and in reality, stimulus investments will not quitereplace planned states’ spending until the recent downturn in tax receipts.

Nonbuilding StructuresNonbuilding structures, including power, highway and street, conservation,

water and wastewater construction, will have slower but still positive growth in 2009,

achieving $195,986,000,000 of construction put in place. This key sector will realizethe most support from the American Recovery and Reinvestment Act of 2009

(ARRA) funds to the tune of around $19.5 billon in 2009, and billions more to come.

MARKET REALITIES — FOUR FACTSFaced with a continuing onslaught of dire economic news, closing the shop

or selling out may seem to be the only choices to some contractors. In fact, manycontractors are considering their exit strategies at this time, yet some are looking atexpansion strategies in order to position themselves for the inevitable market turn.For the optimists or pessimists, we offer four facts for contractors that apply inboth good and bad times:

• There are always contractors making money. • More contractors go broke during expansions.• Individual companies trend independent of the market. • Following the crowd does not guarantee success.

Surviving through a bear market does not have to mean your company willlose money. Successful contractors learn how to make money in both good andbad economies. Over the years, they have learned how to do many things to maketheir businesses successful. For instance, they have learned how not to underbid ajob simply to get work, assuring losses on the job from the start. More often, contractors fail during expandingeconomies because they grow the business beyond their means to executeprojects efficiently, have poorly managed cash flows, or for a numberof other reasons. We described manyways that contractors tend to fail inour article “Why Contractors Fail: A Causal Analysis of Large ContractorBankruptcies” (FMI Quarterly, Issue 2,2007.) The contractors most likely toremain profitable, even in slow times,are those that have built a culture of success to support their ongoingstrategies. They have learned the discipline of creating and implementingtheir strategies, and when marketschange, they often see it earlier andreact sooner than others do.

Surviving through a bear market does nothave to mean your company will lose money.Successful contractorslearn how to makemoney in both good andbad economies.


Another important observation isthat just because the market is up ordown does not necessarily mean yourbusiness is up or down. The stockmarket reflects national trends, butthere are also local and regional markets and then there are yourmarkets. When panelists for the FMI“Nonresidential Construction Index”are asked how their businesses aredoing, even as the NRCI score turnsnegative, there are always companiesreporting their business is doing well. Nonetheless, just copying thestrategies of other companies does notguarantee success for your company.

We have found there are several paths to success for contractors that vary by markets and the unique cultures of each successful contractor.

Being a market follower can be risky, especially if you are following everyoneinto markets where your company has no or little expertise. For instance, it seemseveryone is looking for federal or state projects financed with funds from the stimulus bill. Those projects are receiving record numbers of bidders, so you canexpect the winning bids to be very low. If you win such a bid without the expertise to complete the project profitably, you will be filling your backlog toassure that you lose money. It will take more research and business-developmentwork to find a market or niche whereyour company can make sustainableprofits, but is just staying busy whileyou go out of business.

POSSIBLE FUTURES-BUILDINGSCENARIOS

Given the uncertainties in themarketplace, credit market meltdowns,crises of confidence and a tsunami ofbad news, what kind of future doesyour firm anticipate and how will itaffect your business? Current eventsdemonstrate this is not the time to base one’s strategy on a simple 10% growth projection. Nor is it wise to simply factor in a 12% decline in nonresidential construction according to the most recent forecast. Rather, it is atime for a sound strategic plan that includes contingencies for several possiblefutures and a plan to beat the average industry results.

In a time of uncertainty, we recommend planning based on a number of possible scenarios. Although scenarios must be realistic, they also need to stretchthe imagination beyond simple straight-line projections of past trends. The goal of

Being a market followercan be risky, especially if you are following everyone into marketswhere your companyhas no or little expertise.


good scenarios is to imagine possible futures and how your company will surviveand thrive in those possible economies. In short, the idea is to bring the futureinto the present so you can work on it now. With this approach, one is not simplypredicting and acting along with the herd, but thinking of alternative possibilitiesand helping to shape the future, rather than simply reacting to the evolving future.

We are living at a moment when things taken for granted about our world are changing. What those changes might be and how they might affect your business can serve as a starting point for building possible scenarios for business inthe next five to 10 years. We offer a few basic scenarios of possible futures for theconstruction industry to fit the current planning horizon. These straightforwardexamples are simply drawn here, but each scenario used for planning your strategyshould have the elements of being probable within some range of likelihood, challenging, different from each other and contain enough information to allowreal decision making. Furthermore, scenarios should be generated based on yourparticular business, not merely copied from others.

Scenario One • Markets fall.• Credit crunch stalls construction.• Consumer spending tumbles.• Backlog stagnates and pulls back.• Overcapacity of contractors leads to record business failures.• Prices fall severely, threatening already thin profit margins.

Scenario Two • The market shock is largely over in 2009.• Credit stabilizes for good contractors.• The cost of credit squeezes mediocre contractors out of business.• The Obama administration spends $200 billion on infrastructure over the

next five years, creating stability for public and civil-construction markets.

Scenario Three• Traditional construction markets continue to slow, but new opportunities

open up for green construction.• Government programs and tax incentives cause a boom in alternative-

energy solutions.• The automotive industry is completely restructured, leaving only two

major U.S. manufacturers. Closed automotive plants are sold for pennieson the dollar to entrepreneurs who will retool the manufacturing floor tobuild “the car of the future.”

• A growing number of larger contractors are becoming developers withcapabilities of delivering integrated projects to design, build, own and operate facilities.

PLAN FOR SUCCESS As noted in our recent article “Profiles in Success — How Contractors Define

and Achieve Success” (FMI Quarterly, Issue 1, 2009), there is no single path to


success for contractors. Contractors that succeed are not simply of different mindsetsthan those that fail. Successful contractors learn from their mistakes and preventtemporary setbacks from starting a chain reaction leading to complete failure. By recognizing and correcting mistakes early, they create a culture of success that pervades the company and everything they strive to accomplish. The remainder ofthis article is dedicated to providing proven approaches for achieving success.

BEST PRACTICES FOR SURVIVING STORMY ECONOMIESNo matter how successful your firm has been in the past, there are certain

best practices that should be adopted now to assure survival and participation inthe opportunities that lie ahead.

Have a clearly defined direction for the business.How you define the direction for your business will depend on how you

define success, but it is also contingent on how you see the economic future andyour company’s place in it. In any event, you will be more successful if you

communicate a clear directionthroughout the company, as well as to partners and customers.

Develop competitive goals and strategies, based on an up-to-date assessment of the organizational context.

Even if you have an extant strategy,it may be time to look at it again underdifferent economic circumstancesaffecting the context in which your firmoperates. The organization’s context is defined by its macro-climate, itscompetitors, its customers and its owninternal capabilities and constraints.Having an in-depth understanding ofthe changes occurring in the broader

context will help reduce uncertainty and align your strategy with current conditions.Remember, the amount of work available in the construction industry rests largelyon derived demand. If consumers are severely cutting back automotive purchases,it is unlikely there will be a demand soon for new manufacturing plants or dealershowrooms. New opportunities will need to be found or expectations for sales inautomotive markets will need to be scaled back accordingly.

Have a performance management/compensation plan that reinforces strategy.You first must have a clear strategy and then be able to measure your progress

towards it. Once you have metrics in place, it is easier to design a compensationplan that rewards achievement of performance goals. This is a best practice in bothgood times and bad, but especially useful when you are making key changes instrategy to assure that the right behaviors are rewarded.

Successful contractorslearn from their mistakes and preventtemporary setbacksfrom starting a chainreaction leading to complete failure.


