Quarterly2008 issue 3

’staining green

THIS QUARTER A Building Green-Movement? 4 BY JERRY JACKSON

OPPOSING VIEWPOINTS Coming Clean: Green Building Brings Risk of Greenwashing 6 BY JAY B. FREEDMAN

BUSINESS DEVELOPMENT Storms Clouds on the Horizon 12 BY CYNTHIA PAUL

MARKET INFORMATION Globalizing Green, Verde, Vert, Vihreä, Grün, Grön, Groen 17 BY HEATHER JONES

GENERAL CONTRACTORS Integrity in Tough Times 21 BY RALPH E. JAMES PH.D.

LEADERSHIP Maximize Your Leadership Potential 24 BY VANESSA WINZENBURG

PLANNING Plans That Get Action 28 BY JERRY JACKSON

PLANNING Twelve Reasons (Excuses) For Poor Job Planning 31 BY RALPH E. JAMES PH.D.

QUARTERLY INTERVIEW Credit, Risk, Insurance and Surety: Zurich’s Terry Gray and Bill Cheatham 36 BY TIM SZNEWAJS Publisher & Board of Directors Departmental Editors Senior Editor Jerry Jackson Hank Harris Construction Materials Business Development President and Will Hill Cynthia Paul Editor & Managing Director Contractors Leadership Project Manager Robert (Chip) Andrews Rick Reese Vanessa Winzenburg Alison Weaver Will Hill Engineers & Architects Mergers & Acquisitions Jerry Jackson Group Manager Tim Huckaby Stuart Phoenix John Lamberson Tom Smith Ron Magnus Heavy Highway/Utilities Project Delivery George Reddin Graphic Designer Jay Bowman Michael McLin Hugh Rice Mary Humphrey Lee Smither International Trade Contractors Bob Wright Steve Darnell Randy Stutzman Information Graphics Ken Roper Debby Dunn Private Equity George Reddin Strategy Ken Roper Manufacturers & Distributors John Hughes Training Ken Wilson CONTACT US AT: Owner Services Mark Bridgers Residential Construction www.fminet.com Clark Ellis Surety [email protected] Lanny Harer

Copyright © 2008 FMI Corporation. All rights reserved. Published since 2003 by FMI Corporation, 5171 Glenwood Ave., Raleigh, North Carolina, 27612. Printed in the United States of America. FEATURES

Saving the Planet, One Building at a Time: Is LEED Accreditation Worth It? 52

Two companies experienced in green building help to answer the question: Should your company start taking on green projects if it hasn’t already?

BY KELLEY CHISHOLM

Forecast Calls for Building Green in U.S. Nonresidential Markets 62

Growth rates across the nonresidential building segments reveal construction industry stakeholders are beginning to embrace the green movement.

BY KEVIN HAYNES AND HEATHER JONES

Develop Them and They Will Stay 78

The greatest source of skilled labor and field leaders will come from within, requiring firms to cultivate their own leaders and technicians in order to meet future industry demands of the future.

BY GREGG SCHOPPMAN

What is all that Mumbo Jumbo about Vision and Mission Statements? 88

Rather than view visions and missions as a wordsmith exercise, think of them as invaluable leadership tools that provide focus, motivation and assist in building an enduring company.

BY KEN ROPER

Blowing the Whistle: The Buzz on Executive Coaching 98

Executives who have been coached have found direction, purpose and confidence in achieving their goals more quickly than they would have without their coach.

BY JENNIFER JONES AND JAKE APPELMAN

Do Leveraged ESOPs Make Sense for E&C Companies? 108

While ESOPs offer a number of benefits, they are not the right organizational structure for all companies. If you are thinking about selling to an ESOP, consider the following criteria.

BY CURT YOUNG

The Rise of the General Contractor in 19th Century America 116

Guest writer and project historian Sara Wermiel shares her research on the formation of general contracting in America.

BY SARA E. WERMIEL, PH.D.

Delegation: A Win-Win Strategy 130

Delegation is a valuable, yet often underused, leadership tool. It reduces the leader’s workload while also empowering others to take on a greater leadership role.

