Leadership through Innovative and Responsible Solutions

On a recent flight to Phoenix I finished “Here Comes Everybody” by Clay Shirky.  It had been recommended to me by a business associate a couple of months ago.

The book discusses group action, and how new social technology tools (Twitter, Facebook, Meetup, etc.) are changing the way we interact by enabling group conversation, contribution, and action on a scale not previously possible.

Early in the book the author states, “Group action gives human society its particular character, and anything that changes the way groups get things done will affect society as a whole…For any given organization, the important questions are ‘When will the change happen?’ and ‘What will change?’  The only two answers we can rule out are never, and nothing.

Construction is an industry resistant to change, and as a subset of that, slow to adopt new technology.  We don’t generally use services like Twitter, and our business tends to produce a tangible, physical end-product that is difficult to deliver electronically.  We tend to judge these technologies by the inane uses we hear about on the news.

Never the less, this revolution will change our business.  Perhaps we will simply use these tools to foster cooperation within our company.  Perhaps entire projects will use them to help create a collaborative environment.

As the author states, it will be the people who take these new technologies for granted that use them to change our business.  I’d encourage you to read the book, and think about how your life might change.

It’s January, and it’s a good time to look back on 2009 and talk about where we are headed in 2010.

 

2009 ended with a pleasant surprise, being named the 2009 PHC (Plumbing and Heating Contractor) Magazine contractor of the year.  It was an exciting and humbling honor to receive.  If you’d like to check out the article you can visit it on line at http://www.phcnews.com/pdf/phc12_2009.pdf.

 

2009 was a challenging year, but we still managed to meet many of our goals.  While revenues declined from 2008, we still met our financial targets.  We were also able to exceed our sales target, and increase our backlog through the year.

 

As important as the numbers are, we have to keep in mind our strategic goals.  One of those is to establish Harris as the clearly recognized leader in our market place of creative solutions and sustainable construction.  We made strides towards this goal as well, expanding our resume of GeoExchange projects to include projects underway in Wyoming and British Columbia.  We were also selected for a GeoExchange conversion of an existing conventional school in Whiteriver Arizona that currently awaits funding.  This focus on GeoExchange, and creative and sustainable solutions, is one of the things that sparked the interest of the PHC editorial staff and led to our selections as Contractor of the Year.

 

During the year we also continued to expand our geographic reach and market depth as we booked new contracts in states including Washington, South Carolina, California, Arizona, Utah, Wyoming, Minnesota, Iowa, South Dakota and British Columbia.  We were also successful in a new market segment, procuring several Federal projects, an initiative that began in 2008.

 

2010 offers many of the same challenges and opportunities as 2009.  Doing the basics well in a tight market will continue to be critical, as will balancing resources devoted to strategic goals like Sustainability and continuing to develop BIM and pre-fabrication capabilities and efficiencies.

 

We once again anticipate our work coming from new geographies and markets in addition to growing our presence in markets where we have a permanent presence.  While everyone would prefer the construction Market of 2007, we are optimistic that 2010 will be a successful year for the Harris Companies and we feel we our taking steps to determine our own destiny, rather than the market determining it for us!

The National Association for Business Economics reported recently that during the last quarter industry demand expanded for the first time in five quarters.  The group also expects a rise in inflation-adjusted GDP in 2010.  This seems positive news for our industry.  Reading further though, another trend emerges.  When asked about plans for spending on structures, only 18% of the same survey expected an increase in the next year, and 24% actually expect a decrease!  Not good news for our industry.

 

I recently met with a representative from the Construction Industry Roundtable.  According to his data the construction market in the US was around $1.2 Trillion in 2007.  The market is projected to have fallen to $950 billion in 2009.  That’s a contraction of over 20%.  The contraction becomes even more sever when we consider the fact that, in the past, construction spending was generally 80% private and 20% public.  This year we see a change to over a third (34%) being public.  Since the public dollars are more likely to be spent on horizontal construction, this makes the decline in vertical construction even more severe than it appears just looking at the $250 billion decline from 2007 to 2009.

 

Construction unemployment also continued to rise this year in all states but Louisiana, with Nevada and Arizona (one of our target markets) leading the pack.

 

Generally the clearest driver of construction is employment, and until we see unemployment decline to normal levels, we are unlikely to see any substantial turn- around in the private construction market. 

 

Despite this gloomy outlook, opportunities still exist.  Many contractors, ourselves included, find themselves traveling more to find work; 2010 will mark the first year we perform more work outside of Minnesota than within.  Fortunately this is part of a strategy begun years ago, as opposed to a knee-jerk reaction to current market conditions.

 

All of this being said I am optimistic that the worst is over for the general economy, and that means that our industry is probably close to its bottom as well.

 

 

As I interact with other contractors, suppliers, and vendors both locally and around the country, I typically ask “How is the current economic climate affecting your company?” 