Understand “incremental economics” — revenue, margin, overhead.Understanding the total costs for each project is the first step in knowing

where and how you can improve profit margins. For instance, improving productivity reduces the cost of direct labor with savings going directly to the bottom line. In the case of a morecompetitive market, productivityimprovement also makes it possible to reduce a bid to get the job withoutsacrificing profit margin. Exhibit 4looks at a typical distribution of the contractor’s dollar and how changes in productivity can affect the bottom line.

Incorporate contingency plans into all corporate strategy discussions.

In the example used earlier, if your business focuses on building manufacturing plants for the automotive industry or dealer showrooms, your choices will be limitedby economic circumstances in that scenario. You could mothball your companyfor a couple of years or look at building manufacturing plants for the potentiallygrowing solar-energy industry. You might also work to develop contacts andknowledge to build plants for alternative-energy vehicles. Contingency plans keepyour options open and allow for changing direction rapidly (See Exhibit 5).

Score

Revenue

Direct Costs

Material

Subcontracts

Labor

Equipment

Other Direct Costs

Total Direct Costs

Gross Profit

Overhead

Operating Income/(Loss)

Other Income/Expenses

Net Income/(Loss) before Taxes

121,359,514

9,657,598

100,838,706

4,201,925

0

1,753,696

116,451,925

4,907,589

2,883,585

2,024,004

28,310

2,052,314

121,359,514

9,657,598

97,813,545

4,201,925

0

1,753,696

113,426,764

7,932,750

2,883,585

5,049,165

28,310

5,077,475

100.0

8.0

83.1

3.5

0

1.4

96

4.0

2.4

1.7

0

1.7

100.0

8.0

80.6

3.5

0

1.4

93.5

6.5

2.4

4.2

0

4.2

Before After

Exhibit 4

Typical Distribution of Contractor’s Dollar and Changes in Productivity3% Improvement in subcontract = 147% more profit

Percentageof Sales

AmountDollars

AmountDollars

Percentageof Sales

Understanding the total costs for each project is the first step in knowing where andhow you can improveprofit margins.


Reduce nonessential spending.The definition of nonessential will become stricter as business becomes

slower, but essentially, it means anything that adds to incremental costs withoutfurthering the completion of contracts. For instance, by asking, “Is this trip necessary” before sending people around the country to meetings and conventions,you begin to challenge the necessity of incremental costs. Some trips are necessaryto keep your business going, but many can wait until better times.

Examine your team and strengthen weak positions.Looking at your strategy and projected sales, do you have the right people in

the right places to execute the strategy, and make the sales budget? Some peoplemay not fit the strategy and others will need to move from one position to anotherto execute the strategy. People are the engine of your strategy, so having the rightpeople with the right knowledge in place will assure the bus runs efficiently andsmoothly toward your destination.

Keep your bank and bonding company informed.Let your bankers and surety partners in on your plans. If you are changing

markets, for example, let them know your potential needs for support or fundingahead of time. Avoid surprises, especially while credit remains tight and bondingcompanies become more stringent than ever before.

Merge branches and/or eliminate marginal locations.If the next year or two presents a continuing market downturn, maybe the

idea of waiting for the Florida branch office to show positive returns in five yearsis a fatal drag on your thin profit margins. That strategy needs to be re-examined.Maybe Atlanta and Tampa should be merged into one office in the South.

Make swift, informed decisions. There is no time during a storm for second-guessing. Once you have gathered

the facts, settled on a strategy and developed a contingency plan, move quickly

Exhibit 5

FMI’s Contingency Planning Framework

Analysis & Objective Assessment of Facts

Business as UsualUncertainty

2009/2010Contingency Plan

Clarity & Understanding

ScenarioPlan

Business Development

Plan

OperationsPlan

FinancialPlan

HR/PersonnelPlan


into the implementation phase. This is a matter of leadership, and half measures will leave everyone inthe lurch with resulting anxietythroughout the organization. Act now; speed of change is important.Changing markets will not wait foryou to get ready to serve them.Competition is swift and merciless.

Communicate actions to be taken.Leaders set direction by showing

employees how their work fits into the larger goals of the company and conveying why that work is soimportant. Communicating the visionof the company and letting othersknow how they contribute helps turnnegative anxieties into positive actionsto shape the future of the organization.Setting longer-term direction is especially important in times of crisis, because thetendency is to focus only on the short-term. Great leaders recognize the short-termis critical, but the organization must focus intently on the longer-term vision ofthe company in order to survive and flourish.

Keep your customers close and your subcontractors closer. Your business is lost without customers, subcontractors and suppliers.

Customers especially like to hear from you even when they do not have immediateplans on the board. They want to know what new ideas you have to help withtheir next project, but do not want a “courtesy call” that wastes their time.Similarly, you want to stay in touch with subcontractors and suppliers to keep up

on price changes, new ideas for beingmore productive and potential earlywarning signals that they might be introuble. Let them in on your strategyas much as you can and make them apart of your success, but remember tokeep an eye open for signs of troubleon their end.

THE GET-WORK/DO-WORK/KEEP-SCORE ORGANIZATION

There are many ways to organizeyour company. Most firms will likelyhave key organizational differences;however, all contractors need to getwork, do work and keep score. No

Communicating thevision of the companyand letting others know how they contribute helps turnnegative anxieties into positive actions to shape the future ofthe organization.


matter how complex your organization may be, looking at how it is aligned aroundthese three basic practices will help shed light on how well you are prepared tosurvive in tough times (See Exhibit 6).

“Get Work” TruthsWhen business was booming, the “get-work” part of the organization may

have had to do little more than stay in touch with customers and answer thephone to win projects. Personnel charged with acquiring work will be the first to feel the shock of change when the phones stop ringing and customers do nottake their calls. Now is the time to look at reinventing your business-developmentgroup. There are a few eye-opening realities that apply when the economy isunder stress, and one of those is that what got you here may not get you whereyou want to be in the future.

In turbulent times, reliance on the old ways of acquiring work may fail to yield fruit.• Exercise discipline in business development and bidding to avoid bidding

every project in sight in a panic to find work.• Strengthen your estimating expertise to get a deeper understanding of costs

and where you might develop a strategic advantage over the competition.

It is never the “one that got away” that puts you out of the game.• Favor science over emotion and employ a clear process for Go/No Go

decision making.• Assure that decisions are coordinated with the business and strategic plans.• Margins and hit rates tend to increase with a focused approach.

The knee-jerk reaction when sales turn down is to get on the phone, bid on everything in sight and cut prices to the point of losing money before the jobis even started, thereby setting up the “do-work” group for failure that won’t be recognized until the “keep-score” people deliver the bad news. By that time, yourbacklog will be full of losing projects, and the economy will likely be improving.This is one of the explanations as to why business failures typically increase fortwo years past the economic turning point of a recession.

“Get-Work” Best PracticesBest practices for getting work should align with your strategic plan and

surviving the downturn. For instance, if your strategy is to build schools andshopping malls in Georgia and SouthCarolina, spending time and resourceschasing a new hospital project inFlorida is off the map. However, youshould know everyone consideringbuilding a school or a shopping mallin your target regions. Then it is amatter of knowing your incrementalcosts, being creative in your workacquisition techniques and improving


field and organizational productivity. Follow these best practices to assure you getthe right work in the door:

• Know your costs; price for profit.• Realize that competitors’ costs are not the same as yours.• Base price on value, not simply costs.• Develop “win strategies” on key sales opportunities. • Refocus estimating departments

on creative bidding strategies. • Involve operations people in

estimating and preconstruction.

“Do-Work” TruthsCongratulations! Now you have

the job; it is time to build it. While the“do-work” group is a different branchof the organizational tree, there shouldstill be clear lines of communicationfor the hand off from the “get-work”branch. The operations group mustalso undergo some changes in order to work leaner in tough times withoutsacrificing safety, quality and profits.That means some basic truths apply:

• Increases in productivity have the ability to increase profit margins substantially.

