Highway Contractor

Better Roads Staff | September 7, 2012

 

Old Dog, New Tricks

 

Even with a strong foundation and a long history, you need to be willing and able to adapt to stay competitive today.

 

By John Latta

 

It’s not 2007 anymore.

Changes in the economy, the way work is decided on, planned and done, future expectations, even legislation (finally) and a variety of other factors, mean the highway and bridge industries have changed to the extent that successful companies – and agencies – must adapt to stay competitive and squeeze the most out of every dollar.

Most observers feel that the new surface transportation legislation, MAP-21, provides some short-term stability, certainly more than living under endless extensions of the previous legislation, SAFETEA-LU. But with its inadequate $40 billion a year and its very short two-year term, MAP-21 does not offer enough for contractors and agencies to be anything less than cautious going forward. Given that chaotic extension-fest, few would seem to be willing to anticipate a smooth road to an adequately-funded new bill when MAP-21 ends in September 2014.

There is another reason for concern about the amount of funding states will be able to send to jobsites because most state budgets remain tepid at best. And many states are just now facing the bill on a series of bonding measures passed over the past decade, so we’re likely going to see increasing portions of existing state DOT budgets dedicated to repaying bonds.

But companies must move forward.

The extension limbo and the recession, even with some “stimulus” money available, created a mindset of uncertainty, a dominance of short-term maintenance and repair jobs, less work and major unemployment. Continuing state and regional budget woes will tend to keep the situation somewhat static, and there are even predictions that total spending on highways and bridges may fall in the coming years unless state incomes rise. So even MAP-21’s emphasis on getting more bridges up to standard may bring only moderate upswings in longer-term work. Then again, that’s good news today.

Two of the major questions contractors now face are whether to hire back highly skilled workers, and whether to invest in new equipment. While the pressure to be careful remains intense in these economic times, the need to get back to a long-term money-making mode is pressuring the industry. MAP-21 may appear as such a positive sign to planners that is impossible to ignore. It does seem likely that both employment and fleet purchases will expand because the industry must emerge from the recession’s “hunkering down” mode.

The other shoe would seem to be the election. If the pent-up need to get going again is to be released, the first week of November may do it.

Cost Efficiency

A leading industry association executive says that in her opinion, “We will continue to see a huge emphasis on maintenance not new construction, and maintenance projects will typically need to be the most cost-effective possible.”

If we are looking for a single metric for success in current and future projects it may well be cost efficiency. This applies both to the cost of the work itself and the actual cost of the funding, both overhead and capital.

“If you look at the cost structure for [heavy highway] contractors there’s really three areas where they can probably have some impact in terms of control and cost,” says Scott Kimpland of Raleigh, N.C.-based construction management consultants FMI. “Clearly, for these guys, equipment management and utilization is a huge percentage of their direct cost, and so just becoming a lot more proficient in terms of how they manage their equipment costs and utilization is a big factor for these kind of contractors right now. And the other side to that is the labor productivity – just how productive are they with labor and equipment?”

Kimpland points out that this industry relies a lot on overhead, and “we truly believe you need to manage overhead and be in control of that and be mindful of it. But when you look at the bottom line opportunity, if you’re just focusing on managing overhead you’re stepping over dollars to pick up pennies because the equipment costs and labor costs are a significant portion. Contractors have to be much more focused on improving productivity.” Today, he says, “where margins are tight, jobs are not forgiving, so the ability to manage at or better than your estimated cost for equipment and labor, that’s really the key to these businesses and if they can manage the labor cost and equipment cost on each job then they tend to do pretty well.”

 

If contractors can increase their productivity 10 percent – “which we’re finding is very doable” – the bottom line impact of that … is a game changer.

 

Safety, says Kimpland, is something roadbuilding companies have managed very proactively, “but what’s interesting is very few of them put the same emphasis and focus on managing productivity and equipment cost and utilization, and there’s a huge economic impact if they do that.” In many cases, Kimpland cases, if contractors can increase their productivity by 10 percent – “which we’re finding is very doable” – the bottom line impact of that, or just the initial competitiveness it gives them on bid day, is a game-changer. The amount of labor and equipment cost these companies incur is substantial, he says, “and so when you start to tweak that by 5 or 10 percent it adds huge economic advantage to [their] business.”

