For all of the angst that accompanied the global financial crisis, the top international architecture, engineering and construction firms felt little pain. The building market “is like a balloon,” said Ken Fredrickson, president and managing director of Samsung C&T Engineering & Construction Americas, during a webinar by the Engineering News-Record. “When you squeeze it in one place, it pops up in another.”
ENR ranked the top 225 international AEC firms, which had combined revenue of about $1.2 trillion in 2011, up about 12% from 2010. Of that, about $453 billion was earned in countries other than where the firms are headquartered. This is good news; it’s an 18.1% increase compared with 2010.
Fredrickson is one of three executives from major AEC firms who spoke during the webinar. Discussion touched on where the building market was hot and the execs’ concerns moving forward.
Asia, including India and China, and Australia were the top building destinations, making up 24.8% of the market, followed by Europe and the Middle East, accounting for 22.4% and 18.3%, respectively. Then came Latin America, where activity was up 8.5%.
“You see the middle class growing in developing areas, and with that affluence, there is a need for infrastructure,” said James Lewis, chief administrative officer at Black & Veatch, No. 118 on ENR’s list. In addition, there’s been “a tremendous amount of activity in oil sands,” said Thomas Hewitt, senior vice president of the commercial group at KBR, which came in at No. 18. That activity brings a need for more infrastructure and development to support it.
So, with a burgeoning middle class in developing areas and resource-rich regions needing aid to handle their resources, it’s no surprise that some types of construction projects increased significantly last year. Among them:
- Telecommunication projects: up 100.9%
- Industrial processes: 41.2%
- Hazardous waste: 31.3%
- Manufacturing: 30.7%
- Water supply: 24%
Will the “hot” last?
All three men, although pleased with a good year, see stumbling blocks ahead.
The financial result of conflict
Arab Spring, which deposed leaders in force from power in Tunisia, Egypt, Libya and Yemen, resulted in a fall-off in building revenue in Africa, said Gary Tulacz of ENR. He said one of the companies ENR tried to survey wouldn’t participate. All of its nonhomeland work was in Libya, and all of it was on hold.
Hewitt said there’s still a risk of major conflict. “If something happens in Asia or the Middle East, that could really slow down business.”
Financing is a huge problem
“These are unsettled times,” said Fredrickson of Samsung, which is No. 63 on ENR’s list. “Financing is the biggest issue.”
Though the need is there, money is tight. In Europe, a “great deal of project financing comes out of the European banks, and they are pretty soft right now, which means financing could be harder to come by,” Hewitt said. In addition, many U.S. cities are “challenged financially,” Lewis said, meaning water- and sewage-treatment work likely will decrease.
The financing issue goes beyond tight money. Because financing is scarce, the way projects are being evaluated internationally is changing. Rather than evaluating a project on life cycle costs, as had been the norm, many look only at the capital cost, Lewis said.
At the same time, each executive acknowledged that there’s a lot of private money sitting on the sidelines, some interested in getting into the field. However, for that to happen, funding models will have to change. Public-private partnerships will become more popular, Lewis and Hewitt said. “There are some excellent models out there,” said Lewis, who added that it is essential that whatever model is chosen, it must be presented in a way that private-equity holders would understand.
Procurement and skilled-labor issues
Most of the top AEC firms engage in large projects and have offices worldwide. This means they must source globally, which brings up variation in the quality of building goods, Lewis said. This makes bidding harder because competitors can offer a different pricing structure.
In addition, finding skilled labor is a “consistent problem all over the world,” Frederickson said. Some companies bring in expatriates to act as a bridge between the local culture and workers and project heads, he said. However, visas, although “customarily” approved in some countries, are more “challenging” to obtain in others, Hewitt said.
The lack of skilled local workers leads to challenges in delivering what was promised to a client, particularly in the approach to quality and safety. This means intensive training of a local workforce is essential, as is a company’s consistency in approach worldwide, Lewis said.
Each executive agreed that another solution to the labor issue is to use modularization and bring as much work off site as possible. This helps control quality and keep things on schedule. In a liquefied natural gas project KBR is doing in Australia, about half of the mechanical value is done in modules, Hewitt said.
“Off-site modularization is the right thing to do. … Sometimes we struggle to get the lead time to do it,” Lewis said.
In March 2011, Global Construction Perspectives issued a report that forecast that the global construction market will expand almost 70%, with China, the U.S. and India accounting for more than half of that growth.
KPMG sees AEC firms changing the way they operate and expanding services to include “design, build, finance and operate.” This is something that Samsung already does, Frederickson said. Speaking of how the company puts together a project proposal, he said, “We try to look at the whole solution, from construction to financing to output of resources.”