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CONSTRUCTION KNOWLEDGE BLOG

June 3, 2011

Andre Agassi Funds Charter School Construction
Filed under: Industry outlook — Tags: — nedpelger

Andre Agassi, tennis great, does good and does well. Agassi operates an award winning charter school in a poor section of Las Vegas and believes in the power of the charter school concept. Since privately owned schools lack the public bond funding mechanism available to public schools, school facilities tend to be a limiting factor for proposed charter schools.

To help fill that void, Agassi and Canyon Capital Realty Advisors teamed to create the $750M Canyon-Agassi Charter School Facilities Fund. Low income urban areas will have access to the fund for new construction or remodeling projects.

Finding a place to put a school is typically the hardest and most expensive hurdle charter startups face.

“It is very prohibitive for many charters that have great programs,” said Vielka McFarlane, founder of Celerity Educational Group, which operates four charters in low-income areas of Los Angeles and is opening three new ones in the fall. “It’s the biggest challenge.”

So if you’re involved with school construction, here’s another way projects may trickle in.

20 years ago, I ran a company Privatization Services, Inc. that focused on privately building and owning public school facilities (not operating them). We could deliver fantastic cost savings, but couldn’t get past the political inertia to get change initiated. In these more fiscally challenging times, that privatization concept deserves dusting off as well. I doubt I have the passion to jump back on that horse, but hope someone does. It’s a strong idea for these times.

CONSTRUCTION KNOWLEDGE BLOG

May 26, 2011

Building Factories in America Makes Sense Again
Filed under: Industry outlook — Tags: — nedpelger

A customer recently told me they want to proceed with a 50,000 sf factory addition. They considered trying to outsource the manufacturing to China, even took a few trips over there. They concluded, however, that they benefited from the close feedback loop of tweaking the design and making changes during manufacturing (the same thing they do during building construction). They keep changing things on the fly, but end up with a great product.

Turns out The Economist article Moving Back to America indicates that the decision  to build here makes sense on a few other levels as well. The labor costs in China have risen 65% from 2005 to 2010. America’s labor costs…not so much.

“Sometime around 2015, manufacturers will be indifferent between locating in America or China for production for consumption in America,” says Hal Sirkin of Boston Consulting Group. Since factories take time to plan and build, many manufacturers have re-directed their efforts to America. Caterpillar starts a plant in Texas soon. Wham-O, the manufacturer of Frisbees and Hula Hoops moved half its production from China and Mexico back to America.

Of course, for goods to be sold in Asia, plants there will continue to make the most sense. As the world settles into globalization, companies learn that simply lowering labor costs doesn’t balance more complex supply chains and higher inventories due to long distance relationships.

So more good news for the American construction industry. If you’re struggling in this crazy construction market right now, hang in there. Remember the words of wisdom from the old contractor, “When it’s good, it’s never quite as good as it seems it is and when it’s bad, it’s never quite as bad as it seems it is.”

CONSTRUCTION KNOWLEDGE BLOG

May 3, 2011

You Can Eat Wetlands, But They Taste Like Crap
Filed under: Industry outlook — Tags: — nedpelger

The Florida House of Representatives just passed a bill to streamline land development approvals. The environmentalists are steamed.

“In 30 years of working to protect Florida’s unique natural wonders, never have I witnessed such an egregious and blatant dismantling of those protections,” said Debra Harrison of the National Parks Conservation Association.

Those of us in the construction business for many years have watched the steady increase of complexity of environmental regulations and land development approvals. Every year for decades the time and cost to get a project approved for construction has increased. The rules tend to get written by folks who benefit from the increased complexity. Consulting engineers and planners have their fees increase as the land development process requires more. Local boards and zoners feel more power against developers as their regulation books get fatter.

Meanwhile, the cost of construction goes up and the appetite of owners willing to jump into the convoluted mess goes down. Hopefully, the Florida legislators will lead the way for many other regulatory bodies to consider simplifying.

I consider myself a conservationist, spending large amounts of time in the woods and in nature. We have a responsibility to take care of the Earth. Our environmental responsibility must be balanced with our responsibility for economic growth and productivity. You can eat wetlands, but they taste like crap.

A few years ago I was managing construction on a 100,000 sf factory for welding firm. The Owner’s Rep was building a factory in California at the same time. When he’d start railing about our punitive approval process and the extra costs he was having to endure, I’d discreetly ask about the CA project. Then he’d really get fired up! CA was making him spend on all sorts of whims…like putting a 8′ high brick wall around the entire 30 acre property or putting a lawn irrigation system for all the grass areas. We sucked, but not as bad as CA.

As those trends have come forward, CA has become a place no one wants to build or do business. We aren’t quite there yet, but we’re headed in that direction. This financial crisis and slow recovery recession should help legislators and local officials think hard about where they want to head. The story of the golden goose applies.

If we are are going to succeed together, we need to drop our arrogance and our win/lose mentality. We need to learn to see the other person’s point of view and compromise. It’s what made America great and we need to find that skill again.

