Cutting Through the Infrastructure Investment Fog

At this point, everyone is seeking clarity on what the American Recovery and Reinvestment Act (ARRA) and the pending highway bill reauthorization will mean in terms of future projects in the pipeline. While no one can predict the future with any degree of certainty, industry experts can help shed light on what has happened up to this point, and where there could be rays of hope in the future.

According to Ken Simonson, chief economist, Associated General Contractors of America (AGC), the ARRA injected an "unprecedented amount" of government funding into construction projects -- around $135 billion, much of which will be obligated in an 18- or 19-month period.

The immediate benefactor has been the transportation industry. "That is because there is already a system in place and an identifiable formula for allocating money to the states for highway and transit programs," says Stephen Sandherr, the AGC's CEO.

"Unlike all of the other construction money, the money for transportation has the commitment that 50% of it has to be obligated within six months or the states would actually lose it," he continues. "That sent a strong incentive for the states to identify projects that are eligible for the funding."

ARRA still holds future promise

The ARRA provided $48 billion for transportation infrastructure investments: $27.5 billion for highways; $8.4 billion for public transportation; $9.3 billion for passenger rail; and $1.3 billion for airport infrastructure.

Of the bill's highway funds, roughly $18 billion was provided directly to states, and half of these funds had to be obligated in 120 days. The remaining $9 billion in state funds and the $8 billion allocated to local governments must be obligated within one year of the bill's enactment. States and localities that do not meet these deadlines will have their funds redistributed to other states.

Industrial Builders, West Fargo, ND, has been a recipient of some of the first-round projects. The company mills roads as a subcontractor to paving companies.

As of early August, the company had 12 jobs in North Dakota, nine in Montana, six in South Dakota and five in Wyoming.

"They are all stimulus related," says Paul Diederich, president. "Of those 32 projects, we have already completed 21 of them. They are small projects. They are easy to design; they are quick. Those are the kinds of jobs that can get the money on the street."

But Industrial Builders has not yet witnessed the flow of stimulus dollars into more design-intensive projects.

"We also do a lot of structural work," says Diedrich. "Out of all the stimulus money that has been let in those states, we have seen only one structure, and we were not successful in getting it because there were so many barriers." Still, he remains hopeful. "The bigger picture is there is so much money that has not hit the streets yet."

To discover the true impact the stimulus is having on its member contractors, AGC recently conducted a survey of its member companies. The results, as well as all statistical information, can be found at www.AGC.org.

"The analysis of the survey shows that while the stimulus is having an impact, it is far from delivering its full promise and potential," says Sandherr. "One reason the benefit has been so limited to date is, outside of the transportation arena, much of the construction funding authorized in the stimulus has yet to result in actual contracts that will allow contractors to begin work. Most agencies have committed very little, if any, of their stimulus funds."

For example, the ARRA provides $4.6 billion to the U.S. Army Corp. of Engineers. As of early August, only $716 million had been obligated and only $84 million had been paid out.

"With respect to the General Service Administration (GSA), the act provided $4.9 billion for investments in federal buildings and the procurement of more energy-efficient motor vehicles," Sandherr points out. "Only $656 million has been obligated and only $12 million has been paid out. Only half of 1% of the $6 billion in funds available for the EPA clean water and drinking water programs has been put to use at this point."

As a result, some segments of the market have yet to see any stimulus money.

"As a building contractor, as opposed to a highway contractor, it takes a while [on] a capital expenditure project for an architect to produce the drawings that can be put out to bid," says Dave Higgens Jr., president, HMH Builders, Sacramento, CA. "What we have been told is that the GSA will look at alternative delivery methods, such as design/build, to be able to produce the documents quickly. We are cautiously optimistic that we are going to see that work, but we haven't seen it yet."

"We are only five months into a multi-year stimulus program," Sandherr emphasizes. "The stimulus will keep our industry alive, but it will not turn around a trillion dollar construction industry overnight.

"The stimulus is working," he continues. "It is just not working fast enough for many construction workers and many communities."

Competition proves fierce

Jim Andoga, president, Austin Bridge & Road, Irving, TX, says you really can't distinguish between stimulus-funded projects and other projects the company bids.

