There was more good news in December 2013 when Reuters announced on their website that during November 2013, U.S. housing starts surged to their highest level in nearly six years.
The article went on to say that, according to the Commerce Department, “Housing starts jumped 22.7 percent—the biggest jump since January 1990—to a seasonally adjusted annual rate of 1.09 million units, the highest level since February 2008—a sign that the construction recovery is now well and truly under way.
Given this now brighter outlook, one question on many a subcontractor’s mind is whether general contractors would now return to the more traditional relationship of retaining subs to do their jobs while the GCs did theirs.
To be sure, GC self-performance is a touchy issue, and a bit of an elephant in the room.
But in many cases during the downturn, self-performance became a GC survival tactic—another way for the GC to make money and ends meet. Now, that the market is heading up again, though, will we see GC/sub relationships return to the time-honored relationship?
We turned to those best equipped to answer that question: general contractors.
Recovery Effect on GC Business
Out of the gate we wanted to know how the recovery is affecting the GC’s business and business model. Is increased activity easing the business model back toward the more traditional way of doing business?
“Business-wise, we are finding an increasing number of projects to bid, and we are indeed able to negotiate more projects,” says Bruce Dockter, a project coordinator at Comstock Construction, a North Dakota general contractor.
Bill Thumm, a project executive at Hensel Phelps Construction in Maryland, adds, “The recovery is affecting our model but in a good way. More work has forced us to re-assess our internal operations to make them more efficient.”
Chuck Taylor, manager of business development at Englewood Construction in Illinois, says he doesn’t know whether the recovery has affected his company’s business model, “but it is affecting our business for sure.”
Taylor offers this example: “In 2008 we were building very high-end, high-profile retail shopping centers. After the crash, in 2009, we bid and built anything we could lay our hands on. Today, we are again vetting our prospects and we’re not bidding everything that comes through the door—we can again afford to analyze it, and determine whether it’s a good fit for us. Today, we are able to be a little more selective.”
“The recovery seems to be real and sustainable, but at a more gradual and incremental rate than everyone would like,” says John Gromos, vice president of Turner Construction Company and the general manager of Turner’s Nashville, Huntsville and Memphis offices with responsibility for construction work in Tennessee, Alabama, Mississippi and Louisiana. “We have been fortunate to be able to maintain our business model fairly consistently during all recent phases of the economic cycle; that is, to seek relationships with owners who place great value on partnerships and are concerned about the equal alignment of cost and quality when selecting their builders.
“I believe we have maintained this same model in our relationships with our subcontractor partners, and we have been fortunate to find incredibly good and sound subcontractors attracted to the projects we have been awarded, and their performance has been consistently strong. I don’t expect that we will change this model moving forward.”
Andre Grebenstein, project manager at The Martin Group LLC in New Jersey, asks, “Recovery? Are we talking economic or hurricane?”
He then goes on to say, “As for the economic recovery, so far we’ve only seen a slight uptick in the bidding activity. And with the aftermath of Sandy, we are still performing hurricane recovery work. In fact, we just secured a $3 million restaurant construction project. In other words, Sandy work is still flowing.”
Recovery and Manpower
The consensus is that work volume is rising, albeit more significantly in some areas than others. However, with a heavier project load, manpower has become an issue for many wall and ceiling subcontractors. What are GCs doing to find labor?
“We hung on to our key employees during the recession,” says Thumm, “and now we have begun aggressively to hire again. I don’t think the recovery will ever return to the roaring millennia age, but it’s beginning to heat back up again.”
For Dockter, manpower is an issue, “especially with the increased oil industry activity in our area (North Dakota),” he says. “We continually run ads in regional newspapers, offering employment with benefits.”
Dirk Squire, owner of Squire Construction in California, also has manpower issues, “Yes, it is starting to become a challenge, though mostly with our subcontractors who have been running lean crews for a few years now. Now that our projects have gone from small to medium to large projects, our subcontractors are finding it hard to hire new quality employees.
