After five years of unprecedented challenges in the general contracting business, many firms are once again on the upswing. The market in certain geographies is booming, and nationwide it is growing at a healthy rate. Vertical construction is up 5% overall and expected to grow at similar rates over the next few years.
Many general contractors are hiring again, and margins, though slimmer than most might want, have returned. Bid lists are getting a little bit shorter and backlogs a little longer. For the first time in a long time, general contractors have cause for optimism. In addition to the positive economic news, the firms that are still standing are getting stronger in other ways.
Companies are pursuing new project types; contractors are seeing the return of manufacturing in some parts of the country, and industrial construction is on the rise. During the downturn, many firms discovered new talents, niche markets and project types with reduced competition and the opportunity to negotiate rather than compete on low price.
General contractors are also seeing the benefits of investments of another kind. While construction firms have long been slow to change, investments in BIM and tablet technology have started to bear fruit for the companies that have made them. In addition, contract delivery methods once seen as outliers, such as integrated project delivery (IPD), are beginning to achieve wider adoption and provide a competitive edge to the contractors who have invested the time and effort to master them.
Pockets of Recovery with Accelerating National Momentum
No one can dispute that the past five years have been among the toughest the construction industry has ever known. From a peak of almost $500 billion in 2009, nonresidential building construction fell to a low of less than $350 billion in just two years, and improved only marginally through 2012.
However, the multiyear growth trend now seems to be stabilizing at a sustained 5%, which puts it well above overall U.S. Gross Domestic Product growth. The construction economy is now healthier than the economy of the U.S. as a whole. Certain geographies are showing signs of growing strength: southern and northern California; south Florida; western Pennsylvania; New York City; Washington, D.C.; Houston and more are all seeing construction activities improving at rates outpacing the overall industry.
What these geographies have in common are strong underlying economic drivers and large metropolitan areas with diverse needs. Examples of these sorts of economic drivers include energy in the Dakotas, Pennsylvania and elsewhere or government in the Washington, D.C., metro area.
General builders are seeing this recovery apply, albeit unevenly, to their activities. As single-family residential construction gradually normalizes in these areas, the follow-on needs for commercial and retail will be driving nonresidential demand. At the same time, the multifamily construction market remains strong, particularly in areas with large transient populations or younger demographics, while health care construction demand continues to grow, driven by the continued aging of the population as well as changes in diagnostic and treatment technologies.
On the other hand, office, lodging and amusement construction continue to be hampered by oversupply and tight lending conditions and these markets will remain challenged for the foreseeable future. While the positive momentum may be gratifying to see, general contractors that have fought the hard slog of the last few years should not let down their guards.
The return to normalcy does not mean a return to the boom times of 2007-2008. Those days are gone, likely never to return. Growth in vertical construction volumes is welcome news, but must be tempered with caution. In many markets, general contractors are reporting that the growth in opportunities has led to some reduction in the number of bidders.
Projects that would have had 10 or 12 bidders during the past few years are back down to the four to six bidders that would be close to the historical norm. Unfortunately, though, this reduction in competition has not yet been reflected in a loosening of fees; in most parts of the country, margins remain constrained. This means that cost control is still an important skill for general contractors, so those that have emphasized improved productivity and LEAN construction methodologies must continue to do so.
Similarly, strong subcontractor relationships will remain a source of competitive advantage. Since there is a tendency for firms to over-expand going into a growth cycle, many fail, due to insufficient cash reserves. General contractors today must keep themselves apprised of the financial conditions of their subcontractors. Thorough prequalification practices for subs – consistently followed – should be a part of an overall risk management approach. These practices will help general contractors protect themselves from the risks of subcontractor default.
A Continued Drive for Diversification
While the general building market is in the early stages of a sustained and gradual recovery, the prolonged market downturn has changed things permanently for many general contractors. Some of these changes are obvious — dramatically shrunken workforces for many contractors, depleted capital bases for others, and a general “fatigue” among most.
However, probably the most important result of the market downturn for many has been a reorientation of the business to approach new and different opportunities. The rising tide of the broad economic boom that preceded the Great Recession created tremendous opportunities for general contractors across almost all sectors of the building markets. However, as markets tightened and the economic tide receded, market conditions exposed those businesses that were “swimming naked.” Put another way, the last few years of extremely lean market conditions have challenged general contractors to demonstrate how to create value for project owners and still make money for themselves.
