Scrambling for Government Bucks
Hungry contractors are chasing after an abundance of government construction projects, driving down prices, creating jobs and helping the economy
By Manny Cruz
In 2003, the New York headquarters of Turner Construction Co. dispatched Rick Bach to California to head up the company’s Southwest regional office in San Diego. “It was an opportunity to grow a region,” says Bach, speaking from Turner’s spacious offices in Sorrento Mesa. “There was a lot of potential here.”
Potential, indeed. The San Diego office grew from 16 employees back then to 110 today while the entire Southwest region boasts 410 staff and field personnel covering Southern California, Arizona, New Mexico and southern Nevada. It’s a big region that Bach, a senior vice president, oversees from his third-floor perch in the Turner building that overlooks Interstate 805.
The sandy-haired Bach, a native New Yorker who looks about 15 years younger than his 50 years, has a bigger challenge today — making sure that the region that he inherited back in 2003 continues to grow during some difficult and challenging times.
Although the economy has not been kind to the construction industry — thousands of jobs have been lost in the downturn — the Turner company and other large and small contractors have been feeding off an unusually large number of regional construction projects that have one thing in common: they all are sponsored by government agencies at the city, county and federal level and by high school and community college districts. And Turner is a big player in the field.
“Right now in San Diego, probably 85 percent of our work is for the government — the highest percentage (of any company) in the region,” says Bach.
One of Turner’s largest projects is the $1 billion expansion of Terminal 2 at San Diego International Airport, a joint bid with PCL and Flatiron, for the San Diego County Regional Airport Authority. The “Green Build,” as it is called, will add 10 new gates to reduce terminal congestion, curbside check-in to allow passengers to check in, print boarding passes and check baggage before entering the terminal, dual-level roadway to relieve curb-front traffic congestion, 12 security lanes and an expanded concession area. At peak construction, the project under way now will create 1,000 jobs.
Turner also was selected to manage construction of the $185 million, nine-story Downtown library that is to begin construction this summer (it was awarded the project back in 2004). The company is collaborating with T.B. Penick & Sons to complete a multi-billion-dollar housing project at Camp Pendleton, and in April it completed construction of the $91 million Ten Fifty B affordable housing project — in partnership with Affirmed Housing Group and the Centre City Development Corp. — in Downtown San Diego. Turner was the construction manager for a UCSD north campus housing project and was granted one of the largest projects in the San Diego Community College District’s $1.6 billion construction bond initiative — a five-story arts and humanities building and a three-story business technology building at City College.
Bach’s company also will have a hand in the construction of a new Civic Center Downtown if voters approve a measure that the San Diego City Council placed on the November general election ballot. Turner is part of a Gerding Edlen Development group that won a bidding competition. “Turner has been on Gerder Edlen’s team from the beginning and we are excited at the prospect of building the project,” says Bach.
The company is always hungry for more work. Bach says there are a few military and education projects in the pipeline that Turner may go after and it will certainly go after the contract for the proposed expansion of the San Diego Convention Center. “We built this last expansion and the current proposal includes a new hotel and a 250,000-square-foot addition,” Bach says.
Around The Region
All those developments are just a fraction of the government-sponsored projects either just completed, under way now or planned for the near future in the region.
County government, for example, opened its $85 million medical examiner building, the $11.7 million Ramona Library and $10.4 million Fallbrook Library in the last year and has begun construction of the first phase of the new County Operations Center on Kearny Mesa, a massive $500 million project designed to consolidate the county’s existing operations complexes. The general contractor is ROEL Construction Co. Many of these projects are being paid for in cash, an effort to prevent financing expenses from being a burden on future generations.
Last month, the county Board of Supervisors authorized its staff to seek bids for a new Women’s Detention Center to replace the Las Colinas facility in Santee, a $308.5 million project, and Supervisor Ron Roberts is leading a Mid-Coast Trolley expansion effort to connect Downtown, Southeast San Diego, Mission Valley and East County with the UCSD campus and the UTC shopping center. The project will pair $600 million in transportation cash held by Sandag with $600 million in federal transportation dollars.