• Standardizing firm-wide best practices serves to optimize and improve efficiency in critical cost centers.

• Proactive and collaborative processes are better than reactive individuals.• Changing personal behaviors and organizational habits are the largest

hurdles to overcome.

“Do-Work” Best PracticesWhen looking for that silver lining in the midst of a stormy economy,

consider this is a period when companies are often forced to do what they shouldhave been doing all along. Improving processes and systems in order to manageprojects more efficiently should be an ongoing challenge for successful contractors.If your best practices have slipped into a condition of neglect, now is the time toshake out the cobwebs. Consider how well your company stacks up against thefollowing practices:

• Conduct detailed pre-job planning sessions with the right people to get the right strategy for the project.

• Develop project communication plans.• Develop (and use) short-interval plans to drive project performance.

When looking for thatsilver lining in the midstof a stormy economy,consider this is a periodwhen companies areoften forced to do whatthey should have beendoing all along.


• Conduct focused daily huddles.• Proactively manage client expectations and change orders.• Manage cash flow. • Close strong with a “kick-finish.”• Conduct post-job review meetings.

“Keep-Score” BasicsSo, how is your business doing? It is a casual question everyone asks in tough

times. The answer to this question should never be, “I don’t really know.” Howyou keep score should be a part of your strategic and contingency plans. Institutea few basic concepts that need rigorous application in recessionary periods:

• #1 — Cash is King! • #2 — Companies hoard cash in tight times. • #3 — Do not give clients a reason to hold your money due to poor billing

and collection procedures. • #4 — Cash is King!

Build your scoreboard with these basics in mind and make it clear to all ofyour team that they need to understand their company’s own cash flow as well asthat of their customers and suppliers. Having customers who cannot or will notpay on time or suppliers that go out of business in the middle of a job is worse thannot having the job in the first place. Negative cash flow can quickly lead to failure.

“Keep-Score” Best PracticesThere are many ways to keep score, but one method is to use a “dashboard”

that provides a regularly updated look at critical items to track the progress ofyour goals along with forward-looking reports, key economic forecasts and indices.Along with the dashboard, you should have reports that regularly:

• Detail the 12-month operating budget and cash-flow projection.• Verify project funding for all projects and leads.• Manage cash-flow (daily).• Assure that collection efforts are managed intensely. • Verify subcontractor solvency.

If there is anything in your accounting or estimating systems that makes it difficult to provide this information in a timely fashion, now is the time to makean investment to fix them. These measures are vital when operating in lean times,but good business habits to follow in any economy. Contractors that fail are oftenlax in the keeping-score part of the business and are not prepared when cash flowseems to dry up suddenly or subcontractors go out of business.

THE BRIGHT SIDE OF TURBULENCEContractors, unlike Bear Stearns or Fannie Mae and Freddie Mac, are not

too big to fail. At the same time, many of the successful survey participants havebeen in business through many business cycles and have done more than just


survive. They have created cultures and practices that are resilientand sustainable. Theyhave prospered over thelong term.

Today’s constructionmarkets have been disrupted by the perfectstorm, but the sky hasnot fallen. Some contractors will alwaysmake money in theseconditions. Successfulcontractors will use their time to refocus thebusiness, examine strategic opportunities and re-size their operations accordingly.In fact, those seeking to expand their markets will see this as a good time to lookfor acquisitions, not by going on a buying spree, but through targeted acquisitionsthat fit a long-term strategy. The latest storm will leave a world of opportunities in its wake, but the next boom will not likely look like the last one. There aremany possible futures, and the goal is for your company to be there and participatein the recovery. ■

Scott Winstead is a principal at FMI Corporation. He may be reached at 919.785.9249 or via e-mail at

[email protected]. Phil Warner is a research consultant with FMI and may be reached at 919.785.9357 or

via e-mail at [email protected]. Briston Blair is a consultant with FMI. He may be reached at 919.785.9293

or via e-mail at [email protected].

Exhibit 6

Corporate Strategy

CEO/President

BusinessDevelopment

Estimating

Preconstruction

ProjectManagement

Superintendents

Accounting

HumanResources

Office

Do Work Keep ScoreGet Work

E xpert planning and decisions made in the

pre-construction phase of a project lay the foundation

for all other stages of the project. Excellent

pre-construction skills, including communicating effectively to

both internal and external customers, streamlining material costs

and leveraging organizational connections are key to optimizing

profits in both good times and bad.

Although a well-executed pre-construction process is of high importance to home builders, on average, it is much less understood in multi-echelon home building organizations. The forces affecting home builders today require afrequent retooling of product sets and focus on reduced waste in the home buildingprocess. A rapid and error-free product-development process from marketing toconstruction completion is necessary for future success. Product-developmentagility is an essential and necessary adaptation for a profitable business. After providing the context and sharing some insights of the pre-construction process,we address top lessons learned, which include communication, knowing yourcosts and focusing on the connections.

By Jim Schug and Brandon Hart

Laying the Foundation: Pre-construction andLessons Learned

Home builders face a great challenge to ensure the mostprofitable construction methods possible.

108 ■ laying the foundation: pre-construction and lessons learned

EVOLVING BUSINESS MODEL: ARE ADJUSTMENTS REQUIRED?Field productivity for home builders is highly dependent on the ability to

develop a set of conceptual plans rapidly and accurately in response to evolvingmarket needs during the pre-construction process.

In some cases, rapid product development can deliver “first-mover” advantagein a market (e.g., the first “green” product line in a market, first outdoor enclosedseating area, revised architecture, etc.). Improperly developed plans lead to costly

field expenses and often result in relationship problems with trade contractors. National home buildershave inadvertently introduced complications to the pre-constructionprocess while trying to create efficiencieson a national scale. Centralized pre-construction processes, such asarchitecture or engineering, often blur lines of responsibility. While acentralized department of architectsand engineers can create efficiencies, it often removes them from the localbuilder’s construction team and span of control.

A custom home builder uses amodel not unlike the design-build construction model (see Exhibit 1). The homeowner becomes the project owner, and the risk is born entirely by the home builder. This risk is passed on to trade contractors much like a general contractor. Production builders modify this model by developing sets of prints tocreate advantages through regional and national efficiencies. In the case of anational home builder, the homeowner no longer controls the home design.Interior selections are often referred to as “homeowner options” in order to appealto the buyer who is searching for a customized home. The production builderattempts, through extensive market research, to identify the most widely appealingor “sell-able” plans to build. A centralized architect develops these conceptual planswith input from an engineer. Local divisions of the production home builder usethese plans in concertwith their local engineerto develop plan sets that meet local code. In most cases, builders havereduced overhead andoutsourced architects.Divisions use local market research to identify the best plans to use from corporate plan sets. In cooperation with local engineers and corporate architects, the divisions modify theplans to ensure a product that is marketable to their customers.

As depicted in Exhibit 2, the custom-builder model replicates unique productsdeveloped, similar to the nonresidential general contractor model.

Exhibit 1

Pre-Construction Functions of a Home Builder

MarketAnalysis Design Purchasing Construction


Managing the dynamics of the construction project or home with this modelis challenging for a general contractor. Contrast this with the production builderat the opposite end of this custom-builder model. The production-builder modelis more complex for national builders, which sometimes have up to 30 divisions

throughout the country.This model becomes easier, and usually more efficient, for thestatewide builder withtwo or three divisions. As home buildingdemand increased in the1990s, national builders developed practices andprocedures to createnational efficiencies.Many national buildersevolved from a business

model of a holding company composed of many local builders. Each local builderwas directly responsible for its business entities. The practices and procedures tocreate national efficiencies required changes in organizational structure, demandingincreased communication and coordination. Any introduced variations thatreduced profit were absorbed by volume. Due to the reduction in demand today,those variations or oversights that have become accepted norms are now in question.Across all fronts, builders are now analyzing their business structures and processesto realign with the challenging market and look toward the future. When properlymanaged, a minor reduction in costs across the enterprise can become a competitiveadvantage in attempts to compete with foreclosure prices. When improperly managed, the efforts at corporateheadquarters to create cost savings can become expensive.