BY TIM TOKARCZYK AND WILLIE HEPWORTH Dear Reader:

Green … the color of money. Or is it?

In this quarter’s publication, we provide some thought material on the Green movement. Few agendas have had as profound or as fast an impact on American business and the construction world as getting Green. Is it substantially a product of Scuppies? (Socially Conscious, Upwardly mobile Persons … coined by Chuck Failla, author of The Scuppie Handbook) Or is the Green movement a permanent part of our futures?

According to Kermit, “It’s not easy being green.” A new writer for FMI Quarterly, Jay B. Freedman, a business and real estate lawyer from California, explores the risks of building Green. Unusual for FMI Quarterly, this article is drawn from an earlier article published in Builder and Developer. The fit with our theme was too good to ignore. Jay also provides a brief article on “Greenwashing,” an appellation that you really would rather not acquire. Kelley Chisholm, a frequent contributor to FMI Quarterly, asks and answers the question of the value of LEED certification. Kevin Haynes and Heather Jones from FMI’s Research Services Group forecast and comment upon the Green market in nonresidential building. Layne Newton takes two profound trends of our time and links them in “Globalizing Green” (and other unpronounceable terms).

In case Green is not part of your world (yet), we also have our usual assortment of other good reads.

Another writer for this issue from outside the FMI ranks is Dr. Sara Wermiel. A historic preservation consultant, a project historian and an independent scholar, Sara gives us a look at the evolution of the general contractor from the early days of Norcross Brothers and George Fuller. For those of you who would like to understand the origins of the industry, find time to read Sara’s article. 2008 issue 3 FMI QUARTERLY ■ 5

Our Leadership and Organizational Development Group, represented by Tim Tokarczyk and Willie Hepworth, provide ways to leverage your time with “Delegation, a Win-Win Strategy.” Vanessa Winzenburg provides her departmental look at how to maximize leadership potential. Jennifer Jones rounds out the Leadership team’s offerings with her look at executive coaching.

Long-termer Ralph James gives us “Twelve Reasons (Excuses) for Poor Job Planning.” Strategist Ken Roper begins a series on corporate direction and strategy with his article on “What’s all the Mumbo-Jumbo About Vision and Mission Statements?” Gregg Schoppman, our editor for all things of a Project Execution flavor, gives us reinforcement for investing in the development of our human talent as a retention device.

Storm Clouds in the marketplace mean getting your business development machine operating at top efficiency. Cynthia Paul gives us some tips. Ralph James provides a second article in this issue, and this one illustrates how integrity gets challenged in tough times and what you might do about it. Employee stock ownership programs are not appropriate for all companies, but they can be an excellent ownership-transfer vehicle for some companies. Curt Young from FMI’s Investment Banking Group shares specific criteria to help you determine if an ESOP is a good mechanism for your company’s ownership transition. Terry Gray and Bill Cheatham from our publishing partner, Zurich, give us contemporary market views from the insurance and surety perspectives of Zurich. Terry is global head of construction, General Insurance for Zurich and Bill is has been head of Zurich’s surety operation.

I think that you’ll find plenty to keep you busy reading, thinking and discussing many of these topics with your team. You may even find the reading a bit easier, now that we have made some adjustments to our type size and layout. What we lose in elegance, we hope to make up for with increased ease in reading, especially those of us with 40-year-old eyes (or more!).

Share your thoughts on the new look, our content or what you want to see in upcoming issues. Our next issue will deal with Change Management. Until then, keep developing your organization. If we can help, we’ll be glad to participate.

Sincerely,

Jerry Jackson FMI Quarterly Publisher and Senior Editor BUSINESS DEVELOPMENT Storms Clouds on the Horizon

Walking out of the house on a beautiful spring morning, I am instantly surrounded by sunshine, flowers just starting to bloom, grass that’s turning from wintery brown to green and fresh air. A quick glance to the west reveals dark charcoal-gray storm clouds on the horizon. Living in the prairie of eastern Colorado, there are few things between where I am and the clouds on the horizon some 30 to 40 miles away. The implication of approaching storm clouds starts a familiar sequence of events — get the cars under cover, gather up the animals, drag the potted plants in and start shutting the windows. Spring storms can either be a light sprinkle of rain or golf ball-size hail. There’s no need to rush around in panic, just a need to prepare for the potential storm.