"Our parent company bids on hundreds of projects every year," he states. Stimulus funding just means there are more opportunities to bid jobs than there would be otherwise. Yet, that doesn't necessarily translate into more work. "Our problem is that we have a hit ratio of about one of every 20 jobs this year," says Andoga. "In previous years, it has been much higher than that."

This stems largely from increased competition. "We bid a fairly typical project a week ago," comments Art Daniel, president and CEO, AR Daniel Construction Services, Cedar Hill, TX. "It was a rural type of water project, where a lot of EPA state revolving fund money is going. It is a small project, a $1.5 million estimate by the engineer.

"Normally you might have 15 or maybe 20 contractors pull bids on that. Of that number, six might turn in bids," he continues. "With this project, there were over 40 plan holders and 27 bids were turned in." The lowest bidder came in at just under $1.1 million -- 27% below the initial estimate.

"I think it is fairly typical of what we are seeing in a lot of projects, both in the transportation highway business and the utility business that we operate in," says Daniel. "It is because a lot of people are moving from other markets. That is bringing the prices down. People are just trying to get enough money in to keep their investment in their equipment working."

According to Doug Pruitt, chairman and CEO of Sundt Construction, Tempe, AZ, "Ultimately, that may be problematic. You are going to have some people pick up this work who do not have the skill set or the experience with some of the agencies they are going to be working for. You could see some significant increases in costs or delays on those projects because of that."

Consequently, Pruitt advises fellow contractors to avoid the temptation to take no-margin jobs just to keep equipment and employees busy.

"When we take on bad work because we have jumped in a market that we don't understand, or when we take on a project with no margin and we have missed our cost, now we are paying for it out of pocket," he asserts. "We do that as an industry for all of the wrong reasons. Contractors load up with work that turns out not to be good work. It costs them money. It erodes their net worth. It is not a time to load up with work or move into markets. Be prudent and be cautious about jumping into markets that you don't know anything about, because it could be what takes you down as a company."

Instead, he recommends right-sizing the organization to the markets you're in and for which you have the required skill sets. Unfortunately, that probably means layoffs and cutting costs.

"But you need to be liquid," he stresses. "You need to be prepared, too, which means investing in certain things to be prepared when the market recovers. You need to be prudent.

Highway bill can bolster job growth

Despite ARRA funding, there has not been a significant increase in transportation-related projects.

"Overall, midway through 2009, we are seeing the national dollar value of transportation infrastructure construction put in place slightly behind the 2008 pace," says William R. Buechner., Ph.D., vice president for economics and research, American Road and Transportation Builders Association (ARTBA).

According to ARTBA, 15 states have cut transportation funding this year, and 19 report they plan to cut their transportation program funding in 2010.

"The only bright spot in the transportation construction market this year is the additional federal funding made available to the states and local governments through the ARRA," Buechner says. "Unfortunately, due to state budget challenges, the stimulus funds are allowing some states to simply maintain their 2008 activity level. In other states, stimulus dollars are, at best, serving to make overall state transportation program cuts less severe."

He adds, "The stimulus funds are saving a lot of jobs. But to really boost new job creation in the near term will require a strong signal soon to the states and private sector that the federal government is fully committed to a significant, sustained and multi-year investment in transportation improvement programs.

"This is absolutely required to get states to begin putting the larger, multi-year construction projects out to bid that spur significant capital investments in materials and equipment and create new jobs," he continues. "Otherwise, we're looking at a constricting or flat market in most states for several years."

The House Transportation & Infrastructure Committee is proposing legislation that would authorize a $500 billion investment in roads, bridges, transit systems and high-speed rail over the next six years.

ARTBA estimates the multi-year $337 billion highway and bridge investment called for in the House bill would generate almost 150,000 new jobs during 2010 if enacted this year. Over the six-year period, estimates place job growth at 540,000.

But the Obama administration has asked Congress to postpone action on the bill until at least March 2011, and maintain the current level of funding to states. This could dampen future work.

"Short-term authorizations are simply too disruptive," says Buechner. "It is virtually impossible for a state or local transportation agency to develop an effective program without a long-term funding horizon."

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