We have simplified the production-builder model shown in Exhibit 3 to represent a nationalbuilder headquarters relationship withonly one builder division. While it isalso a “simplified” model that does not represent sales or land functions, it shows how complex management of the people and processes involvedcan become.

This simplified business modeloften becomes complex and requires agreat amount of communication andcoordination when the scale of thebuilder shifts. The typical design-buildrelationship that a custom builder can

The practices and procedures to createnational efficienciesrequired changes inorganizational structure,demanding increasedcommunication andcoordination.

Exhibit 2

Custom Builder Model

Owner

Architect Engineer TradeContractors Suppliers

Custom Homebuilder


enjoy with a homeowner (see Exhibit 2) gives the builder responsibility, as well as liability, for design, engineering and construction. This relationship is adjustedfor the national builder. The production builder remains responsible to the owner,but loses the span of control over architects and engineers in many cases (seeExhibit 3). Responsibilities become blurred. From the perspective of a local builder that contracts with a future homeowner to build a home, local builders areaccountable for the centralized functions, but have little or no influence on them.As with most construction, home building is a local business. From the localbuilder’s perspective, the efficiencies of a design-build delivery system are lost tothe frictions between builder and architect in a traditional (design-bid-build) andless efficient delivery system.

Home builders face a great challenge to ensure the most profitable constructionmethods possible. Given reductions in overhead, some local and regional builders

are outsourcing critical functions to purchasing “subcontractors.”Outsourcing purchasing functions tosubcontractors may reduce costs butmay cost more in the long run.Purchasing subcontractors can assistwithin that functionality but oftenlack thorough understanding of product differentiation and enterpriseprofitability. This arises when fullunderstanding of the builder process is absent and critical functions losecontext. While subcontracting specificadministrative functions can be a cost-saving measure, it must be managed well.

Exhibit 3

Production Builder Model

Homeowner Production Builder National

Headquarters

LocalEngineer

TradeContractor

Suppliers

Centralized Architect

(Engineer)

National Supplier

Contracts

National Trade

Contracts

Production Homebuilder

(Local Division)

Rebates

Plans

Discounts


Builders must continue to adjust to increasing external changes. Customers,as well as competitors, continue to adjust during periods of uncertainty. Even in the face of these complications for the national builder, we have found it is possible for builders to create the proper business model to leverage efficiencies.

A viable pre-construction process accounts for external and internal pressures thatchallenge the builder. This may include a decrease in personnel available to manageantiquated processes developed during the boom years while supporting a greatergeographic area of responsibilities foreach division (see Exhibit 4).

The local nature of home buildingmagnifies these factors and oftenrequires another dimension of consideration. The national buildershould understand the implications of these forces on each market inwhich it operates and then create acohesive set of processes and companystructure to adapt for local conditions.Understanding the importance of theforces above, and how they shape the pre-construction process, ensuresan agile system during this downturnand in the future.

In the context of understanding thecommon structure and considerationsrequired for an effective pre-constructionprocess, the following section discusses some of the common mistakes weencounter and recommendations for improvement. These include internal andexternal communication problems, inability to streamline and manage materialcosts, and the lack of reinforcement of organizational connections.

COMMUNICATION BARRIERSNatural silos exist in organizations. Smart companies take active measures to

counteract them and increase communication between functional groups. The

Builders must continueto adjust to increasingexternal changes.Customers, as well ascompetitors, continue to adjust during periodsof uncertainty.

Exhibit 4

Forces Affecting Home Builder Strategy

ClimateCustomer (Market) Competitors Company

Commodity Prices

Regulation

Unemployment

Baby Boom #2

Foreclosure Rates

Green Building

Ability to Automate

Changes in Buying

Behavior

Smaller Homes

Closer to Cities

Energy Efficiencies

Gen Y

Entry/Exit

Reputation of the Industry

Chapter 11s

Land “Grabs”

Multifamily

Rentals

Strengths

Weaknesses

Reduced Overhead

More Geography


most common barriers occur between the architecture department and divisions,the construction staff and purchasing staff, and the construction staff and tradecontractors. In addition, communication barriers are prevalent between leadershipand middle management. For example, corporate management has a responsibilityto communicate new initiatives in a manner in which all employees can relate theseinitiatives to their personal roles and responsibilities. An e-mail from the corporateoffice that contains a bulleted list of five ways to reduce costs is not sufficient. A better alternative is to hold a face-to-face, company-wide meeting where groupdiscussion is encouraged. This allows all employees, from sales to field staff, theopportunity to brainstorm various ways to reduce costs and communicate without

barriers. Whether a national buildercentralizes many functions or servesonly as a headquarters holding company,communication barriers commonlyaccount for lost profits. A strong pre-construction process can reduce or even remove these barriers, even inthe most demanding of markets.

INTERNAL ARCHITECTURE AND DIVISIONS

Problems typically arise betweenarchitecture and builder divisions dueto improper management. Builderrequests rarely occur in an even flow,causing inconsistent staffing ability tomeet their demands. For instance, onebuilder wanted to streamline plans intoa “green” series. The purchasing staffredlined 40 individual plans and sent

them to the architect for corrections. The normal workload, coupled with overheadreductions, resulted in delayed responses and missed details. This presents anincredible challenge, especially in this hypercompetitive market, for those nationalhome builders who have a hard time updating their “legacy plan sets.” Frequently,builders do not communicate their deadlines to the architect clearly, which resultsin delays to project starts. On the other side, architects are hesitant to displease thebuilder with a late project-delivery date in fear of losing the contract. It is importantto schedule an indefinite series of weekly meetings to avoid setting unattainabledeadlines on the front end of the project. These meetings allow the architect andbuilder to openly discuss progress and agree on a realistic delivery date. This alsoprovides an outlet to actively review all plan revisions in process and discuss anychanges to scheduling. Set a firm deadline to the plan revisions as soon as possible,so the purchasing agent can schedule the bidding process and any trade meetings.

CONSTRUCTION AND PURCHASINGThese two functions are often adversaries due to misaligned objectives.

Construction tries to build the home as fast as possible while Purchasing tries to

Whether a nationalbuilder centralizes many functions or servesonly as a headquarters holding company, communication barrierscommonly account forlost profits.


build it as cheaply as possible. These two groups should work together to reach aset of common goals: build a low-cost home while maintaining a certain level ofquality, and deliver the home on schedule. These two groups should communicateopenly and honestly on topics such as trade-partner performance, material requestsand job-site delays. A breach in communication is almost sure to result in cycledelays or unnecessary costs. Best-in-class builders have a pre-construction processthat systematically involves the construction manager in the planning of the project. This process creates an opportunity to involve trade contractors as well,ensuring “buy-in” from all parties. Nothing is more pleasing to a field managerthan building something they helped develop.

Construction managers should also play an active role in the selection of trade contractors. A lack of their involvement will not result only in a blamegame, but ultimately in reduced profits. Much of the field manager’s time will bespent in conflict with the trade contractors they did not personally select. Mostfield managers are able to use theirpersonal knowledge of reputation andexperience when selecting the besttrade contractors to complete the job.