MIXED ECONOMIC NEWS Today’s economic news points to storm clouds on the horizon. I can’t tell you with certainty if the nonresidential markets need to prepare for a spring shower or hail; but I can tell you that the time to get ready is now. The residential market has been struggling for months. The subprime situation has impacted the credit markets — and consumers. The U.S. economy is dependent upon consumer spending. The old adage is: When the U.S. consumer gets nervous, the economy gets a cold. Now is the time to begin to readying your company for the potential of a softening market. Now is the time to get close to The old adage is: When existing customers, meet new customers and prepare to jazz up the U.S. consumer your selling efforts. gets nervous, the Talking to contractors across the country, we are hearing that 2008 economy gets a cold. looks to be a good economic year for many of them — especially for companies whose backlog is filled 2008 issue 3 FMI QUARTERLY ■ 13

with large projects. For mid-size contractors whose backlog burn rate is faster, the second half of 2008 looks to be challenging. Most contractors are saying that they are eating through backlog at a rate that is faster than they are adding to it. But the news is still mixed on the economy.

PREPARING YOUR COMPANY Getting ready for a changing market means dusting off your go-to-market strategy, building your get-work machine and targeting the type of customers and projects you need to be successful. Here are some tips for getting ready:

Devise additional keep-in-touch strategies. When schedules are crazy busy, keeping in touch with customers is a challenge. Keeping in close contact tells customers that you value the work they provide, you are willing to make an investment in them and gives them the reassurance that if something goes wrong you will be there. Get creative about ways to stay in touch. Face- to-face meetings are wonderful, but neither you nor your contacts have the time to meet every day or week. Periodic phone calls, a note through the mail, an e-mail informing them of the status on the job, meeting them at civic or social events, etc., all give customers the confidence that you and your organization value their business. Expand your contact list inside a key customer organization from one or two contacts to three, five or more. That way, when one of your contacts leaves the organization, your relationship with the company stays strong and grows. Get close to existing customers. Spend time getting candid feedback on how your company has performed on the customer’s current and past projects. Brainstorm together about what and how lessons learned can be taken from past projects and invested into future ones, making the process smoother and more efficient for both of your organizations. Learn more about their pressures — those they face in their business and what pressures they are feeling from their customers and competitors. Use that knowledge to develop unique ways to continue to build value and drive customer loyalty. Revisit your key value propositions. Why should a customer or potential customer pick you over another very good contractor? The answer to this question represents your value proposition. Value propositions need to keep pace with changing markets and improvements being made by competitors. Get a team of key operations, estimating, senior management and business development together to critically revisit your value proposition and answer the following questions:

• How truly unique is your value proposition compared to your very best competition? • Can you objectively prove it to the customer and prospective customers? • What can you say/offer to the customer that none of your other competitors say/offer?

Get more feet on the street. Nothing beats feet on the street for meeting and cementing new relationships. Investigate how much time your 14 ■ departments

business development people are actually on the street meeting new customers. You do not have to add people to get more feet on the street. You just need to free up your current staff’s time so they can call on prospective customers. Have the business development staff estimate how they spend their time. Use the time categories shown below to get a clear picture of where the staff is currently investing time, and realign this time according to your go-to-market strategy.

a. ______% Servicing existing customers b.______% Writing proposals, participating in presentations and following up c. ______% Putting out fires d.______% Internal meetings e. ______% Doing research and getting ready to run sales calls f. ______% Calling on new customers

