Industrial College of the Armed Forces Industry Studies 2003 Construction ABSTRACT: The economic recession finally caught up with the construction industry. Public works, institutional building, and housing are insufficient to maintain industry momentum in 2003. Overall value remains strong but there are few growth markets domestically or internationally. Two growth niches are military privatization initiatives and security enhancements. While devoting more resources to information technology, full realization of the benefits still exceed industry’s grasp. Industry must partner with other stakeholders to fix the shortage of labor in the skill trades. Research funding remains low compared to other sectors. Despite these challenges there are no serious concerns about the ability of the industry to continue to support future national security objectives. COL Stephen Austin, USA Ms. Kathy Collier, DA LTC Craig Cowell, USA Mr. Shanan Farmer, DISA CDR Steven Fischer, USN Lt Col Steven Grozinski, USMC Mr. Kenneth Harris, Dept of State LTC John Jordan, USA LTC Ray Josey, USA Brigadier Nikolaos Karakonstantis, Greek Army Lt Col Christopher Karls, USAF Mr. Timothy Kelly, DCMA LTC Guy Laroche, Canadian Army Col Michael Leahy, USAF Lt Col Rita Meyer, USAF LtCol John O’Hey, USMC Lt Col Richard Stonestreet, USAF Hugh Conway, PhD, Faculty Ms. Robin White, Faculty COL Colin Dunn, USA, Faculty 1 Report Documentation Page Form Approved OMB No. 0704-0188 Public reporting burden for the collection of information is estimated to average 1 hour per response, including the time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information. Send comments regarding this burden estimate or any other aspect of this collection of information, including suggestions for reducing this burden, to Washington Headquarters Services, Directorate for Information Operations and Reports, 1215 Jefferson Davis Highway, Suite 1204, Arlington VA 22202-4302. Respondents should be aware that notwithstanding any other provision of law, no person shall be subject to a penalty for failing to comply with a collection of information if it does not display a currently valid OMB control number. 1. REPORT DATE 3. DATES COVERED 2003 2. REPORT TYPE 00-00-2003 to 00-00-2003 4. TITLE AND SUBTITLE 5a. CONTRACT NUMBER Construction 5b. GRANT NUMBER 5c. PROGRAM ELEMENT NUMBER 6. AUTHOR(S) 5d. PROJECT NUMBER 5e. TASK NUMBER 5f. WORK UNIT NUMBER 7. PERFORMING ORGANIZATION NAME(S) AND ADDRESS(ES) 8. PERFORMING ORGANIZATION National Defense University,The Industrial College of the Armed REPORT NUMBER Forces,Washington,DC,20319 9. SPONSORING/MONITORING AGENCY NAME(S) AND ADDRESS(ES) 10. SPONSOR/MONITOR’S ACRONYM(S) 11. SPONSOR/MONITOR’S REPORT NUMBER(S) 12. DISTRIBUTION/AVAILABILITY STATEMENT Approved for public release; distribution unlimited 13. SUPPLEMENTARY NOTES 14. ABSTRACT 15. SUBJECT TERMS 16. SECURITY CLASSIFICATION OF: 17. LIMITATION OF 18. NUMBER 19a. NAME OF ABSTRACT OF PAGES RESPONSIBLE PERSON a. REPORT b. ABSTRACT c. THIS PAGE Same as 27 unclassified unclassified unclassified Report (SAR) Standard Form 298 (Rev. 8-98) Prescribed by ANSI Std Z39-18 PLACES VISITED Domestic Associated General Contractors of America, Alexandria, VA Massachusetts Turnpike Authority, Boston, MA American Subcontractors Association, Alexandria, VA National Energy Management Institute, Alexandria, VA National Association of Homebuilders, Washington, D.C. San Francisco District HQ, U.S. Army Corps of Engineers, San Francisco, CA Fluor Corporation, Aliso Viejo, CA DPR Construction, Redwood City, CA Metropolitan Transportation Authority, Los Angeles, CA The United States Capitol Visitor Center Project, Washington D.C. General Services Administration, Washington, D.C. Bechtel Inc, San Francisco, CA Boston Harbor/Central Artery Tunnel Project, MTA, Boston, MA California DoT, Airport Bay Area Rapid Transit Extension, San Francisco, CA American Society of Civil Engineers, Washington D.C. Parsons-Brinkerhoff, New York, NY Pentagon Renovation Project, Arlington, VA Port Authority of New York/New Jersey Headquarters, New York, NY Ralph Parsons Inc, Pasadena, CA Sheet Metal Workers Union, Local 100, Suitland, MD Stromberg Sheet Metal Works, Beltsville, MD The Port of Oakland, Oakland, CA Design-Build Institute of America, Washington D.C. Golden Gate Bridge Highway and Transportation District, San Francisco, CA Virginia DoT, Springfield Interchange Project, Springfield, VA International South Korea: U.S. Embassy, Seoul Bechtel International (Korea High Speed Rail Project) Hanmi-Parsons Corporation Incheon International Airport Morgan Stanley Real Estate Fund (Sang-do Urban Development Project) United Nations Joint Security Area, Camp Bonifas, (DMZ and Tunnel 3) Thailand: U.S. Embassy, Bangkok American Chamber of Commerce New Bangkok International Airport Rama VIII Suspension Bridge Siam Paragon Development Company 2 Metropolitan Rapid Transit Authority of Thailand Underground Mass Transit System (Subway in Bangkok) Japan: Shimizu