CONSTRUCTION KNOWLEDGE BLOG

April 28, 2011

Going to Where the Jobs Are
Filed under: Industry outlook — Tags: — nedpelger

In the past, contractors tended to suffer through the local economy. Profits soared when work was plentiful and plummeted with work scarcity. Recent technology improvements allow many contractors to move into new geographical markets more easily than in the past.

Houston Neal writes an excellent construction technology blog and has a recent post Technology Accelerates the Migration of Contractors. He includes the chart below to show where the construction jobs are.

He then goes on to outline the various technologies that allow contractors to more easily move into new geographic markets. It’s good to be aware of the possibilities and to keep thinking strategically.

On the other hand, I’ve learned in my career that most of the value I bring to a construction project comes from my knowledge of local people and processes. I’ve learned some hard lessons venturing out from the turf I know. Remember one of the basic rules of business: not making money is still better than losing money.

CONSTRUCTION KNOWLEDGE BLOG

April 5, 2011

PA Has Worst Bridge Maintenance in America
Filed under: Industry outlook — Tags: — nedpelger

It’s not a trivial accomplishment to be substantially better, or worse, than everyone else. Pennsylvania has achieved this distinction by having the worst bridges in the nation. “The Fix We’re In For: The State of Our Nation’s Bridges” was recently released by Transportation for America, a Washington, D.C.-based coalition of 500 groups working together to change transportation policy.

PA has 26.5% of its 22,271 bridges listed as structurally deficient (meaning the the superstructure, substructure or deck was rated “poor” by inspectors). The next worst state was Oklahoma at 22%. That’s a big difference and a big problem for cash poor PA.

My buddy Bob Navitsky, PE handles the bridge maintenance for the covered wood bridges in Lancaster County, PA. He uses a common sense approach to test the bridges and keep them repaired at reasonable costs. He manages the program well.

Poor maintenance generally looks like a symptom from a financial crisis, but generally it’s a management failure. As you look for opportunities in this economy, remember that every management failure is an opportunity as well.

CONSTRUCTION KNOWLEDGE BLOG

March 19, 2011

Construction Remains a Drag
Filed under: Industry outlook — Tags: — nedpelger

From Vanguard’s Economic Week in Review: Fed’s outlook brighter but stocks shaky:

Gradual improvements in the labor market helped lift the Federal Reserve’s outlook for economic recovery, though construction remains a drag. Food and energy prices jumped, with core inflation still modest. But investors were perhaps more distracted by declines in stock prices during the week in the wake of Japan’s earthquake-tsunami-nuclear woes.

I just returned from a Lancaster County Mud Sale, huge community auctions run by Amish folks to benefit volunteer fire companies. I spoke with an old friend. His carpentry and home renovation business has no work currently. He said, “Last year was bad, but so far this year, I haven’t had any work at all.” He’s a competent, honest contractor who does excellent work. He just can’t find any.

This wonderful business we’ve chosen—to design and construct buildings and other structures, seems to be navigating the most challenging times in the past 50 years. What words of wisdom can I offer?

What doesn’t kill me makes me stronger.

Try to use these challenging times to better understand yourself and this business. Try to position yourself in a place to win. Remember the fundamental rule of success:

Successful people do the things unsuccessful people don’t want to do and won’t do.

CONSTRUCTION KNOWLEDGE BLOG

February 17, 2011

Another Governor Rejects Billions in Federal Grants
Filed under: Industry outlook — Tags: — nedpelger

Florida Gov. Rick Scott (R) just rejected the $2.4B federal grant to build a high speed rail link from Tampa to Orlando. The grant was supposed to cover 90% of the project costs.

Why the rejection? He believed the costs would over-run and if the project was cancelled later, FL would have to repay all the upfront costs to the Federal Government. That’s what happened in NJ with the rail tunnel to Manhattan. The Governor also felt the rider and revenue projections were too optimistic, which would lead to operating losses.

Governors in Ohio and Wisconsin also recently turned down over $1B of federal grants for high speed rail projects. As I’ve written before, the inability of our industry to deliver projects on time and budget certainly hurts us. Firms that develop contracting methods and histories of successful projects have great opportunities to prosper.

The other interesting aspect of these rejections involves the failure of the top down funding mechanism. The Federal Government wants these sexy high speed rail projects, whether the locals really need them or not. Deciding what projects should be developed is a difficult process.

I’ve worked with many commercial developers and helped them through that decision making matrix. After all the analysis, it always seems to come down to the decision maker’s gut feelings. Almost all those projects were successful for the developer/owner. I don’t know how that gut decision making, that comes partly from having some skin in the game, could be passed onto government. Any ideas?

CONSTRUCTION KNOWLEDGE BLOG

February 15, 2011

US Manufacturing Boom Continues
Filed under: Industry outlook — Tags: — nedpelger

That’s right, contrary to what we typically read from those nattering nabobs of negativity (hat tip to Spiro Agnew), US continues to lead the world in manufacturing output. The numbers vary, depending on the source, but let’s use the United Nations’ comprehensive database of international economic data. The manufacturing output of America in constant 2005 dollars was $2.15T in 2009, while China was $1.48T. That’s an impressive 45% lead over China. Other sources state different numbers, but all indicate that the US still leads the world in manufacturing output and has since 1890.