Reinforce/reward customer service. Customer service is what your field, project management, accounting and administrative functions do to ensure that customers are getting everything they have been promised in your proposal or contract. Today’s customers are demanding, potentially unprepared or misinformed, sometimes short-sighted and always concerned about getting the most they can from the investment they’re making. Give your people new strategies, skills and tools to discover customer hot buttons, proactively solve problems, resolve people conflict, build lasting relationships, ask good questions and follow through on commitments. In a soft economy, customers will have more choices of which good contractor to use. Growing the customer satisfaction skills of your people will ensure more customers continue to build with you regardless of market changes. Re-examine customer contact points. Whose job is it anyway? Keeping in touch with customers and building lasting relationships is the responsibility of more than just your business development staff. Meet with estimating, project management and field leaders to revisit their roles in delighting customers, maintaining relationships and exploring additional work opportunities. It is too easy for these managers to let this responsibility fall onto your business development staff, when the reality is that these managers have more contact with existing customers on projects than your business development people. Make sure that they know how critical their role is. Create incentive and feedback systems to reward those team members that help you keep and win additional work with existing customers. Recharge your business development people. Whether full-time or part-time, all business development personnel represent a critical link in your get-work chain. Giving them new skills, tools and selling messages makes their 2008 issue 3 FMI QUARTERLY ■ 15

jobs easier, increases the number of qualified leads to chase and helps you close work. Analyze your collateral, point-of-sale and leave-behind tools. Could they use a face-lift? Do the project pictures represent your best and most current projects? Do they include your current value propositions? Don’t discount skills development as a way to recharge your staff. If you want them to call Proposals are selling on executive-level customers, give tools. They either get them the skills they need to relate to and interface with senior executives. you a spot in the One of the hottest training topics for business development people is interview schedule or business skills. Being able to understand a customer’s economic get you passed over. model, implications of changing markets, economic forecasts, changing customer preferences, etc., gives business developers the tools they need to have meaningful conversations with senior executives and build value for your company. Increase the selling effectiveness of proposals. Proposals are selling tools. They either get you a spot in the interview schedule or get you passed over. Read two of your recent proposals — cover to cover:

• What would you think if you were the client? • Is the proposal uniquely crafted to that client? • Is your offering unique, attention-grabbing and compelling? • Does the proposal clearly show why your company is the best choice?

If you can’t utter an emphatic “yes” to each of these questions, get working on your proposals!

Define customer contact expectations. Setting goals helps us achieve what we have set out to accomplish. The same can be said for creating specific targets regarding the frequency of meetings with existing, past and new customers. Create criteria to objectively evaluate which contacts warrant weekly, bi-weekly, month, quarterly, semi-annually and annual contact. Include a list for those contacts which only need contact via marketing communications. Develop a rating system to show which contacts represent the greatest opportunity for your company, and build the contact schedule. Measure staff members on how well they maintain the contacts, what opportunities are generated and how many projects are booked into backlog. Measure progress toward your goals. Give staff members feedback on what they are doing that works and where opportunities exist for improvement. Set realistic goals with a hint of “reach” in them, and you will keep your team focused. Build robust go/no-go criteria. Not every opportunity is a good one. There are more opportunities in your market than you can afford to chase, 16 ■ departments

even when markets are soft. Quantify what it costs you to chase a typical opportunity. This is where the vast majority of your marketing dollars are being spent — chasing opportunities. Focus your efforts on opportunities that you have a good chance of winning, have the potential for repeat work and fit your sweet spot. Build a robust go/no-go process. Do not waste time chasing customers who only use you as an estimating service Presentations are to keep their favorite contractor honest. Use your resources wisely. more than just another Create a go/no-go that helps you step in the process; they identify which opportunities and customer groups in which to invest are your best chance your time and resources. Put more pizzazz into your to sell who you are and presentations. Presentations are why your team is the more than beauty contests. Clients use them to determine who really right one for the project. understands their needs and who is right for the job. Presentation skills are critical for getting selected. Invest the time to prepare for a presentation. Conduct a few dry-run presentations and get feedback on what is working and not working. Create a unique approach that will get you out in front of the competition. Tell the client that you are the right team for the job and that you are excited for the opportunity to work with their organization. Presentations are more than just another step in the process; they are your best chance to sell who you are and why your team is the right one for the project. Create capture strategies to win key customers and opportunities. Capture plans are strategic business development plans targeted to win a specific customer or project opportunity. Think of it like a mini strategic plan on a specific opportunity. The capture plan is your road map to displace competition, build a new relationship and cement customer loyalty. Take the time to carefully identify and plan for winning the right key opportunities in your marketplace.