CONSTRUCTION AND TRADE CONTRACTORS

FMI helps builders and trade contractors develop well-organizedprocesses and systems. Best-in-classbuilders recommend that all tradecontractors establish a pre-job planning process before starting a project. In most cases, however,builders overlook their critical role in ensuring the trades have proper information in a timely manner. Scope meetings, pre-job planningmeetings, site orientation and projectkick-off meetings all support the overall effort of trade contractors.Trade-partner councils are often created to ensure an open flow of feedback between builder and tradecontractor. This communication prevents jobsite mistakes and costlyassumptions. For example, one builder’s senior vice president will drive to his tradecontractors’ offices when a new plan set is developed. This allows the discussion ofany new details or building assumptions. In contrast, a lack of communicationresulted in significant costs for one top builder. A series of plans were introducedthat included a new look to the exterior of the homes and the deadline to completethe construction of these plans was in jeopardy. The superintendent instructed thesiding crew to finish the exterior of the homes as soon as possible. Unfortunately

Best-in-class buildershave a pre-constructionprocess that systematicallyinvolves the constructionmanager in the planningof the project. Thisprocess creates anopportunity to involvetrade contractors aswell, ensuring “buy-in”from all parties.


for the builder, the siding crew was forced to fabricate its own version of the decorative items on the front of the houses in order to meet the deadline. At the endof the project, the majority of the decorative items on the homes were custom-made,which resulted in additional costs of nearly $50,000 for the builder upon completionof all homes in the new series. “Finish these lots as quickly as possible” was theonly form of communication between the builder and the siding contractor. Apre-construction planning meeting would have allowed the builder the opportunityto explain the new materials to the siding contractor, eliminating the fabricationof custom materials.

STREAMLINING YOUR MATERIAL COSTSBuilder divisions within the same region will often share certain plans, such

as the top-five sellers or a certain set of plans that can be built quickly and efficiently. The total cost to build these plans may vary slightly due to minor code changes, such as the need for additional hardware and interior shear wall

for divisions located on the coast. Forthe most part, however, the divisionsshould incur the same costs for the sameplans, as the overall constructability of the home should not change frommarket to market. Many builders arenot able to streamline their costs fromdivision to division for the same plandue to inconsistent takeoffs. Theunderlying source of the inconsistencyin material quantities comes from the lack of a centralized estimating system. Whether a national builderhas one centralized estimating department or chooses to outsourceits estimating to a third party, theability to produce takeoffs from onesource is needed for streamlining andcontrolling material costs.

The main advantage of centralizedestimating is consistent methodology.Many variables are involved in estimating, such as varying waste factors, measuring tactics, estimatingsoftware, plan assumptions, etc. For

example, a framing takeoff is likely to vary from estimator to estimator due tomethods on estimating “deadwood” (temporary wall and roof bracing). In addition,personal preferences on waste factors will drastically affect stud counts and other framing material. However, a centralized estimating system allows for the establishment of waste factors and methodology upfront, providing consistency inmaterial quantities and pricing for all plans moving forward. Once this system iswell-established, the builder, or third party, helps the trade contractor adapt to the

Whether a nationalbuilder has one centralized estimatingdepartment or choosesto outsource its estimating to a thirdparty, the ability to produce takeoffs fromone source is needed for streamlining and controlling material costs.


predetermined methodology and buildthe home given the materials provided.In addition, the field manager’s interaction with the trade contractor atthis level of detail emphasizes efficientbuilding and often results in significantproductivity gains for both the builderand the trade contractor.

Outside of a centralized estimating source, builders also havethe opportunity to streamline coststhrough effective communication. For

example, if one division achieves a 5% reduction in 30-year shingles for a specificsubdivision of plans, share this accomplishment with other divisions that arebuilding the same plans, as they are entitled to the same reduction.

OPTIONSThe delivery of options is very important to every home builder as it provides

the customer the opportunity to personalize his/her new home. Most large nationalhome builders allow the buyer to choose from a large line of interior and exterioroptional upgrades. Option strategies will vary from builder to builder based on its target market. The majority of builders tend to focus on the costs of their basehouse and not the costs of their options, especially during a down market. Whilethe builder is attempting to increase margins on its base home by reducing materialcosts, its margins remain low for homes that include options. Lowering the directmaterial costs within each option enables the builder to reduce the option salesprice. This benefits the customer as well as the builder, as the customer is payingless for the option and the builder isincreasing profit due to an increase in options sold. In addition, thededuction in material costs will result in increased margins not only for spec homes, but also for those homesincluding numerous options. Thebuilder who successfully is able to drive down the costs of their optionswill gain a competitive edge in a challenging market.

One common method to reduceoptions costs in today’s market is todemand a specific reduction across theboard. Many purchasing agents willspend most of their day on the phonerequesting 5% reductions from alltrades. Although a common practice, this method is limited in effectiveness. An in-depth analysis of each option is much more effective as it provides the opportunity to uncover all hidden and unnecessary costs. The analysis of all

The builder who successfully is able todrive down the costs oftheir options will gain a competitive edge in a challenging market.


options requires time, which is something that most purchasing staff members donot have. The process involves analyzing all materials in each option. Often, tradepartners will include costs for materials that do not belong in the option. Forexample, FMI once identified an option that removed a 4-foot wall and includeda $50 fee to be paid to the drywall crew. The builder should have actually receiveda $50 credit in this situation because a wall was removed. In addition, many framerswill overestimate the additional lumber that is required to build the option, suchas studs. An option that requires an additional 32 studs will often include the costfor 50 studs. Other examples include receiving a credit from the siding contractorwhen optional windows are installed,or receiving a credit in shingles whenan optional metal roof is installed.Obviously, this analysis is best supported with the correct takeoff for all options (see Exhibit 5).

Having the correct quantities for all materials in the option, alongwith the costs, will allow the builder to price each line item and verify the costs that are being charged by the trade partners. With the proper information, an in-depth analysis ofeach option can provide a majorreduction in direct material costs.

With the proper information, an in-depth analysis of each option can providea major reduction in direct material costs.

4020

Exhibit 5

Recent Project Results: Direct Cost Reduction by Type of Option

500 3010

Source: FMI Options Analysis Project, 2008

7060

Percentage of direct cost reduction

9’ Ceiling

Kitchen Sink

Den to Bedroom

Powder Room to Bath

Faucet

Covered Patio

Stair Rail

Radiant Barrier

Coffered Ceiling


Once the option cost is reduced, the sales price can be lowered which results in ahigher rate of option sales. This often results in more satisfied homeowners andgreater profit for the builder. A thorough options analysis allows the builder tonegotiate effectively with its trades for their options, which is quite the alternativeto begging for 5% reductions over the phone.

FOCUS ON THE CONNECTIONSSome of the challenges for national builders arise out of the contradictory

nature of their struggle: build homes and compete in a local market while leveraging national advantages. Many builders deviate toward one extreme or theother; some select contractors for the local builder from the corporate office milesaway. This lack of input and involvement from the field in critical aspects of the pre-construction process saves money initially, but typically results in greatercosts through the duration of the construction process, as well as warranty period.Without local input, the hidden costs of poor-performing trade contractors areoften difficult to quantify in a report. Builders need to target areas of profitabilityleaks and take active measures to keep them at bay with integrated efforts acrossall units.

Exhibit 6 demonstrates builder costs that arose primarily from a wide variety of disconnects between corporate and division operational functions (architecture, purchasing and estimating). These disconnects resulted in a highrate of purchase orders arising from plan error, which in turn correlated to a highrate of subcontractor and superintendant error.

Ideally, corporate strategy should telescope through the division office andreflect in local business plans at the community level. Sales and marketing shouldstill sleep and breathe a local version of the corporate vision, and construction

4020

Exhibit 6

Variance Purchase Orders — 4Q2008

500 3010 807060

$ Thousands

Theft

Land Turnover

City Requirement

Studio/Sales Error

Plan Error

Superintendent Error

Material/Take-Off Error

Subcontractor Damage

Subcontractor Error


should build with procedures and efficienciesgained from the strengthsof the corporate office(see Exhibit 7). Whencorporate strategy conflictswith the strategy of thelocal division leader,incorrect reporting andwasted efforts create extrawork, reduce morale and decrease profitability.Strategy and businessplans aside, builders aremost successful building homes with cost efficiencies and quality standards typically created through effective pre-construction processes. Corporate structureshould ensure that centralized functions add value and reduce the distractions (e.g., reporting requirements).