The results vary a little, with a few contractors still doing quite well, but from most the response I hear is that field employment by the end of the third quarter will be down to 50% or less of last years levels.  For specialty contractors like us this is certainly alarming.  More than other contractors, for direct installers like us, field installers are what generate revenue for our business. 

So what does this market trend mean for Harris, and why? 

Fortunately as a company we will see only a moderate reduction in revenue this year.  It is in times like this that the diversity of our portfolio truly pays off.  This diversity comes from two primary sources, geography and market sectors.

 Several years ago we identified that to be able to grow we would need to expand our geographic reach.  Two strategies developed.  The first was looking to other markets to develop a presence in.  This is what led us to Rochester, Phoenix, and Salt Lake City.  The second was improving our ability to travel and compete on a job-by-job basis.  It is the result of these two strategies that currently finds us performing work in fourteen states, and almost twenty states over the last two years.

 Markets sectors are another source of diversity.  While virtually every market is down right now, some are down less than others, and a few are actually up.  Healthcare and Industrial work have been mainstays for Harris for the last twenty years.  Over that time we have developed other market sectors.  One of the newest is certainly GeoExchange.  We currently have three GeoExchange projects under construction and several others in the planning stages.  Bundled Energy Solutions are another new addition.  By driving a project based on long term reductions in owning and operating costs we can create projects that make sense even in a down economy.  Our fabrication only businesses (which sell product to other contractors like us), Federal work, Data Centers, and Conveyor and Specialty Fabrication all provide diversity that helps to shave the peaks and fill in the valleys. 

The unfortunate thing about business strategy is that only history will tell whether you choose the correct one or not.  In the short term, this strategy of diversity provides us with some reassurance in today’s economic climate.  It has resulted in a relatively steady backlog and the strongest balance sheet our organization has ever seen.  While the consensus among economists is that the recession has either just ended, is ending, or will end shortly it will take time before our industry sees the benefit of that turn around.  I am sure that more challenges lie ahead, but we face them confident in our strategy and with the resources we will need to carry us through!

Change in our industry tends to move from the coasts inward, and Integrated Project Delivery, or IPD as it is know in the industry, is no exception.

Superior Air Handling, a division of the Harris Companies, is currently in the process of negotiating a multi-party contract for the Sutter Castro Valley Medical Center. The project is located in the San Francisco, East Bay area. The contract with Sutter Health includes the Architect, Consulting Engineers, General Contractor and the MEP team. All will sign onto one comprehensive agreement commonly called an Integrated Form of Agreement (IFOA).

The fundamental goal of IPD is to align the interests of all the parties to the contract. The contract puts at risk the fees of all of the major project participants to bring the job in under budget. The owner shares in the risk by being responsible for, at minimum, the cost of the project. Traditional delivery methods often put members of the team at odds with each other, while each party tries to protect their own contract. IPD does away with that by having the language of the contract match the stated intent of the parties to work together collaboratively towards the success of the project.

BIM is an important aspect of the IPD process. We have learned much working through this project. One of the most important aspects was evolving from a conceptual estimate to model based estimating. As the team advances the design, the model is integrated with estimating tools allowing the project pricing to be solidified as the design proceeds. The entire team can see in near real time the impact of their design decisions as the model and budget evolves.

IPD represents a significant change in the way we do business; It's a different model meant to produce a collaborative environment between the A/E, and the construction team. This collaboration allows the elimination of redundant design activities inherent in traditional delivery methods, reducing costs, eliminating rework, and saving time.

For more information on this process, check out the following link to an ENR article on the project.

Some see the current state of our economy and green building construction as diametrically opposed.  The conventional wisdom is that in today�s difficult market we cannot afford the additional capital cost of sustainable construction.  In fact according to the 2008 McGraw Hill Green Building Smart Market Report �higher first costs� were listed as the most common obstacle impacting the expansion of the green building market.  This stands in stark contrast with reality.

A 2006 study by Dennis Langdon titled the �Cost of Green Revisited� found there to be �no significant difference in average cost for green buildings as compared to non-green buildings.�  This is not to say that many project components that fall into the �sustainable� category are not more expensive.  The point is that the costs of the project are largely determined by factors other than whether or not the project is �green� (in this case green being defined as LEED certified).

Additionally, data accumulated from the CoStar Real Estate Information Group shows that Green buildings have higher occupancy rates, higher direct rental rates, and generally sold for a 30% premium when comparing non-energy star buildings to energy-star buildings.  

The obvious question then becomes not �can we afford to build green,� but �can we afford not to build green?�  If a LEED building commands a $11.24/SF rent premium, a 3.8% occupancy premium, and a $171/SF sales premium (CoStar 2008) might it make sense to sacrifice some high cost cosmetic building components and invest the savings into the sustainability of our projects?