Broadly speaking, this re-examination of the general contractor business model has taken two forms — either refining one’s business operations (that is, becoming more efficient) or positioning one’s business to capitalize on new and different market opportunities.
While much can be written about refining business operations, it is the drive for diversification by general contractors that FMI has observed and believes deserves additional commentary. Diversification for general contractors takes many forms. Most general building contractors still in business today have figured out how to work for new and different owners and to stretch beyond traditional customer bases from pre-recessionary times.
However, the diversification that FMI has observed is much more dramatic than just switching from building commercial office space to multifamily apartments. Many contractors in today’s markets are building entirely new product types and entering entirely new geographies: interesting and challenging to execute, but not groundbreaking.
It is striking, though, how many are entering entirely new markets — civil, industrial and energy, just to name a few. These are markets that represent a significant departure from the core traditional general building markets. These are not subtle shifts; these are firms repositioning themselves to alter the composition of their customer base and revenue away from general building and into other markets with different economic drivers and trends, countercyclical to the building market.
The strategies that underpin these drives for diversification are innumerable and specific to each business that pursues them. Examining and understanding each of them is not the point. The more salient observation is that businesses, which for decades and generations have always considered their core competency to be in the general building markets, have committed significant amounts of resources to figure out how to diversify away from this same market.
If you are a general building contractor that is not examining the market to understand what diversification opportunities exist, how well-positioned will you be to survive the next downturn? General building contractors in 2014 need to challenge themselves and ask the hard questions: “Do I need to diversify? If not, why not? If so, how do we do it?”
The competition never stands still, and the continual drive for diversification and market opportunity among general building contractors remains as intense as ever.
Technology and IPD are Redefining GC Services
While the engineering and construction fields unquestionably boast some of the most industrious, innovative and creative professionals in the U.S. economy, it has been a routine statement for some time to point out the lack of technological innovation in construction methods. Wood, stone, steel, manual craftsmanship, etc. — the materials and mechanisms in use today have existed for centuries. While the basic inputs to the construction process will remain consistent, it is clear that the tools and technology the general building industry uses to complete its work are changing drastically today.
In short, the technological innovations of broadband mobile communication and immensely powerful, distributed handheld processing devices are radically altering the way in which general contractors deliver projects in 2014. Look around any construction site. How much technology is deployed today that did not even exist five years ago on a mass-market basis? Smartphones and tablets, sure. But how about the following?
- Laser scanners weighing 10 pounds that render intensely accurate, multidimensional, “as-built” drawings that can be taken in minutes and downloaded even more quickly.
- Three-dimensional printers that can fabricate a permanent building element in a matter of hours.
- Truly paperless project sites where original and revised drawings, change orders, and even claims and disputes, are transmitted from office to job site to owner using integrated applications with workflow management and intelligent routing tools.
Technology will never replace the talented people and individuals that make construction such a fun and challenging industry in which to work. However, technology adoption “in the field” is arguably altering the landscape of expectations for the services that a general builder can provide to owners. The sheer efficiency with which information can be shared and processed demands businesses to change. Much like with the topic of diversification discussed above, the question for general building contractors is not so much what is the next best technology to improve my business, asthat will always be a moving target.
Instead, the question is: Does your organization have a culture and a structure that allow the company to incorporate technology to improve the value proposition for the company and customers? Or, in other words, does your company use technology to:
- Make the general building process better for the owners you serve?
- Increase the coordination with your subcontractors and trade partners?
- Stimulate the individuals you employ who are more technologically savvy than ever?
The successful general contractors that FMI sees in the marketplace are asking these questions and figuring out solutions that will become the standard for the industry in the future. Figure out how to shape the future, not react to it.
The Sun is Out Again
It may be easy to get excited about the prospects of a brighter day for an industry that has had more than its share of hard times over the past several years. The growth in market opportunities must feel like a ray of sunshine to many firms after a multiyear cloudy winter. However, like anyone getting back into the sun after a long winter, general contractors must take precautions to keep from getting burned. Solid cost control, subcontractor prequalification, diversification and appropriate investment in technology all will serve to protect the wise general contractor from some of the dangers this improvement in the market will likely present, and allow for the kind of recovery the entire industry has been eagerly awaiting.
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