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By Michael Kulchisky
Special to Ontario Construction News
In comparing the U.S. to Canada, there are both similarities and differences between the two countries. Here’s a look at the key considerations that engineering and construction (E&C) should be thinking about on both sides of the border.
After emerging from the Great Recession and spending several years in “rebuilding” mode, the construction industry has become one of the best-performing sectors in the North American economy. With plenty of projects to choose from, backlogs to contend with and a dwindling workforce to select from, the industry is now facing a complex mix of challenges and obstacles.
Across the continent, demand for investment in all types of infrastructure is strong and relentless. Broadly speaking and looking across the breadth of the built environment as a whole—and based on industry backlogs that are (on average) booked through 2018—FMI says that the next 12 months should be as good as (or even better than) 2017.
“I think CEOs are generally positive and upbeat about growth right now, but there’s also an undercurrent about when the cycle might correct itself since this run has lasted so long,” Scott Winstead, president, FMI Management Consulting, pointed out in the 2018 AGC/FMI E&C Industry Risk Study: Managing Risk in the Digital Age. The study findings were based on 100 responses from best-in-class companies that are active in AGC’s forum.
“The 2009 downturn still rings very loudly in executives’ minds,” he added, “so they’re looking at how to proactively address business challenges while the market is still strong. Right now, most executives are preparing for a downturn (at least in the back in their minds) – just in case.”
Canada: E&C is going strong
We’re seeing similar market strength in most parts of Canada, where we’re cautioning E&C firms not to mistake a healthy, robust or slight recovery in the markets as an excuse to practice “business as usual.” For example, the increase in the price of oil will not return the market to past earnings for contractors and suppliers.
Much like what’s happening in the U.S., where the current unemployment rate is hovering at a historically low 3.7%(1), the people factor remains one the biggest challenges here in Canada. The Canadian unemployment rate was 5.9% (2) for September, 2018. Put simply, good people are still very hard to find and retain.
Right now, the Canadian market rests on the high side of the employee turnover rate (20% versus 14-20% in the U.S.). We’re also at the top side of the transition that’s coming as the baby boomers continue to retire. We have a lot of owners and employees in the business sector who have stayed in E&C throughout the latest oil price crash, and I don’t imagine that they’ll want to stick around and wait for a big rebound—especially in Western Canada.
In Western Canada the competition remains high, and many firms are looking at other parts of Canada and the U.S. Paul Verhesen, CEO of Clark Builders based in Edmonton, commented: “We are currently not as confident in the Canadian marketplace as contractors are in the U.S.; as a result, we are looking for opportunities across North American.”
Pinpointing industry disruptors
Change and disruption are coming to the E&C industry, which is already home to a host of new entrants. In short, a radical change in the way we create our built environment is required. As noted in AGC/FMI study, Katerra’s business model is to run a construction company the same way Toyota would operate a factory—fully integrated from architectural design through fabrication and installation. This allows the company to offer services faster, cheaper and safer than a traditional E&C competitor.
At the Offsite Construction Expo in Vancouver in June 2018, several Canadian companies shared information about new partnerships that are designed to lead and disrupt. For example, Mike Schmidt of Auto Construct Inc. discussed the critical aspects of starting an automated, prefabrication manufacturing operation; Andy Berube of Stack Modular Structures talked about how modular construction isn’t always the perfect solution to every project; and Craig Mitchell of Metric Modular discussed the new levels of complexity being introduced when modular builders, contractors and consultants work together on projects.
Here in Canada, we’ve definitely witnessed a struggle to adapt to these new methods—a struggle that some companies are addressing through mergers and acquisitions. Last year, for example, Bird Construction Inc. acquired 50 per cent of Stack Modular Group. Stack is a modular construction company with production operations in China, and it makes steel frame modules for permanent construction. These modules are suited for the hotel, senior housing, office space and general housing sectors in the North American market. Expect to see more “mergers” among companies in an attempt to address the key disruptors in our industry right now.
Managing project risk
Going forward, there’s even more change in the wind for the Canadian E&C sector. Industry stakeholders expect to see more change in the built environment within the next five years than there has been in the last 50 years—a point that was highlighted in the AGC/FMI study. For this reason, risk mitigation and planning are more important than ever for E&C firms that want to sustain themselves for the long haul.
It’s going to take more than just additional insurance and more claims management to get through this. It’s going to take better relationships and more upfront planning. Right now, a lot of companies just “push” that risk down to the lowest possible denominator—the entity most likely not to be able to afford to pay for it all. Put simply, the GCs hand it off to the CMs, and then the CMs hand it off to specialty contractors, and so it goes down the line.
Going forward, the whole industry really needs to be mindful of subcontractor default, which could reach an all-time high over the next couple of years, with margins and the market being as ruthless and tight as they are. To offset these challenges, E&C firms need to know that the firms they’re working with are still going to be here in five years. That’s going to be really important.
It’s still a people business… on both sides of the border
Ultimately, success in E&C comes down to having the right people in the right organizations and in the right positions. As much as we hear about technology and how it has infiltrated our industry, we still need good people to lead change. It’s still a people-focused industry, with technology as a great enabler (but not a replacement). The E&C companies that understand and embrace this will be best-positioned for success in our changing world.
Michael Kulchisky, a managing director at at FMI Corporation headquartered in Raleigh, NC, is based in Alberta. FMI provides investment banking and management consulting services to the architectural, engineering and construction sector. This story was originally published in the FMINet.com blog.
2 “Canada Unemployment Rate.” October 23, 2018. Trading Economics.https://tradingeconomics.com/canada/unemployment-rate