Corporation HQ Nihonbashi 1-Chrome Project/Merrill Lynch Kajima Corporation HQ and Technical Research Institute CENTRAIR (Central Japan International Airport) 3 INTRODUCTION The construction industry builds the public and private infrastructure that provides the foundation for our economic and military elements of national power. The construction industry study seminar completed a broad-based review of this vital industry through a series of guest lectures, intensive studies, and domestic and international site visits. A broad spectrum of this diverse industry was covered by engaging with representatives of the global top 10 construction companies, general contractors, trade unions, professional associations, research institutions, U.S. and foreign government agencies, industry lobbyists, and customers. Site visits provided first-hand exposure to the challenges associated with the design and construction of modern bridge, tunnel, subway, airport, and port mega-projects and the competitive conditions of both the domestic and international marketplace. This assessment of the current status of the industry is largely based on those visits and discussions. Individual essays focus on rebalancing the skilled labor market, information technology, and guidelines for profitability in military housing privatization projects. While not without its challenges, the construction industry remains well positioned to continue to support our national security objectives. THE INDUSTRY DEFINED Structure. The construction industry is a vital component of the U.S. economy employing 7.9 million workers and accounting for 8% of the gross domestic product.1 Once you get below the oligopoly held by a few giant general contractors, the construction market primarily operates under very competitive market conditions of: numerous small firms and customers, homogeneity of product, and freedom of entry and exit. Construction is a highly competitive industry where reputation means a great deal and industry-leading firms ensure that customers are satisfied. Some participants do exceptionally well and have built long-term histories within the industry. Others are forced to enter and exit with the ups and downs of the business cycle, though the cost of entry is going up. The industry is segmented into three sub sectors: (1) building construction, land subdivision and land development, (2) heavy construction (other than buildings), such as highways, power plants, and pipelines; and (3) construction activity by special trade contractors. Over 700,000 contractors or establishments2, form a near perfect competitive market engaging in a wide range of activities including new construction, alterations, reconstruction, installation, maintenance, repairs, demolition or wrecking of buildings and other structures, clearing of building sites, sale of materials from demolished structures, performing blasting, test drilling, landfill, leveling, earthmoving, excavating, land drainage, and other land preparation, to design and construction management. The special trade contractors account for about 63% of all the firms within the industry while the general construction and heavy construction represent respectively 31% and 6%. However, with regard to sales, receipts or shipments, the general contracting sub sector produces larger earnings than the other two segments of the construction industry 3. With an annual payroll of about $175B dollars, the total sales, receipts and shipments by the construction industry reached $815B dollars in 2002 4. 4 Trends. The number of construction establishments showed an overall growth from 1970 to 2001. While the number of heavy construction contractors has been steady throughout the years, the special trade contractors division jumped from 214,275 to 442,630 contractors representing an average increase of 206%. The number of employees in the special trade contractor sub sector more than doubled during the same period (1,396,000 to 3,441,500 employees). In comparison, the building, development and general contracting sector experienced some ups and downs while increasing from 90,576 to 216,355 establishments. General contracting employment experienced some fluctuations during this same time period while heavy construction maintained a uniform progression with increases of 588,953 and 135,400 employees respectively. Research and Development. The two primary facilities used by the DoD to conduct research and development to meet the diverse missions assigned to military construction are the US Army Construction Engineering Research Laboratory (CERL) in Champaign, Illinois5; and the Naval Facilities Engineering Service Center (NFESC) in Port Hueneme, California.6 The five primary research organizations focused on civil infrastructure outside of the Department of Defense are: the National Science Foundation (NSF),7 the National Institute for Standards and Technology (NIST), Construction Industry Institute (CII), Civil Engineering Research Foundation (CERF) and the