An overzealous national builder often attempts to nationalize all efforts tomaximize efficiencies, creating a pre-construction process with little or no input or involvement from the field. This approach lacks an understanding of local trade limitations, as some markets are predominantly driven by turnkey shell subcontractors, or integrators, while other cities are full of only small trades. Local styles (market research), codes and conditions vary across markets requiringintensive efforts to ensure centralized functions are adaptable and useable in thefield. One of the most powerful values a division office brings is the refinement of strategy to the local influences (seen in Exhibit 6) and ensuring proper telescoping

of the business plan down to the community level. A balance must be found that pulls information and business refinement from thecommunity level while adding value at the corporate level.

The most common area nationalbuilder headquarters adds value is incentralized plans management anddesign. Centralized plans managementshould result in enough detailed information (e.g., known amount ofmaterial by SKU) to leverage nationalvolume to negotiate contracts withnational trade contractors, as well assupplier rebates.

One tool effective in strengtheningthe structural connections of pre-construction is a key account managerprocess. Based on a collaborative

One of the most powerful values a division office brings isthe refinement of strategy to the localinfluences and ensuringproper telescoping ofthe business plan downto the community level.

Exhibit 7

The Value-Requirements Tradeoff

CorporateVision, Values and Strategy

Division

Community

Creates Requirements

Reports to Corporate Requirements

Answers Reports

Adds Value

Adds Value

Conducts Work


partnering relationship, a structure is established to create accountability across the span of both supplier and builder organizations. The corporate office gets fieldbuy-in on national accounts and scope of work, and pilots the relationship withthe division. After feedback from that community on performance, the contract isadjusted and implemented. Regular reviews occur, empowering the field whileenforcing the contract from the corporate office.

CONCLUSIONA list of various survival tactics is needed to achieve any type of success in

today’s market. These tactics can include the establishment or improvement of the pre-construction process, the ability to streamline direct costs or a strongerfocus on organizational connections. Regardless of which tactics compile your list, accountability to the implementation of these tactics is vital. As the home building industry continues to face challenges in a demanding market, it is important to continuously develop these tactics and align them with the company’s structure, staff and skills. An agile pre-construction process, coupledwith the acknowledgement of our “lessons learned,” will lead not only to a moreprofitable business, but also a business that is equipped to persevere through current and future market challenges. ■

Jim Schug is a consultant with FMI. He may be reached at 813.636.1254 or via e-mail at [email protected].

Brandon Hart is a staff consultant with FMI. He may be reached at 919.785.9289 or via e-mail at

[email protected].

The United Kingdom and Ireland share a common climate, each

averaging only four accumulated days of sunshine a month

for a total of approximately 50 per year.1 Yet, while Ireland

generated the ultimate pessimist in Oscar Wilde, the U.K. provided

us with the ultimate optimist in Winston Churchill. Today in the U.S.,

we stand at an economic and construction industry crossroads with a

choice of either sunny optimism or overcast pessimism. Let us provide a

lens for utility contractors to see their world as either sunny or overcast.

The entrepreneurial spirit at the heart of nearly every construction firm isaligned with an outlook brimming with optimism and confidence. Unfortunately,the 2009–2010 water supply and wastewater construction markets will give thepessimist many reasons to worry. Key drivers affecting this construction segmentare described in Exhibit 1 and offer both the optimist and the pessimist hope ordespair, respectively.

Perhaps the biggest constraint for a utility market segment that is dominatedby municipal owners is a combination of short-term credit and long-term financingavailability. The American Recovery and Reinvestment Act (see American

By Mark Bridgers, Dan Tracey and Mike Chase

Can Optimism Shift the2009–2010 Water Supply and Wastewater Market?The 2009–2010 water supply andwastewater construction marketswill give the pessimist many reasons to worry and the optimistfuel for a sunny disposition.

122 ■ can optimism shift the 2009–2010 water supply and wastewater market?

Recovery and Reinvestment Act: TheStimulus Contractors Need?), passed in early 2009, is already having a positive impact on availability of work.However, FMI’s analysis indicates thatARRA is pushing forward a smallernumber of projects that generally have reduced scope, resulting in areduction in total work volume. Our construction-spending forecastsfor 2009 are showing a shrinking construction spending market or very low growth. Consequently, we anticipatethe 2009 spring bidding season, typically when large volumes of work are releasedfor construction, to be reduced in both size and number of available projects.

Beyond 2009, FMI anticipates a congressional shift toward economic investment to spur growth, as opposed to encouraging consumption. This equatesto greater funding of infrastructure construction, a reduction in restrictions drivenby legislative requirements and the use of alternative financing vehicles, which willbuoy many of the water and sewer infrastructure markets over the long term.

WATER SUPPLYOptimism or Pessimism. Public Private Partnerships or Credit Crisis; Cheap

Real Estate or Housing Collapse; Technology-Centric Capital Construction orWater Demand Management.

Capital spending in the water supply utility segment is largely a function ofmacroeconomic trends. The drastic slowdown in new home starts during late

2008 and 2009 will prevent significantgrowth in the water supply and municipalpipework sectors. Yetdespite the housing slowdown, FMI forecastsan estimated growth rate of 2% in 2009 forwater-related markets as total constructionspending rises to roughly$15.7 billion (Exhibit 3).The stimulus bill’s

allocation of funds to the EPA Clean Water and Drinking Water Fund and theState Revolving Fund programs will improve this utility sector in the near term,though the real driver remains the deteriorating transmission and distribution system in many municipalities.

The dire state of existing municipal water systems should keep contractorsbusy with replacement work, despite the drop in new transmission and distributionwork associated with the depressed housing market. As housing starts rebound,

Public Private Partnerships

Derived Demand

Cheap Real Estate

Alternative Delivery Systems

Catalyst for Aging Infrastructure Replacement

Technology-Centric Capital Construction

Credit Crisis

Increasing Regulation

Housing Collapse

Local Funding Constraints

Wasteful Government Spending

Water Demand Management

Optimist Pessimist

Exhibit 1

Optimist vs. Pessimist

“Pessimist: One who, when he has thechoice of two evils, chooses both.”

— OSCAR WILDE

“A pessimist sees the difficulty inevery opportunity; an optimist sees theopportunity in every difficulty.”

— WINSTON CHURCHILL


FMI expects water supply construction to exhibit corresponding growth from2010 to 2012 that slightly outpaces inflation (Exhibit 4).

As in past years, 2008 saw funding shortfalls in water supply construction andcontinued inaction by governing bodies to write legislation that will address theaging systems under many Northeastern cities. Regulators and government entitieshave gone only as far as to acknowledge the problems; the majority of currentspending represents only stopgap or temporary fixes. The EPA estimates that theUnited States will continue to see a spending gap of more than $100 billion overthe next 20 years. As this spending gap continues to increase and the difference

AMERICAN RECOVERY AND REINVESTMENT ACT:

THE STIMULUS CONTRACTORS NEED?

On February 13, 2009, the United States Congress made history when it passed the $787 billion

American Recovery and Reinvestment Act. Political pundits predicted the massive bill would

create as many as 300,000 construction jobs. While the total bill value is unprecedented,

FMI predicts that only $94 billion is for new capital construction, with an additional $99 billion

indirectly related to construction.