“There is a lot going on for us,” says Roberts of the county projects. “We feel strongly that this is a good time to make things happen, especially if we can create jobs.”
At the southern end of the county, work is progressing on improvements to the U.S.-Mexico border entry points at Otay Mesa and San Ysidro, projects that will cost almost $700 million. The improvements are aimed at easing increasingly long wait times for border crossers and to improve the economies on both sides of the border.
But dwarfing all the aformentioned projects is the military’s frenzied construction projects at the big Marine Corps and Navy installations in the region — projects that not only will improve the quality of life at the facilities but create thousands of jobs and boost the local economy. The military projects will include barracks, new communications facilities, dining halls and a new hospital at Camp Pendleton, which has received the largest share of construction money.
A June study by the Fermanian Business & Economic Institute at Point Loma Nazarene University estimated that military construction spending in the county quadrupled over the past three years to a total of $1.4 billion this year and $1.6 billion in 2011. Military construction will have a total impact of $2.3 billion on the San Diego economy this year and is responsible for creating 15,500 jobs in the county with average wages of $62,000, according to the study.
Bach and others believe that the unusual number of civic projects occurring at about the same time is coincidental, but fortuitous. Contractors greedy for more work have become more competitive in their bids — not a bad thing when public agencies are looking to cut costs. “It’s perfect timing,” says Bach. “At the time that private financing and virtually all private development came to a grinding halt, public projects, many of which had already been in the planning stages, broke ground. It is very fortunate for us.”
Bach says profit margins have been greatly reduced because of increased competition on a much smaller number of prospect. “Where we used to see three or four bids on major trade packages at the peak of the market, we now see eight to 10,” he says.
Ben Meyers, director of business development for McCarthy Building Co.’s San Diego office, agrees with that assessment and says that because of the shrinkage in private sector projects, more contractors have chosen to pursue military and governmental work which had traditionally been a unique market for contractors specializing in that kind of work. “At the same time,” says Meyers, “the American Recovery and Reinvestment Act funding increased the number of projects being brought forward by the military and government agencies, which increased the opportunities in the government work arena.” (The McCarthy company and Clark Construction are candidates to win a joint-venture contract for the construction of the $460 million Navy hospital at Camp Pendleton. The final selection of the team is expected this month with the contract award expected in September.)
“So you have more general contractors going after government work,” says Meyers. “Many see their backlog of existing work shrinking while their current commercial and industrial market opportunities diminish. Facing more pressure to win a project, the pool of contractors is motivated to compete aggressively for the government work that is available, which tends to drive down prices.”
Another factor is that contractors new to government work may not be familiar with the regulations and requirements that are unique to government contracting, thus offering lower prices. “All these factors contribute to lower bids and and smaller margins,” says Meyers. “It forces builders to be even more creative and efficient to survive through these times.”
“The construction industry has a lot of excess capacity — a lot of people who would like to have work,” adds Supervisor Ron Roberts. “The economic recession has been devastating to them. Bids are more competitive, absolutely. In everything from buildings to roads, we’re seeing costs lower than what we were anticipating. So if you (a government agency) are in a position to build things, it’s a great time to do it.”
According to Meyers, subcontractors are facing the same problems as the larger construction companies — seeing their backlog shrinking — which pushes them to aggressively seek more work. “So they’re tempted to drive their pricing even lower to win a project,” Meyers says. “At the same time, building material prices have remained relatively low with the reduced demand for construction materials worldwide, and labor costs have remained steady. But right now, the scarcity of work outside of the government area has many more general contractors and subcontrasctors than usual competing for work. That reality is continuing to drive pricing down.”
That the military and civic construction projects are vital to the San Diego region’s economy is not a matter of dispute. “The explosion of military construction spending has been very significant in offsetting some of the damage of the recession,” says Lynn Reaser, chief economist of the Fermanian Business & Economic Institute.
Adds Turner Construction’s Bach: “The majority of these projects are being built by local firms, which means the money goes to San Diego residents and gets re-invested in our local economy. Our workers can afford to buy a new car, go to the movies, or take their families out to eat. In other regions where the market and employment have dropped more than 50 percent, this is not the case.”