"Extraordinary" times in the Construction Industry

Panelists (in order, above left): Jay Badame, COO, Tishman Construction Corp.; Jane Chmielinski, President and COO, DMJM Harris; David Kane, Senior Vice President, NYC Economic Development Corp.

Please click to view more photographs from this event.

Construction industry experts recently discussed the continuing construction "boom" and cited a number of factors and challenges that must come together in order for the construction industry to remain at its current extraordinary level in the Greater New York area.

Their comments, made at the September 18th State of the Construction Industry event sponsored by Anchin, Block & Anchin, LLP, included:

• The need to "train the trades," a concern expressed at last year's state of the industry event as well.
• A sustained public capital program to balance out a possible downtown in the private sector as financing tightens after the virtual collapse of the sub-prime mortgage market. Though the market remains strong with governmental, educational and institutional projects, a decline in multi-family residential development could have a domino effect.
• The need for a change in building codes that will make it easier and less expensive to bid work in the public sector.
• A new level of partnership, called "alliance contracting," between the client, the designer and the contractor.
• Considerations related to "building green."

Panelists at this year's event, moderated by Richard Anderson, president, New York Building Congress (NYBC), included: Jay Badame, COO, Tishman Construction; Jane Chmielinski, COO, DMJM-Harris; and David Kane, New York City Economic Development Corporation. The event, presented in cooperation with NYBC, drew a standing-room only crowd to the Harvard Club.

Anderson noted that the construction industry has reached an all-time high in New York as a $25 billion industry in 2006 and a projected $26 billion industry in 2007. "It's happening everywhere and in every sector – commercial, residential, hotels, infrastructure, transportation," Anderson said. He noted that 30,000 residential units were built in 2005 and 2006, while only 5,000 units were built 10 years earlier.

In addition to the residential boom, major projects underway include the World Trade Center, described by Badame as "one of the biggest construction projects in the world," new athletic stadiums (along with the demolition of existing stadiums), public improvements around Yankee Stadium, and public projects at Coney Island, the Riverfront, Hunt's Point, Willett's Point, and Long Island City.

"Everyone wants to have a slice of NYC," noted Tishman's Badame, adding that New York is a particularly strong market among European investors and second-home owners.

Training the Trades
The greatest challenge to sustaining this building boom, Badame said, is creating the next generation of skilled labor. He said there are currently 140,000 skilled laborers in the market, with many reaching retirement age. An additional 15% more union workers are needed within the next five years.

Tishman has hired 130 employees in the last 12 to 18 months, with many assigned to active casino projects in Las Vegas and Atlantic City. As a perk to keep these team members, Badame said Tishman is able to send them to these hotels for vacations.

Chmielinski, with DMJM-Harris, said the market is also hindered by a labor shortage at the engineer level. "At the end of the day, we're just stealing from one another," she said, adding that individuals move between companies and to higher level assignments before they truly have the experience that is necessary.

"How do you get people in the industry? To get this done, it feels like we are going farther and farther down the educational system and we are no longer just recruiting in high schools and colleges but working with elementary schoolers to see if they like building with models," Chmielinski said.

Panelists noted the need for maintaining trade programs in high schools, establishing mentoring programs for young professionals, and creating scholarship programs to reward students interested in the architecture, engineering and construction industries.
It is also important to properly staff public positions to provide architectural, engineering and construction firms with competent counterparts. Though the public sector cannot compete with the private sector on salary, Chmielinski noted several factors that make public sector work attractive, including the opportunity for project managers to take on higher levels of responsibility as well as the experience gained by working in the political sphere. In addition, public sector work will be more attractive should there be a downturn in the private sector.

The Public Sector
According to Kane from the NYCEDC, City spending is up 27% over the past 8 years, fueled by the demand for real estate and "extraordinary times" in the Financial Services sector. The City needs a continued amount of infrastructure spending even in a cyclical market to prevent problems like those that plagued the City in the 1970s, such as declining population, poor roads, and infrastructure problems.

Kane noted that city processes are "cost drivers" in the construction arena. Public sector construction carries a 25 to 28 per cent premium due to complex city processes (in bidding, change orders, Wick's Law, and other public bidding rules). "The city makes it harder to get work done," he said, adding that a major overhaul of the Building Code is now underway that should simplify the process of public sector bidding and work.

As an example, Kane noted that sidewalk and streetscape work for most projects require the approval of 17 divisions for a proper sign off, a process in need of streamlining.
Some agencies, like the School Construction Authority (SCA), are already packaging work in different ways, breaking larger projects into smaller projects, to enhance the bidding and implementation process, he said. Code change will require an adjustment period and have implications on scheduling, he said, but in the end it will simplify the code and make it easier to understand.

"I see the bureaucratic difficulties as an opportunity for improvement," Kane said. "There was a study by (Deputy Mayor) Dan Doctoroff on how to improve our procedures. Wick's Law is an excellent example of bureaucracy hurting itself. We need a major overhaul in the building code in order to bring it in line with the national code."

Badame said that public agencies that can make the process easier will get more competitive bids: "We can't take five years to change; the peak will be over. The agency that can do it quicker will do it for less cost."

Alliance Contracting
Chmielinski urged attendees to consider "alliance contracting," in which partners "share the gain as well as the pain." According to Chmielinski, alliance contracting takes the concept of design/build to a new level, in which the client, designer, and contractor share risks so that all objectives are aligned. Such a partnership, she said, will avoid litigious relationships and allow increasingly complex projects to move faster.

Engineering is becoming commoditized, she said, with a push on firms to become the low-cost provider. "It is important for owners to ask at the end of the day," she said, "if they truly got a low price after delays and change orders. I would like to see a move toward more quality-based selection."

Badame noted that there are signs of cooperation in the marketplace: "The Port Authority and the MTA are sharing ideas. Sharing risk is the best way. Otherwise bonding will drive up costs, in particular when full performance bonds are required. Owners need to share the risk."
Kane said that alliance contracting is a goal of the City, but the city's legislation is mandated by the state. "Therefore, we need a working relationship between the city and state to make changes in the legislation for greater procurement flexibility," he said.

Environmental Concerns
The increasing focus on environmental issues, driven by the private sector, affects both public and private sector work, Kane said. Green Building Law 86 impacts municipal projects with LEED silver certification and requires capital implications up front.

The challenge, according to Badame, is compounded by the increasing cost of raw materials, such as steel and petroleum. "We all have to get it right," he said. "We want to get it right for the next generation."

Anchin's State of the Construction Industry event is scheduled each fall, in cooperation with the New York Building Congress.