So what does the stimulus bill mean to the water, wastewater and sewer utility construction

market? The cash injection should temper an overall decline in construction by a couple

percentage points, but FMI has concluded that a large percentage of the cash will be directed

to states and municipalities that are already strapped due to decreased tax revenue and

difficult municipal bond markets. For example, nearly half of the indirect construction

spending (approximately $54 billion over six years) is earmarked for state stabilization funds.

Specifically, in the water supply and treatment markets, funds will be directed toward

environmental cleanup projects, EPA Clean Water and Drinking Water funds, Corps of

Engineers civil infrastructure projects, and a host of local and regional projects. The large

increments of spending will take place in the 2010, 2011 and 2012 time periods (Exhibit 2).

Some ancillary distribution construction work for certain water, wastewater and sewer

authorities will spill over due to the need to move facilities for the planned highway and

transportation spending.

Buildings

Residential

Water and Environmental

Highway and Transportation

Power

Total

3,787

985

2,690

16,192

620

24,274

6,077

2,341

5,861

26,550

1,110

41,939

4,450

1,500

4,693

4,950

1,000

16,593

1,750

3,445

100

1,000

6,295

1,000

2,715

1,000

4,715

2012201120102009Market

1st Quarter

2013

Exhibit 2

Construction Put in Place from the Stimulus BillMillions of Current Dollars

Note: Improvements, additions, alterations and major replacements are included. Maintenance and repairs are not included.


between the current amount of U.S. infrastructure spending and the amount needed to maintain the infrastructure widens, internationalcompetition for water and water-related resources will serve as roadblocks to domestic progress.

Water supply construction hasarrived at the cusp of a potentiallydivisive issue: Do we increase supplyor decrease demand? In past years,construction has focused on increasingthe total supply of water. New-home construction and replacement of aged infrastructure have driven water supply construction from the supply side.

Recent efforts to approach water supply issues from the demand side havegained both intended and unintended momentum. During 2007 and most of2008, the Southeastern U.S. was under a severe drought. Raleigh, N.C., was noexception and enforced severe water use restrictions that effectively lowereddemand — so much so that a 9% rate increase was recently granted by the state’spublic utility commission and city council to make up for the revenue reductionresulting in decreased usage.2 The per capita usage rate has continued into 2009

even though the drought is (momentarily, perhaps) just a memory. Efficiencies in water procurement, storage and transportation methodologies, as well as politicalincentives, could also reduce water demand, which in turn would increase currentsupply. For example, older pipelines in the Northeast have been estimated to be50% less efficient than new-pipe installations, and the cost to construct a new

18,000

20,000

16,000

8,000


6,000 0

–4


4,0002001 02 03 04 05 06 07 08* 09* 2012*

16

12

8

4

20

36

32

28

24

10* 11*

Exhibit 3

Water Supply Construction Put in Place Historical Figures and Forecasts

Water supplyWater supply spending change

10,000

14,000

12,000


48%5%

Thermoelectric Power

Irrigation

Public Supply

Industrial

Self-supplied Domestic, Livestock, Aquaculture and Mining2%

34%

11%

Exhibit 4

Estimated Use of Water — 2000

Source: Hutson, S.S. et al., (2004) Estimated Use of Water in the United States in 2000. U.S. Geological Survey. Circular 1268.


water main can reach five times thecost of rehabilitating an existing pipe.

The aging water-supply system isleading to an increase in water mainbreaks that cause problems outside thewater industry. Mudslides, subway-service suspension, library closings and washed-out roads have alloccurred due to water-main breaks inthe last year. The EPA’s Aging WaterInfrastructure Research Program estimates that over 240,000 water-mainbreaks occur each year. D. WayneKlotz explained to the New York Timesthat recent breaks are much more thanjust a waste of water, they lead totremendous damage and dangerous conditions.3 Decreased end use of water, eithervoluntarily or mandated, would go a long way toward stabilizing the fragile U.S.water supply infrastructure.

SEWAGE AND WASTE DISPOSALOptimism or Pessimism. Derived Demand or Increasing Regulation;

Alternative Delivery Systems or Local Funding Constraints; Catalyst for AgingInfrastructure Replacement or Wasteful Government Spending. Projected spendingon wastewater construction will slow significantly in 2009, dropping 2% from the 2008 high of $25.4 billion (Exhibit 5). Even with growth rebounding in 2010

and forecast to continue through the decade, industry groups still predict funding

29,000

34,000

24,000


–5

0


4,0002001 02 03 04 05 06 07 08* 09* 2012*

20

25

30

35

40

15

10

5

10* 11*

Exhibit 5

Sewage and Waste Disposal Construction Put in Place Historical Figures and Forecasts

Sewage and waste disposalSewage and waste disposal spending change

9,000

19,000

14,000



gaps to grow to between $200 billion and $1 trillion over the next two decades.The credit crisis will hurt municipal utility systems more than other utility

segments due to their frequent reliance on short-term credit facilities to fund capitalconstruction. For example, Jefferson County, Ala., home to the state’s largest city,Birmingham, was recently pushed to the brink of bankruptcy by a downgrade ofthe county’s sewer warrants to junk status. This downgrade was caused by theweakened financial condition of the county’s bond insurers and resulted in dramatic increases in the payments on the sewer warrants.4 Unable to meet thepayments out of the general funds, the county commission voted to move $44

million from the Environmental Services Department to pay Wall Street banksand creditors.5 In an effort to stave off what would be the nation’s largest municipalbankruptcy, Gov. Bob Riley was considering the transfer of funds originally earmarked for school construction.6

The potentially prohibitive cost of obtaining funding for sewer systems andother water-treatment facilities will further stifle spending growth in a segmentthat historically has difficulty securing adequate funding. State-funding support isunlikely because currently 44 states are facing budget deficits during 2009 (Exhibit6).7 The stimulus bill’s recent passage will indeed help to backfill many depletedbudgets and may offer this segment the life support it desperately needs. In manyinstances the net effect will be negligible as the drop in tax revenue and increase inbond prices leave municipalities with holes in their capital construction budgets.However, it remains very much up for debate how such a drastic measure willaffect the long-term outlook for sewer and wastewater utilities.

There are over 16,000 U.S.-based sewage and water-treatment systems, and the older generation of these will continue to struggle with deterioratinginfrastructure in 2009–2010. Combined sewage and storm-water systems built in

WA

OR

NV

CA

AZ

UT

ID

MI

WY

CO

NM

TX

ND

SD

NE

KS

OK

LA

AR

MO

IA

MN

WI

ILOH

MI

KY

IN

TN NC

SC

GAALMS

FL

VAWV

PA

NY

ME

VTNH

MACT

NJMD

Note: Includes states with shortfalls in fiscal 2009 or projected shortfalls for fiscal 2010.Source: McNichol, Elizabeth, and Lav, Iris J., “State Budget Troubles Worsen,” December 23, 2008, p2.

RI

DE

AK

HI

44 States Facing Budget Shortfall 2009 or 2010Exhibit 6


the 19th and early 20th centuries were designed to overflow in extremely wetweather. These antiquated systems are a threat to public health; a 2004 EPA reportto Congress estimated 850 billion gallons of storm water mixed with raw sewagepour into U.S. waters every year.8 This problem is separate and apart from the dire rehabilitation needed for the aging pipe systems. Additionally, wastewater systems and treatment plants face the continuous challenge of meeting increasedwater-quality standards. Issues surrounding Combined Sewer Overflows (CSO)and Sanitary Sewer Overflows (SSO) have given rise to an insurmountable fundinggap for the entire nation.