American Society of Civil Engineers (ASCE). CURRENT CONDITIONS Domestic Performance. The total domestic construction industry is experiencing a period of flat growth while maintaining a historically high contract volume. In 2002, public works, institutional buildings and housing all posted impressive growth rates which offset the huge declines in the industrial commercial and office building markets. Educational construction grew 13%, conservation and development 10%, and sewer systems 7%. Highway and street construction was up by 0.5% from 2001 to 2002. The housing market has grown an average 7.8% for the past four years. The institutional building markets averaged annual increases of 8.3% over the last four years, while several key nonresidential building markets were hit hard in 2002. Hotel and commercial building markets experienced double digit declines in 2002 and the office building market declined 21%. The industrial market fell 26% in 2002, the fifth consecutive year of decline, 54% below 1997. The $11 billion utility market declined 39% in 2002. Two bright spots in the industry are in apartment building and hospital construction, which grew 17%.8 The big players in the industry have not changed. Bechtel, Fluor, Skanska, Centex, Jacobs, Turner and Parsons continue to lead the industry, accounting for approximately $35 billion in total domestic revenue.9 International Performance. U.S. corporations accounted for nine of the top 50 international contractors.10 The 2002 international construction market provided worse returns than experienced at home. The nation’s top contractors reported $19.6 billion in revenue from projects outside the U.S., down 10.9% from $22 billion in 2001.11 One of the driving reasons for the downturn was financial volatility in international petroleum 5 and industrial process work. Those sectors accounted for $19.1 billion in 1999, but only $11.4 billion in 2002. Consolidations in big oil companies, global turmoil, and uncertainty in oil prices negatively impacted projects. The electrical power market was also slow, but some corporations are seeing new opportunities for power plants in Asia and Europe. While Eastern Europe is an emerging market, funding problems are hampering construction and development.12 LOGCAP. In December, 2001, the Army Operations Support Command, a major subordinate command of the Army Materiel Command, awarded the Army Logistics Civil Augmentation Program (LOGCAP) III contract to Halliburton Kellogg Brown & Root (KBR) Government Operations division. Halliburton KBR formerly was known as Brown & Root Services. LOGCAP III is a 10-year task-order contract with a 1-year base period and nine 1-year options.13 By working with the Army planners, Halliburton KBR will provide for the construction of base camps and their infrastructures, including billeting and dining facilities, food preparation, potable water, sanitation systems, showers, laundries, transportation, utilities, warehouses, and other logistics support. Also included is support of the reception, staging, onward movement, and integration process for U.S. forces as they enter or depart theaters of operations by sea, air, or rail. The most recent effort on the LOGCAP contract is for work in Iraq. The Corps of Engineers put in place a "bridge" contract with Brown & Root, which is being used for an interim period as a bridge to competition. The contract with Brown & Root is an Indefinite Delivery/Indefinite Quantity (ID/IQ) contract that enables the government to immediately obtain, through the placement of task orders, the specific services it needs to execute contingency plans. As of May 6, 2003, five orders have been placed totaling $76.8 million.14 Housing Privatization. The General Accounting Office (GAO) recently found that the DoD's overall housing privatization program15 had achieved its two key financial goals - leveraging government dollars for commercial loans and lowering life-cycle costs of operating and maintaining housing. In its report the GAO concluded, "Although implementation of the privatization program started slowly, DoD has picked up the pace and plans to use the program as the primary means to meet a revised goal of eliminating inadequate military housing by 2007, instead of the original goal of 2010" (GAO-02- 624). The GAO made several suggestions for improving the management of the program including developing a single consistent way to: • analyze whether housing is needed on bases or whether there is enough affordable housing in surrounding communities, • determine whether proposed increases in military housing allowances will allow more military families to live off base, and • write provisions into contracts that minimize developer profits from increases in housing allowances. Defense officials are studying each of those issues. DoD is seeking $4.2 billion in fiscal 2003 to continue upgrading military housing. 