Even though China’s manufacturing is growing quickly, America still produced 20% of the world’s manufacturing output in 2009. This amount fell only slightly from 21% in 1990. The fact that American manufacturers are able to continue to produce massive quantities of products while substantially cutting jobs comes from record breaking productivity gains.

This information jives with what I see in my business. I always have at least one manufacturing client planning or building some type of project. I like the manufacturing work because efficiency (one of my favorite things) generally trumps other concerns. If I can help a manufacturing customer plan a great process flow in a production line, I can add some real value. Which means I’ve created some strong customer satisfaction and loyalty. Those two items are the core of a successful small business…or large business.

As I researched this post, I was surprised to find the impressive nature of the US economy. 30% of the world’s millionaires and 40% of the world’s billionaires live in the US. America still breathes opportunity. The net worth gain of American households has been impressive over time.

So as you read the gloom in the press and wonder about the outlook for construction, remember that lots of good things are happening. You just have to dig a little to find them.

CONSTRUCTION KNOWLEDGE BLOG

February 12, 2011

The Government Should Lease Buildings
Filed under: Industry outlook — Tags: — nedpelger

Twenty years ago, my boss and I devised an idea to buy land, build schools and lease them back to school districts. We designed the buildings for high energy efficiency and low operating costs and tied those costs into the lease. Even with paying state prevailing wages, we offered tremendous savings to school districts. We set up Privatization Services Inc. and signed our first project for the Warwick Elementary School. We were less than 2/3 the costs of the traditional delivery method. The cost savings came from intensely managing the land procurement, design and construction processes.

Unfortunately, then PA Governor Casey bowed to last minute union pressure and blocked the slight change we needed to make the state reimbursement system work fairly for leases. We thought the unions had been appeased by our agreement to pay PA Prevailing Wages. The only explanation we ever heard was that the unions didn’t want, “To let the camel’s nose under the tent.” I suppose they feared that one efficiency improvement would lead to others. The result was everyone in PA paying too much for schools and school taxes.

Today I read that one of the stimulus projects, a $500M new building for the Social Security Administration Data Center has agreed on a site in Urbana, MD. The 400,000 sf project was authorized in 2009 and has just found their land. They are already 11 months behind schedule. Governments are almost always terrible at real estate and construction transactions.

The costs for the SSA project also boggle my mind. The ENR article mentioned that $400M was for construction and $100M for data equipment. The arithmetic yields $1,000/sf for buildings and land. What a waste! America can’t compete well with the rest of the world with that kind of inefficiency.

Governments should be moving toward leasing buildings and equipment. Leases are so much simpler than ownership.

  1. Leases can be turnkey and include operating costs
  2. The free enterprise system will deliver at a much lower cost than the government system
  3. Bidding of leases can be fair and open (the US Postal Service has been doing it well for many years)
  4. The project delivery time will be much faster (the vendor doesn’t get paid until the project is completed, providing the best incentive)
  5. Depreciation is a value in the private sector, not in the public or non-profit sector
  6. Government should be using up-to-date buildings and equipment to be effective, not dealing with aging assets and renovation issues
  7. Well written Request for Proposals for leases will force the Government to determine the actual operational needs, rather than offloading that major decision to an architectural firm paid by a percentage fee on the total construction cost (reverse incentive for project control and cost savings)

During this transformational time of right-sizing the government, I hope this concept gets accepted. The potential savings are huge.

CONSTRUCTION KNOWLEDGE BLOG

January 31, 2011

NC Bridge Project a 50% Off Sale
Filed under: Industry outlook — Tags: — nedpelger

A Balfour Beatty Joint Venture was the low bidder at $65M for a North Carolina bridge project expected to cost $130M.  The Winston-Salem Journal noted that the I-85 Yadkin River Bridge project covers about 4 miles of road and the bridge widening.

What does a bid like this tell us about our industry? Perhaps a few things:

  1. Design engineers and architects are often terrible at budgeting construction costs.
  2. The construction bid market is amazingly competitive these days.
  3. Balfour Beatty really hammers down the estimates.

I remember when Balfour Beatty beat GA &FC Wagman (a part of the company I was working for at the time) on the Lancaster Rt 30 road and bridge project. It was about $100M and Wagman was second by $83,000. Joe Wagman said they lost it by less than 1/10th of a percent or “Coffee and Donuts money”.

When Balfour Beatty was working on the project, they got in numerous disputes with PennDot and headed to litigation. I heard one of the Balfour Beatty guys was talking with a PennDot guy and mentioning that things were headed to the lawyers. The PennDot guy said, “That’s ok, we have attorneys on staff.”

The Balfour Beatty guy replied, “Yeh, so do we, but our guys went to Harvard.”

Later I read in the newspaper that the judges mostly ruled against PennDot. It wasn’t a big surprise.

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