STORM CLOUDS Seeing storm clouds on the horizon does not always guarantee that a storm is coming. It simply means that conditions are right for a storm to form and blow into our neighborhood. The storm may be short, long or fail to materialize. While we cannot be 100% certain about what to expect, preparing your company for a potential storm will ensure that any potential damage is mitigated before it occurs. Use the list above to reinvigorate your “get-work” efforts. Get close to your best customers. Start spending more time with them now, before any significant change occurs in the marketplace. Help your people develop the skills they need to delight customers, build loyalty and keep them coming back for more. 2008 issue 3 FMI QUARTERLY ■ 17

The best bet is to get ready for a potential storm before it hits. That way, if the storm does come your way, you will be able to ride it out in warmth and safety — with a solid backlog and strong customer relationships. The time to get ready is now. ■

Cynthia Paul is a managing director with FMI Corporation. She may be reached at 303.398.7206 or via e-mail at [email protected]

MARKET INFORMATION Globalizing Green, Verde, Vert, Vihreä, Grün, Grön, Groen

Like the variances in language, the looks and sounds of what “green” means globally are just as diverse. Although green is a key topic around most of the world, each country has its own ideas of how best to make the transformation. Together, green construction and green buildings are one topic that is generating ample discussion. Buildings capture much of the worldwide attention on the subject since they expend 40% of the world’s energy and create at least one-third of the greenhouse gases. People around the world recognize that green buildings are the best target for reducing energy consumption and pollution. Now countries are trying to indentify the best way to make this happen.

TRENDS SHIFT FOCUS TO Like the variances in SUSTAINABLE DESIGN language, the looks and According to the United Nations Population Fund’s State of sounds of what “green” the World Population Report 2007, by 2008, the world will have more means globally are just as than half its population living in urban areas. This will mark the first time diverse. Although green in history that this has happened. is a key topic around By 2030, the urban population is expected to increase to approxi- most of the world, each mately five billion people. Many developing countries are starting to country has its own ideas recognize that cities are a major cause of pollution and environmental of how best to make the degradation and are taking the transformation. opportunity to build environmentally sustainable buildings.1 Developing areas like Asia and Africa will double their urban population by 2030. With the population increase, countries are demanding more construction of building space. China is seeing 21 billion square feet of new space added every year. China is also the largest consumer of cement, 18 ■ departments

steel, brick and other building materials. The global demand of construction materials also lends itself to green building practices.2 Green building practices create a demand for local and recycled products. According to the California Integrated Waste Management Board, “Building and construction activities worldwide consume three billion tons of raw materials each year or 40% of total global use.3 Using green building materials and products promotes conservation of dwindling nonrenewable resources internationally. In addition, integrating green building materials into building projects can help reduce the environmental impacts associated with the extraction, transport, processing, fabrication, installation, reuse, recycling and disposal of these building industry source materials.”4 Former President Clinton agrees that buildings that are more efficient are a strategic way to improve the environment through the use of already available technologies. He established the Clinton Climate Initiative Energy Efficiency Building Retrofit Program, which will fund building renovations at no net cost. Initially, five global banks — Citigroup, UBS, Deutsche Bank, ABN AMRO and JP Morgan Chase — have each approved assembly of $1 billion for a total of $5 billion in loans, which will be made available to city government and building owners. The money borrowed will be paid back with interest from the reduced energy costs created by the retrofit. American Standard, owner of Honeywell, Johnson Controls, Siemens and Trane, has agreed to financially guarantee energy savings from the projects while increasing its capacity to help with large numbers of building retrofits. The first major cities who have volunteered their municipal buildings for energy retrofits include New York, London, Tokyo, Bangkok, Green building combines Johannesburg, Berlin, Chicago, Houston, Karachi, Melbourne, the best practices of Mexico City, Rome, Sao Paulo, Seoul and Toronto.5 traditional building These major cities are with environmentally working towards developing and constructing more energy-efficient, safe materials. sustainable green buildings because of major climate concerns across the globe. According to the Pew Global Attitudes Project, many countries in the world perceive climate change to be a very serious problem. Interestingly, many developing countries view global warming as a major concern (see Exhibit 1), and while cost concerns are usually prevalent, demand for green building is increasing. Key contributors to the major causes of the global climate change are the construction and past use of buildings. In response, a great deal of attention is now focused on how to reduce the footprint from construction and future development. Green building combines the best practices of traditional building with environmentally safe materials. 2008 issue 3 FMI QUARTERLY ■ 19