6 Utilities Privatization. The Defense Reform Initiative Directives (DRID) #9 and #49 directed the privatization of electric, water, wastewater and natural gas systems, except where uneconomical or for unique security reasons.16 DoD made limited progress in its privatization efforts during the past year. As of 4th Quarter 2003, the Services identified approximately 1,524 systems as being available for privatization, solicited bids for 857 (56%) systems through requests for proposals, privatized 38 (2%) systems, exempted, placed on-hold, or temporarily deferred 477 (32%) systems, and have 152 (10%) systems pending request for proposal release.17 These numbers represent nominal increases of nine privatized systems and eight RFP releases since 1st Quarter 2002.18 Security Impact. A niche market quickly sprung up as result of the tragic world events resulting from terrorism, creating an overnight national concern with security. Though rumors about huge outlays of federal capital to support infrastructure enhancements and fortifications in the wake of September 11 never materialized, many firms are jumping on new opportunities in the security arena. One focus gaining momentum is “vulnerability assessments” of water systems, dams, power plants and chemical plants, with the term “hardening” added to companies’ lists of services offered. 19 Because the security niche in America is growing so quickly, partnerships offering specialized services evolved uniting expertise and capabilities from several different companies.20 Many firms believe the security market niche is here to stay, and likely to evolve over the next several years. As CH2M Hill’s Bill Wallace exclaims, “We have to look at things holistically, not just from a security standpoint. How big the market will be is the wrong question. Over time, this will change the way we do infrastructure.”21 Embassy Construction. Embassy construction continues to be a growth area. The recent trend in embassy construction contracts is towards Design-Build, versus the traditional method of Design-Bid-Build. The State Department’s Overseas Building Operations (OBO) office saved $70 million last fiscal year by implementing best business practices.22 Research and Development. In general, private construction firms have not fully supported new construction technologies nor encouraged research and development of new technologies. The conservative nature of the industry, liability concerns, reliance on prescriptive codes and standards, and first cost versus life cycle cost mentality have limited investment in research and development and therefore the advancement of state of the art practices. The Federal government plays a major role, accounting for nearly two- thirds of a $3.5 billion annual R&D effort.23 The largest construction firms in the United States typically spend less than 1% of their total revenue on research and development.24 In contrast, the major private contractors in Japan often fund their own extensive in-house research and development institutes.25 Environmental. The construction industry, like all profit-oriented industries, must walk a fine line between the need for environmental reforms and regulations, and environmental efforts that impede economic growth. Unlike the federal government’s BRAC program, the private sector sometimes simply leaves a contaminated piece of land vacant instead of cleaning it up. When profit is the primary motivating factor, leaving a 7 dirty site untouched can be the best solution for the balance sheet. But this practice doesn’t bode well for the industry as a whole. Not only is a piece of land unavailable for productive use, but public frustration also gives construction firms a bad reputation. Delivery Methods. After years of spectacular gains, design build revenue flattened out in 2001. Legislative breakthroughs are aiding the public sector, like Arizona’s alternative project delivery and Minnesota’s legislation encouraging design build for state projects. Construction management as a delivery process is declining, as owners shift greater amounts of risk to their contractors. Construction management at risk has maintained steady growth since 1999. It is an alternative project delivery method when it is difficult for a public project to be accomplished by design build. Using construction management at-risk, the owner becomes an integral part of the construction process, and leverages all three interested parties. Military Construction. Terrorism significantly impacted military construction tasks by presenting difficult financial constraints and creating an uncertain environment for maintaining the readiness of U.S. facilities. Military construction remains under funded. Going forward, new facilities must last longer, be more efficient, be under budget and on time, and accentuate the military mission while devoting greater attention to being environmental consequences. Since the Department of Defense manages and maintains the largest dedicated infrastructure in the world, most of the military construction projects focus on base support and family housing