“Of course, the next subcontractor challenge that goes along with that is, Can they meet the payroll costs for a project that doesn’t pay for 30 to 60 days?”
This is an issue for Taylor as well. “We are dealing with a workforce that was largely displaced during the downturn,” Taylor says. “Some of our subs dropped 30 to 40 percent of their crews and many of those are not coming back—they’ve either retired or found other jobs.
Gromos hasn’t seen a significant change in the availability of labor, but Turner Construction continues to monitor the situation. “I count ourselves fortunate in that we have been able to meet our hiring needs in a timely manner with people that meet our expectations for both quality and experience,” Gromos says.
Grebenstein says he is “currently bringing a data center out of the ground in Cheyenne, Wyo., and the labor market in the Denver/Cheyenne area is definitely tighter today than a year ago, and the subs are now strategically choosing bidding opportunities. However, from my perspective, the uptick in work in New York and New Jersey has not tightened the labor market yet.”
Price vs. Skill
With work returning, this becomes another burning question: Is price still king, or are GCs now more inclined to select subs that might have a higher price but know exactly what they’re doing?
Hensel Phelps’ Thumm says it’s both: “It’s a balancing act. If the sub is bondable and competitive, we will sign him or her up. However, we are a little more cautious these days and do a little more due diligence.”
Comstock’s Dockter says, “We are more selective with subs we use on the time-sensitive projects and a little less strict on our selection on the price-sensitive projects.”
According to Squire, “Price is still a factor out there, but I do see subcontractors starting to raise their prices. Of course, I still keep a check on costs by obtaining multiple bids. Also, we have our favorite subcontractors we like to use, and it really comes down to how financially stable they are these days. We cannot afford a subcontractor who can’t finance their payroll, and this really affects whom we select as a subcontractor on a project. The ones with a weaker cash flow are awarded the small projects, and the ones that are financially stronger are awarded the large projects.”
Taylor says, “We’re trying to find the right blend here. For many years now it has been a tenants’ market, with owners choosing the lowest dollars for their projects. This is beginning to change, but pricing is still a big factor.”
Turner Construction’s Gromos says, “Our approach has always been to ensure we have highly qualified subcontractors who have accounted for the full scope of work and are aligned with our expectations for safety, quality and schedule. There really is no advantage in selecting purely on a price and then hoping for good results. I believe our success is linked to all members of the project team being successful in what they do.”
In Grebenstein’s experience, “For more commoditized trades (concrete, carpentry, finishes), price is still king. For specialty trades (MEP), we take a closer look at expertise to align the right job with the right subcontractor.”
Decimated Subs
It is an unfortunate fact that many subcontractors find themselves decimated to a greater or lesser extent due to the length and severity of the downturn, so now that jobs are back, how does the GC protect himself against subs that may not yet have the manpower or the finances to finish a given project?
Thumm’s answer is short and to the point: “Bonds.”
Dockter elaborates: “We make a point of tracking their past progress, their current manpower and their projected progress and manpower. This while we also keep a tight rein on their monthly billings as verified against the amount of materials stored on site, the amount of material installed and amount of work performed versus percent of project being billed.”
Squire says his company deploys “a very strong contract that clearly states that if the subcontractor fails to man the project, we are free to bring another subcontractor in to help them finish the project, at the subcontractor’s expense. In fact, we ask for their signature right next to this verbiage in the contract.
“That said, we have only had to do this once, and that was 10 years ago. We really have good, stable subcontractors, and they know our policy on manning the project.”
Taylor agrees that this is an important question. “However, bonds, in my experience, will always drive the sub’s price up, so instead of bonds we do our best to vet our subs—Dun & Bradstreet reports and such.
“Also, when in a union market, you can always call the sub’s affiliated union to ask if they’re in good standing on their dues. If they are members in good standing—and the union officials will say either “yes” or “no” but won’t give details—that is, if their audits are clean and all union bills are paid, including pension and welfare for his guys, then there’s a good chance the sub is in good shape financially.”