Exhibit 1 Pew Global Attitudes Project In your view, is climate change a very serious problem, somewhat serious, not too serious or not a problem? 2005 2000 Very Somewhat Not too Not a DK/ Serious Serious Serious Problem Refused Total North America United States 47 28 13 9 2 100 Canada 58 29 8 4 2 100 Latin America Argentina 69 21 2 1 7 100 Bolivia 68 24 4 1 3 100 Brazil 88 8 1 2 2 100 Chile 75 17 2 1 5 100 Mexico 57 24 10 2 7 100 Peru 66 20 4 1 9 100 Venezuela 78 17 1 2 1 100 West Europe Britain 45 37 10 5 3 100 France 68 27 4 1 0 100 Germany 60 26 8 4 2 100 Italy 57 35 2 1 6 100 Spain 70 25 2 0 3 100 Sweden 64 25 5 2 4 100 East Europe Bulgaria 66 19 5 1 8 100 Czech Republic 61 29 8 3 0 100 Poland 40 47 8 2 4 100 Russia 40 33 19 6 3 100 Slovakia 65 28 5 1 1 100 Ukraine 59 30 7 1 2 100 Middle East Turkey 70 18 3 1 8 100 Egypt 32 37 18 8 6 100 Jordan 32 32 25 8 3 100 Kuwait 69 19 6 6 1 100 Lebanon 41 42 15 2 1 100 Morocco 69 13 6 3 10 100 Palestinian territory 59 22 5 7 7 100 Israel 48 37 11 2 2 100 Asia Pakistan 41 21 5 3 30 100 Bangladesh 85 12 2 0 1 100 Indonesia 43 32 9 3 12 100 Malaysia 46 32 10 2 10 100 China 42 46 7 1 4 100 India 57 28 4 1 10 100 Japan 78 19 2 1 1 100 South Korea 75 22 2 0 0 100

Note: Due to rounding, percentages may not total 100%. The top-line “total” columns always show 100% however, because they are based on unrounded numbers 20 ■ departments

GOVERNMENT AND BUSINESS SUPPORT Many national cities have support from local and state governments to build more sustainable buildings. All U.S. General Services Administration buildings have to be Leadership in Energy and Environmental Design (LEED certified. Companies, individuals and even politicians, like California Gov. Arnold Schwarzenegger, Chicago Mayor Richard M. Daley and New York Mayor Michael Bloomberg, are recognizing green is not an eccentric, passing trend. In addition, there is a growing list of companies driving the market for green construction, including Seattle-based Starbucks; Austin, Texas-based Whole Foods; Minneapolis-based Target; Charlotte, N.C.-based Bank of America; and San Jose, Calif.-based Adobe Systems. High-profile companies, individuals and politicians will drive the definition of green and create strategies that will shape a greener, cleaner future. The construction of green buildings is growing at a rapid pace. According to Architecture Week, “There are over 40,000 projects in the United States and beyond that are accredited through the USGBC LEED rating system, totaling 3.2 billion square feet.” The president of the USGBC warns against becoming apathetic, “Only about one in every nine buildings is going green; we’ve got a lot more work to do.” As many companies are greening up their ways, many organizations are developing to help them. The most recognized organization doing this is the United States Green Building Council (USGBC). The USGBC is driving the green building movement. In 2007, more than 22,000 people attended the USGBC Greenbuild International Conference. The conference started in Austin, Texas, with 8,500 people attending.6 The growth and interest in green building has grown and will continue to do so. The World Green Building Council is a union of national building councils like the USGBC and is working to reduce the global construction footprint. This organization is trying to accelerate market transformation of the global property industry towards sustainability.7 Their participating countries include: Australia, Canada, Japan, the United States, the United Kingdom, India, Mexico and Argentina. Taiwan, Brazil, Germany and China are in the development process, while 31 other countries are interested in organizing councils. The main obstacle to building green remains the perception that it is too expensive to build this way. As with most cycles, the prices for green materials are decreasing as more suppliers are providing green materials and more people are demanding their use. However, in the developing worlds, there is an additional struggle for growing green building; beyond cost, the 2008 issue 3 FMI QUARTERLY ■ 21