projects. MAJOR CHALLENGES Labor force. While the demand for a ready, willing, and able work force is a constant over time and across industry sectors, the construction industry is facing unique challenges, not only in resourcing current needs, but also, in its’ ability to grow a pool of skilled and productive labor to meet future requirements.26 Soliciting and preparing young men and women for a career in construction, and retaining those already in the workforce, will require a per capita investment both greater and more diverse in scope than any previously seen within the construction industry. While the industry itself must take the lead in addressing the problem, government support will be needed to help leverage the generation and retention of a work force to support both current and future needs. This topic is the subject of further discussion in a later essay. Embassy Security. The increased threat of global terrorism had an unprecedented impact on U.S. overseas construction. Embassies are being modernized and constructed at an unprecedented rate, and many U.S. owned and/or operated facilities overseas are looking to upgrade their capabilities. The new embassies opened in Nairobi, Kenya and Dar es Salaam, Tanzania are model installations. Both have 3 ½ inch thick bulletproof windows and walls able to withstand a blast from a 1,000-pound bomb, are set back more than 100 feet from the road, and the buildings have six-foot-thick concrete walls with reinforced steel doors that resemble freezer lockers.27 New construction is typically built on a 10–15 acre compound or “campus”. When all the protective measures are implemented concurrently, the embassies of the future will prove to be a much safer, 8 secure environment for American citizens working abroad. New embassy compounds will now be completed within two years after breaking ground. At this projected rate the State Department is well on the way to completing the 180 compounds scheduled to be constructed within the next ten years. The challenge the U.S. faces is not lack of dollars, but lack of time, finding a skilled work force, and reassessing the threat to determine if the same size personnel presence is necessary overseas. Codes. Building codes exist to provide a minimum standard for the health and safety of the public at the lowest acceptable cost. The construction industry does not have a national building code for the United States. States decide which codes they adopt, use and enforce; codes can change from state to state, and/or local jurisdiction to local jurisdiction. Sometimes climatic conditions and demographics of the buyer necessitate the difference, but often codes change from jurisdiction to jurisdiction for no apparent reason. Construction firms must recognize and adhere to the particular set of codes used in their local area. The result is non-standard material supply operations, slower project completion times, confusion in building code enforcement, and possibly unnecessary and expensive additions/alterations to projects. The Government needs to work with industry to develop a national building code and thereby improve construction efficiency, affordability, and profitability. Privatizing DoD Utilities. In general, infrastructure privatization projects ask private investors to accept major risks that require many years to recover costs. The unique character of the projects requires non-recoverable capital investment into systems that may not be used elsewhere. They also require investors to act as a monopoly for services where the DoD is essentially the only customer.28 Effective policies entice investors to carefully select the projects they will pursue and to efficiently run those projects they win.29 Therefore, the government must be reasonable about the amount of risk it asks investors to take. Until now, however, attempts to transfer too much risk reduced incentives for potential bidders to pursue contracts and impacted contractor interest. Some of the emerging issues are: system purchase values; wage issues; property and state/local taxes; request for proposal consistency and continuity issues; DoD-wide schedules and response time frames; delayed government decisions, system inventories and associated risks on bidders; easement issues; project bundling, and a need for government feedback.30 Foremost in utility industry leader minds is the need for clear policies, level playing fields, aggressive award timeline compression and improved communications. A quick summary of contractor concerns highlights the challenges DoD needs to overcome to move the privatization process forward: a. Incremental estimates fail to consider overall engineering and management costs. b. Utilities can only privatize gas and electric systems that meet state codes, yet many government estimators do not develop costs based upon approved utility codes.31 c. Contractors should be exempt from Contribution in Aid of Construction taxes if the system will be used solely to service the government. 9