According to the EPA, almost equal shares of the estimated immediate capitalneeds for wastewater construction are for wastewater treatment systems ($69 billion;34%) and wastewater collection and conveyance ($65 billion; 32%). CSO and SSOcorrections account for 27% ($54 billion) of the capital needs. States with largerpopulations and/or the oldest operating systems are facing the greatest need forwastewater construction. New York, California, Illinois, Ohio and Florida are thetop-five states with the largest funding needs for wastewater construction and

RECENT SEWAGE SPILLS

• A mechanical failure at Washington Suburban Sanitary Commission’s Piscataway

Wastewater Treatment Plant in Maryland sent millions of gallons of raw sewage into

nearby Piscataway Creek in February 2008.

• A 42-inch pipe ruptured near Fritz Island wastewater treatment plant in Reading, Pa.,

in January 2008.

• Heavy rain, combined with deteriorating pipes, overwhelmed a Marin County, Calif.,

wastewater treatment plant in January 2008, spilling 2.45 million gallons of sewage into

Richardson Bay, which connects to San Francisco Bay. Days later, an additional 2.7 million

gallons of sewage spilled into the same bay when operators failed to engage all of the

treatment plant’s pumps.

• In August 2007 a ruptured sewer pipe spilled millions of gallons of raw sewage into the

Hudson River just north of New York City.

• Improper excavation near Cary, N.C., ruptured a pipe and spilled approximately 8 million

gallons of raw sewage into Swift Creek, Lake Wheeler and Lake Benson in June 2006.

• A pressurized sewer pipe in Honolulu burst in March 2006, spilling 48 million gallons of

sewage into Ala Wai Canal, which runs into the Pacific Ocean. High levels of bacteria

detected in coastal waters closed Waikiki beaches for a week.

• About 14 million gallons of untreated sewage flowed into San Diego Bay between 2004

and 2006 due to improper construction of a Navy barracks high-rise.

• About 7.8 million gallons of raw sewage poured into White Clay Creek in Wilmington, Del.,

for 13 hours in August 2007 after a pump station switch and an alarm failed.

Source: Wheeler, Larry, and Smith, Grant, “Aging systems releasing sewage into rivers, streams,” USA Today, May 5, 2008. Data collected by Gannett News Service.


treatment. Together, these five states make up almost 40% of the reported $200

billion needed to improve the nation’s wastewater infrastructure. Even given therecent stimulus, federal funding for wastewater construction will remain limited,and local communities and municipalities will inevitably bear this burden. Localtaxpayers, already stretched by increased spending needs related to other aginginfrastructure (transportation, education, water supply, etc.) will have to makefunding allocation decisions with limited resources.

New construction technologies and a focus on the green aspects of sewageand wastewater construction may also have an impact on plugging the drain ofneeded financing. A movement back to the use of naturally occurring detentionponds, retention ponds, streams and aquifers to transport and store water has decreased the cost to treat and store needed water reserves. As with water

supply, there are opportunities forgrowth by managing the current infrastructure assets in a more efficientand reliable manner to prolong theuseful life of many sewage and watersupply systems.

CONCLUSIONIt is clear that aggressive

investment in water supply and wastewater infrastructure is necessaryto bring the United States up to thestandards we’ve come to expect. Whilethe funding may be more difficult to obtain through 2009 and 2010, the environment does not demand pessimism. On the contrary, we can

Exhibit 7

2008 Ranking of 50 Most Populous Cities’ Water Supply Sustainability

Leading

1. Chicago, IL 1. Cleveland, OH 1. Milwaukee, WI 4. Detroit, MI 5. New Orleans, LA 6. Memphis, TN 7. Jacksonville, FL 8. Tulsa, OK 9. Minneapolis, MN 10. Honolulu, HI

Mixed

21. Washington, DC 22. Philadelphia, PA 23. Nashville, TN 24. Austin, TX 25. Charlotte, NC 26. San Antonio, TX 27. Seattle, WA 28. Portland, OR 29. New York, NY 30. Arlington, TX

Challenged

31. Fort Worth, TX 32. Houston, TX 33. Dallas, TX 34. El Paso, TX 35. Sacramento, CA 36. Fresno, CA 37. Miami, FL 38. San Francisco, CA 39. Oakland, CA 40. Denver, CO

Endangered

41. Albuquerque, NM 42. San Jose, CA 43. Colorado Springs, CO 44. Long Beach, CA 45. San Diego, CA 46. Los Angeles, CA 47. Tucson, AZ 48. Mesa, AZ 49. Phoenix, AZ 50. Las Vegas, NV

Advanced

11. Indianapolis, IN 12. Columbus, OH 13. Oklahoma City, OK 14. Boston, MA 15. Baltimore, MD 16. Virginia Beach, VA 17. Atlanta, GA 18. Louisville, KY 19. Kansas City, MO 20. Omaha, NE

Interpretation Note: The above table lists the cities ranked by SustainLane according to water sustainability. Data analyzed included distance in miles from primary source of untreated drinking water, dependence of water on snow pack, level of drought or other conflict, population growth rate and gallons of water consumed per person per day. SustainLane US City Rankings is a proprietary, peer-reviewed, special feature of SustainLane Media. This leading national survey ranks the largest 50 U.S. cities in terms of their sustainability practices. The rankings explain how people’s quality of life and city economic and management preparedness are likely to fare in the face of an uncertain future. These indicators gauge, for instance, which cities’ public transit, renewable energy, local food and development approaches are most likely to either limit or intensify the negative economic and environmental impacts of fossil fuel dependence.

Source: 2008 SustainLane US City Rankings, www.sustainlane.com.


chose a sunny outlook or succumb to the overcast pall. Achieving a record year for both revenue and profits in 2008 followed by a severedrop-off in the first three months of2009, North Carolina-based McCallBrothers has pursued a diversificationstrategy and is optimistic that severalof their seven market sectors (welldrilling, environmental testing,cleanup, tank removal, dewatering,horizontal directional drilling for conduit and line placement, anddrilling for foundation piers) will perform well during 2009. Its president explains, “There is no argument from me that today istough, perhaps the toughest market in 20 years. Nevertheless, we remain optimisticand specifically have pursued a diverse mix of work. While our top segments from2008 are sliding, several other sectors are beginning to pick up. We choose to seeopportunity rather than difficulty!”

We couldn’t have said it better ourselves. ■

Mark Bridgers is a senior consultant with FMI Corp. He may be reached at 919.785.9351 or via e-mail at

[email protected]. Dan Tracey is a business analyst at FMI. He may be reached at 919.785. 9298 or via

e-mail at [email protected]. Mike Chase is formerly with FMI.

1 Met Office data and reporting on United Kingdom climate. Downloaded at http://www.metoffice.gov.uk/climate/uk/

averages/19712000/areal/england.html. The Irish Meteorological Service Online reporting Ireland climate. Downloaded at

http://www.met.ie/climate/rosslare.asp. 2 Sheehan, Ruth, “Rate hike in 2 easy pieces,” The News & Observer, April 29, 2009. 3 Cooper, Michael, “In Aging Water Systems, Bigger Threats Are Seen,” New York Times, April 19, 2009.4 “With Jefferson County’s sewer mess already spilling over, reaching a deal is even more imperative,” The Birmingham News,

October 24, 2008. 5 Wright, Barnett, “Jefferson County Commission asks Gov. Bob Riley for special legislative session, OKs $44 million payment,”

The Birmingham News, August 5, 2008.6 Wright, Barnett, and Thornton, William, “Gov. Riley says solution to Jefferson County sewer debt crisis may wait until new

administration takes office,” The Birmingham News, December 17, 2008.7 McNichol, Elizabeth, and Lav, Iris J., “State Budget Troubles Worsen,” States in the Recession Archive: December 23, 2008, pg. 1.8 Wheeler, Larry, and Smith, Grant, “Aging systems releasing sewage into rivers, streams,” USA Today, May 5, 2008.

It is clear that aggressiveinvestment in water supply and wastewaterinfrastructure is necessaryto bring the UnitedStates up to par withour international peers.

130 ■ contact us

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