notion exists that environmental leadership needs to come from Until there are national first-world countries. Until there are national and international green and international green standards set, green building may remain an option rather than a standards set, green standard in construction around the world. building may remain an Green building is becoming a option rather than a global trend that construction companies should not only be standard in construction aware of, but also actively pursue and work to educate both the around the world. owners and the public about its benefits. Although there has been major growth in building and developing green, it is still mostly encouraged by government incentives and some independent owners. Until there are standards in place, green building can be and is a differentiating competency for contractors around the globe. ■

For more information related to this article, please contact FMI Construction Economist Heather Jones at 919.785.9335 or via e-mail at [email protected].

1 UNFPA State of the World Population 2007: Unleashing the Potential of Urban Growth 2 Fogarty, David. Inaction on Greener Buildings Puzzle Experts, Reuters. December 7, 2007. 3 D.M. Roodman and N. Lenssen, A Building Revolution: How Ecology and Health Concerns are Transforming Construction, Worldwatch Paper 124, Worldwatch Institute, Washington, D.C., March 1995, p. 5. 4 California Integrated Waste Management Board, http://www.ciwmb.ca.gov/ 5 Nichols, M., Gardner, T. Clinton, Cities, Unveil $5 billion building energy plan. Reuters. May 16, 2007. 6 Libby, B., GreenBuild 2007 Conference. Architecture Week. December 14, 2007. 7 World Green Building Council Mission

GENERAL CONTRACTORS Integrity in Tough Times

Bill leaned against his pickup, “You know, Tom, I don’t believe in integrity in construction, especially in these tough times.” A slow grin stole across Tom’s face, “At least you’re honest about it!” Can we believe in integrity in construction, especially in hard times?

LEADERSHIP INTEGRITY It depends on leadership. If leaders have made promises based upon unwarranted market assumption, they may find themselves trapped by their own words. “The reason I promised no layoffs was my honest belief that the market would hold up.” But should leaders ever make promises based upon beliefs about future markets? Honest mistakes can still destroy trust. 22 ■ departments

The leadership opportunity in hard times, therefore, begins with killing off wishful thinking. This is the first step in protecting company integrity. Trust is the essential fabric of corporate culture.

PRICE/SCOPE INTEGRITY The second essential is price/scope integrity. Price can be the source of hope in tough times. “If we reduce our prices, maybe we can get enough work to hold ourselves together until the market recovers.” But how can we reduce price and maintain price/scope integrity? Let’s look at a typical hourly charge-out rate for a subcontractor:

Standard Hourly Rates Hard-Times Hourly Rates Material $35 $30 Labor $23 $20 Equipment $20 $20 Overhead $17 $15 Profit $5 $1