George Reddin, managing director of investment banking at FMI, says in the current economic environment, company financial strategists may have to deal with fewer options for movement. “As times got tougher in the early years of the recession,” he says, “the first step was we had backlog from the good days and so that covered us through maybe the first twelve-plus months of the so-called recession. Then we may have gotten a little bump with a little bit of the stimulus work – not much because it really substituted for projects that from the state level were shelved. But you got through the first year or two with those things. Then you had some cushion in your balance sheet from the good years and you ran through that. Then you divested some excess equipment because you didn’t have the same volume, and you propped yourself up. Then you renegotiated your debt and you sat down with your bonding company to get some relief and now you’re out of options. If this continues I think we’re going to see some problems that we haven’t yet really seen.”

Both Kimpland and Reddin say a vital factor for companies in today’s economy is a really accurate understanding of the cost of doing work.

As the recession dragged on, they say, a lot of companies, under pressure to get work and to keep their equipment busy, took on unprofitable work and were well into such projects before they realized that the price they were getting for it was lower than they had estimated. Knowing your actual cost, knowing all the numbers, they say, is critical for companies, whatever their bid strategies. And, equally, they suggest, agencies must be just as confident of their own estimations and completely understand funding mechanisms lest they too find, midway into a project, that the numbers are wrong.

Managing cost effectively is not solely a matter of working with big-ticket items. For example, properly insulating pipes and covering stockpiles saves money, so does reducing time wasting and managing inventories without periods of having too much or too little. Check out the free National Asphalt Pavement Association (NAPA) publication, 101 Ideas to Reduce Costs and Enhance Profits at www.asphaltpavement.org.

Cost management is also hindered by other factors that are easy to overlook, such as congestion. It continues to be such a serious problem that contractors can expect to keep working during increasingly compact work windows, a cost-management problem that shows little sign of abating.

The increasing use of recycled materials in mixes, in terms of both tons used as well as percentages in a pavement, also offers potentially significant cost efficiencies whether it’s recycled concrete aggregate or used asphalt being re-used. Asphalt pavers, and agencies issuing specs, are finding ways to use more and more recycled material in mixes. Last fall’s repaving mix for Chicago’s Magnificent Mile included 45-percent binder replacement (courtesy of RAP and RAS) in an SMA mix. Chicago DOT says they saved 40 percent off the cost of an SMA that didn’t include recycling.

Building toll roads may become more commonplace where there’s a high traffic flow as states look to build projects that can draw in private money.

Anemic state budgets also inevitably mean an increase of lesser-used paved roads, especially in rural and semi-rural areas, being turned back to gravel roads. That process can be done in a number of ways, and contractors may find the ability to do the work increasingly valuable. It may even be a situation where the contractor can be proactive and propose such work.

Innovative Contracts

DOTS are increasingly looking at contracts that might not too long ago have been called “non-traditional,” such as design/build and design/build/finance. They are also showing a willingness (as budgets stay tight but the public stays hungry for new and better roads) to discuss innovative ideas from contractors that can see new ways to bid jobs.

For example, some DOTs appear more than willing to take on Construction Manager/General Contractor (CM/GC) jobs because the cost estimates are done upfront and the risk is shared, ensuring that things get done more quickly at the lowest possible cost.

Keep in mind agencies are looking for ways to squeeze every dollar for all it’s worth and innovation in bidding and contracting is a proactive option. For example the practice of contractors actually taking the lead and offering innovative changes in both bids and contracts, sometimes after approaching an agency unexpectedly, while not commonplace, has its successes. (For more on CM/CG and other options see our Financial District story on ways contractors can adapt to changes that are resulting in a wider variety of delivery methods and changes in the qualifications of who can compete. Page 28.)

 

Tom Brown’s Story

“One of the most concerning issues for contractors are the investments we make,” says Tom Brown, president of Sierra Pacific West and chairman of The Associated General Contractors of America’s highway and transportation division. “With little on the horizon for work it makes it extremely difficult to plan for our organizations. Purchasing of the new equipment probably is one of biggest concerns. We have decided to look at our long-term investments once the elections are over.

“We have continued our efforts to stay ahead as it relates to state of the art software involving our civil engineering portion of the company. Retaining good personnel has been a challenge in itself due to the lack of work within our industry.

“We have managed to stream line our corporate overhead thus allowing us to stay healthy,” says Brown. “As to looking for new ventures or work, we now find ourselves looking for work in other areas outside San Diego, something we really have not had to do for over 25 years.”

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