Gromos sees it as “the delicate balance of not digging too deep into the sub’s business, but at the same time gathering the proper information to ensure he will stay in business.”
Then adds, “Turner has a very comprehensive prequalification process where we seek to understand the subcontractor’s safety record, capabilities and experience alongside their financial health and capacity to complete the work.
“I believe good vetting also shores up the competitive environment because our subcontractor partners recognize that the people working alongside them on our projects are also financially sound and also bring the people and experience to deliver upon their promises.”
Grebenstein has not yet had problems with manpower, but regarding finance, he says, “We purchase the needed material ourselves at times to ease the financial pressure on the subs.”
The Elephant Question
Now that the downturn appears to have bottomed out, will GCs continue to see the need to self-perform certain aspects of a project?
Thumm says the Hensel Phelps model “is to do everything a carpenter or laborer can perform. We will, however, subcontract concrete, especially on large frame projects.”
Dockter says Comstock “finds it most effective to self-perform work on time-sensitive projects. We find that is the best way to keep the project progressing to meet the schedule.”
Squire says his company still likes to “self-perform certain trades: demolition, framing and drywall, hanging doors and windows.”
When it comes to Turner, Gromos tells us, “We began as a concrete contractor more than 111 years ago and we often still self-perform the concrete scopes on many of our projects.
“Really, it is part of who we are and what we do. Our people take great pride in being builders, not just construction managers. I don’t see us getting away from this practice.
“However, we do this by choice, not by necessity—there are times that a project may exceed the capacities of our existing crews and therefore it is in the project’s best interest to subcontract this work. Our test is always what is best for the project.”
On the other hand, The Martin Group doesn’t fall into the self-performing category. Grebenstein says, “We rarely self-perform. Occasionally, perhaps, some minor carpentry.”
There’s no self-performing of carpentry work at Englewood Construction either. Taylor tells us that Englewood once had a sizeable carpentry department that has been phased out over the last several years.
“The biggest reason for this is cash flow,” Taylor says. “As our clients take longer to pay, I need to operate in a pay-when-paid environment. Using my own guys, I have to pay them weekly no matter what—whether the owner has paid us or not—but if I use a sub, I am not as pressed for cash. I will pay him or her as soon as I am paid, but not before. Self-performing puts more of a financial strain on you as a GC.”
Improving the GC/Sub Relationship
In an effort to bridge any gaps between the GCs and subs who build our skylines together, we asked the GCs what would improve the GC/sub relationship.
Dockter suggests subs be more careful about the work they choose to bid. “We see a number of subcontractors getting in over their heads on projects by bidding work they don’t have the manpower or experience to complete,” he says. “Subs need to look closer at the plans they are bidding, at the timeline of the project and their manpower.”
Squire believes that “subs need to be strong financially, and they need to be thorough when bidding projects and not miss things on the plans. Also, they can be more proactive when it comes to discovering mistakes on the plans and notifying us of these mistakes.”
Taylor believes the key is mutual respect: “The GC needs to be cognizant of the sub’s time. It is our responsibility as a GC to make sure that an area is ready for that contractor’s task.”
“Also,” says Taylor, “we need to help the sub make as much money as possible; we have to treat them as partners.
“The sub has to man the job properly. If we make sure the job is ready for them, they have to make sure they arrive and do it on time.
“And, of course, constant and honest communication.”
Gromos points out that today’s technology has changed the way people communicate, and it’s not always for the best. “I think technology has created barriers to the relationships between subcontractors and general contractors,” he says. “Today, so many of our interactions occur electronically. We no longer have the number of face-to-face interactions among the leaders of the different businesses as we had in the past. While the electronic medium is certainly more efficient, it can also be a barrier to that personal relationship that builds trust.
“I think we can improve performance by taking the time to meet the people with whom we are entering into agreements, and this would also set an example for junior leaders. It would show them that this is still a people business.
