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‘GC Lite’ Approach May Benefit Subs

Monday, March 7, 2011

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Enterprising subcontractors will be doing more end runs around GCs, the noose will tighten on unethical operations, and infrastructure spending will keep rising, a new industry analysis forsees.

2011 U.S. Markets Construction Overview, by construction consultant and banker FMI, takes an unsparing look at the top trends that are—for better and for worse—impacting construction and related industries.

Among the hot topics:

‘Sub’ No More

The construction market’s growing shift from new projects to upgrades and expansions is making it easier for subcontractors to cut out the middle man. Huge general contractors may be—or seem—too big for smaller projects and are scrambling to reposition themselves as nimble and economical enough to do these jobs.



Improvement projects open the door
to more direct relationships between
painting contractors and facility owners.

Meanwhile, “for the subcontractor, it is an opportunity to build direct relationships,” FMI reports.

“Struggling to position themselves on value, subcontractors are working around general contractors and building relationships directly with end owners.”

For one progressive specialty contractor, FMI reports, this has meant positioning itself to manage other trades on-site, where the scope of work is interrelated and directly affecting its own labor efficiency.

A “general contractor ‘light’ approach is adding real value to the end owner,” FMI says.

Ethics: Era of Reckoning

Elsewhere, FMI predicts an era of legal and regulatory reckoning for construction-related businesses engaged in “negligence, conflict of interest, bid rigging, fraud, confidentiality breaches, bribery, kickbacks, asset misappropriation, accounting impropriety, corruption, intellectual property infringement, money laundering, illegal insider trading, espionage, collusion, price fixing, tax fraud” and other wrongdoing.

High-profile fraud cases like Enron and Bernie Madoff as well as catastrophic accidents due to safety lapses have shown “how costly and personal” unethical business practices are, FMI reports.

Consequently, FMI warns, “the industry’s focus on ethical behavior is intensifying. The government is also intervening with rules like the Federal Acquisition Regulations (FARs). These ethics requirements add mass to the momentum created by the most sensational public ethical violations.”

“The next trend to watch is the heightened focus on business ethics in the construction industry.”

The Cost of Fraud

“We come in contact with unethical behavior daily, and it is costing the industry a fortune,” FMI reports. Construction-related industries have “the highest reported cost per fraudulent event,” with a median cost of $330,000.

“Sadly, 43% of surveyed employees admitted to doing at least one unethical act in the workplace in the last year.” Moreover, when they saw an unethical action, 75% of these observers did nothing about it “unless they had a safe mechanism for doing so,” reports FMI, citing the consulting group Ethical Advocate.

Warns FMI: “Like safety years ago, something will be done to stop the pain. An industry focus on business ethics is certainly coming. In the next decade, when a firm positions itself in the marketplace it will need to do so as one of the most ethical companies.

“A company will win work by demonstrating honesty and fairness. Owners and subcontractors will work with firms because they have a definable ethical culture….

“Trust will increase delivery speeds and reduce costs. As a result, more profits will be made. Like safety, ethics will be good for our business.”

Show Me the Money

The outlook for infrastructure construction is generally upbeat, according to FMI.

After “phenomenal growth” from 2005 ($35.5 billion) to 2009 ($88.7 billion) and a slight decline in 2010, power construction should continue recovering and reach $127.5 billion in 2014. Despite a “call for a ‘nuclear renaissance,’ a surge in nuclear power projects is unlikely.

Wind power will increase from 1% of America’s power needs today, to 20% by 2030. Solar power will also see gains—three solar plants are now being built in Florida—but “lower cost of traditional energy will slow advancement of alternative energy plants,” FMI contends.

Highway and street construction “is facing a tough climate as state revenues decline.” The American Association of State Highway and Transportation Officials has put the nation’s bridge repair pricetag at $140 billion—about $48 billion to repair structurally deficient bridges and $91 billion to improve functionally obsolete bridges, FMI notes.

The nation’s 16,000 wastewater systems, which drew a grade of “D” in 2009 from the American Society of Civil Engineers, are in need of repairs and upgrades, FMI says. The U.S. Conference of Mayors foresees $2.5 to $4.8 trillion in spending on public water and wastewater systems through 2028.

Sewage and waste-disposal construction will remain at historic highs. The market was $10.1 billion in 1999, $26.9 billion in 2010, and should reach $33.7 billion in 2015, FMI says.

Water-supply construction more than doubled, from $7.6 billion in 1999 to $15.5 billion in 2010, and should hit $21.8 billion in 2015, according to FMI. “The aging water supply systems and occasional headlines about dramatic pipeline failures and flooding, along with many large EPA consent decrees, will eventually spur increases in construction levels.”


Tagged categories: Construction; Market; Market research; Subcontractors; Trends

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