“At the end of the day, our business comes down to skilled workers plying his or her craft to put work in place. We, as leaders who recognize this and make this happen, can improve and strengthen our relationships by getting to know each other on a more personal level.”
Grebenstein believes that if a GC gives the subs “a good return on their efforts, and they know to expect this, they are more likely to devote sufficient resources to the effort, which in turn makes for a better project and a better relationship.”
Coordination of Trades
What would help to improve the GC’s coordination of various trades on a job site? Technology seems to be the primary answer. In fact, Dockter makes the point that those who don’t keep up with technology “make communication somewhat cumbersome.” But there are other considerations as well.
Squire says, “We really like subcontractors who communicate with us and check on our schedules. Subs who are proactive when it comes to letting us know when they are becoming busier with other clients, which might affect the current project.”
Taylor’s vote is for communication: “Open communication and proper scheduling both ways.
“Also, these days we shy away from subs that are not technologically savvy. If they still need everything on paper—asking for hard copies—we don’t let them bid.
“There are still subs that don’t use email. If they don’t, we don’t use them.
“Get a smartphone, and get it now, so that we can work with you. I know it’s a matter of teaching old dogs new tricks. Sure, I know you can build stuff, still, if you don’t learn email, we can’t use them anymore.
“And it is what our clients expect. They ask for a photo of a storefront and won’t wait for the sub’s wife to mail it from her gmail account in a day or two. They want it now. That takes a smartphone. In fact, they’ll call in five minutes and ask where the picture is.”
For Gromos, it’s BIM, “Turner has made great strides and tremendous investment in BIM technology. In fact, several trade publications have ranked us the leading adapter of this technology among the major general contractors.
“We make this investment because it improves the quality of our work and allows us to better serve the client through a more efficient approach to the project. BIM is our primary tool to coordinate the trades, and I really feel that firms, regardless of trade, that don’t learn to use these tools effectively stand in danger of being passed by.”
Thumm answers that “trade juggling” would be better if only owners would hire general contractors rather than construction managers. “CMs tend to stay in their trailers and let subs self-manage,” he explains. “GCs, on the other hand, understand the project and its risks much better, and they actually manage it and its subs.”
The GC’s Greatest Assets
What does the general contractor consider his most valuable asset? Most agree that it’s their employees and/or their subcontractors.
Taylor says, “Our people, always our people. That is our culture. It’s not just words for us, it’s real.”
Grebenstein adds specifics: “Project managers, and superintendents with initiative and excellent communication skills.”
Gromos agrees, “I believe my answer would be the same as most anyone in a position of leadership in our industry—our most valuable asset is our people.
“Nothing happens without them, and I am continually amazed at what our people can accomplish. The quality of people entering the industry is extraordinarily high. Their knowledge, skill and work ethic are significant. Their grasp of technology and the unique ways they utilize it in the execution of our work keeps advancing the ball farther and farther down the field. The construction industry is no different from any other industry—people are what drive us.
“When you assemble the best team you can find, give them the right tools and present them with challenging opportunities, they can accomplish amazing things.”
Squire says subcontractors “can make or break our company. They are the key to making us look good to our clients.”
Finally, Dockter says his company’s most valuable asset is “being solvent, having the resources to maintain financial solvency, maintain project control and manpower to self-perform.”
Jack of Many Trades
What to take away from this is that while most GCs consider their subs one of their main assets and could not live without them, a minority are still not shy of self-performing, and in some cases it’s even their trademark.
While some GCs, like Turner Construction, grew from a concrete sub to a general contractor and no doubt remains a masters of that trade, and while most GCs are indeed masters of integration, the average general contractor is, and will remain, a generalist rather than a trade expert.
Therefore, in the final analysis, as the market heats up—and as projects grow larger and more demanding—most GCs will undoubtedly, whether by choice or necessity, turn again to the traditional master of their specialized trade: the trusted sub.
Los Angeles–based Ulf Wolf is the senior writer at Words & Images.