$100 $86

In our new price, we plan to install the same work as performed previously for $100. Has price/scope integrity been maintained? We have trimmed our cost, thus enabling a price reduction to attempt to get a desperately needed job. We submit our bid with the new prices. But our competitor bids the job at $74, well below our cost. Our competitor has violated price/scope integrity, but we are still without a job. Our price/scope integrity has been maintained because we reduced cost, not price. We will bid again with our lower cost. Our competitor must have deep pockets or it’s game over for them. To maintain price/scope integrity and protect our reputation, we must reduce cost in hard times. Our new lower price reflects our lower cost. The mistake is to act like a volume-sensitive industry (airlines, etc.). We cannot do this because construction is a variable-cost industry, not a fixed-cost industry. Price/scope integrity is essential to survival, especially in hard times. We can understand our variable- cost structure and price sensitivity To maintain price/scope by simply looking at the fact that variable costs are defined as those integrity and protect our costs that fluctuate with sales. No job awarded; no job cost. Job cost reputation, we must constitutes 80% to 90% of our cost. reduce cost in hard times. CYCLICALITY OF CONSTRUCTION Our new lower price The third reason for integrity in hard times is cyclicality. reflects our lower cost. Construction business cycles have thrown us into tough times/good times fluctuations for years. This 2008 issue 3 FMI QUARTERLY ■ 23

Exhibit 1 Contractor Pre-Tax Return on Sales Electrical Paving Commercial HVAC Heavy Construction Utilities

7 Rec Rec

6 ess ess

5 ion ion

4

3 Pe 2 Period

1 riod 0 1985 86 87 88 89 90 91 92 93 94 95 96 97 98 9900 01 02 03 04 05 06 2007

Source: Risk Management Associates, Philadelphia, PA, Annual Statement Studies, 1985–2007 can be seen in Exhibit 1, which shows Contractor Pre-Tax Return on Sales from 1985 through 2007. Notice that recovery is always just a few years away. How we treat customers and suppliers in tough times can be remembered easily. In the Integrity Chain, the argument is made that the key to long-term profitability is treating customers and suppliers with such trustworthy behavior that a high percentage of repeat business can be maintained. Can we imagine profitability without repeat business? Most contractors report that 60% to 80% of their business is from repeat customers or in recurring market segments because of their good reputation. This philosophy obviously applies to negotiated work, but it also applies to bid environments since the integrity of our construction processes, i.e., job costing, planning, etc., positions us to be low-cost providers.

GOOSE INTEGRITY The fourth reason for integrity in hard times is protection of the golden goose. Refusal to reduce cost when the market sags jeopardizes the company itself. Our fiduciary responsibility requires priority of goose protection. It is better to save some jobs than lose all jobs by killing the goose. Brutal honesty outranks sentiment. Not incidentally, laid-off employees often complain more about the way it was done than the fact that it was done. This can reflect promises that should not have been made or just sloppy management. Honesty with employees is just as important as honesty with customers and suppliers. You cannot say opportunistically, “I’m sure our layoff will be temporary,” since you cannot know the duration of hard times with certainty. Our $86 price-reduction example protects as many jobs as possible through cost reduction. Still, we cannot prevent competition panic that is expressed in selling below cost. In a price-sensitive industry, this may hurt our business while the competition’s panic cuts its throat. We must be prepared to face the hard facts. We have enough work for X number of people. Or we don’t. We may think we are a $100 million company when, in reality, we are a $40 million company. And this can happen almost overnight in construction. 24 ■ departments

You can say, “I will do everything in my power to sail through the downturn.” The integrity of this statement can be supported by my cash management strategy. If you have created cash reserves because you know the up and down of the construction business, then you have empowered the goose to survive and your commitment rings true.

SELF-PERCEPTION One final reason for integrity in tough times is self-perception. Are you a trustworthy person? Can you be counted on when the chips are down? Are you really fighting to save as many jobs as possible while protecting the goose? Are you going to look back at yourself after the downturn and be able to say “good job”? What we do during tough times tells us who we are. Our actions also tell others who we are. ■

Ralph E. James, Ph.D. is a director with FMI Corporation. He may be reached at 919.785.9227 or via e-mail at [email protected]. To order a copy of the book, Integrity Chain by Ralph James, contact FMI at 919.787.8400.

LEADERSHIP Maximize Your Leadership Potential

If you “Google” leadership, you will receive more than 124 million hits. Search Amazon.com and you’ll find more than 250,000 book titles in English on the subject. MBA programs talk about it. Fellowships exist to harness it. And citizens around the globe are tuned in to the news and other sources to try to determine who is best suited to lead this country for the next four years. So why is leadership such a hot topic? In today’s volatile economic and political marketplace, leaders are the ones who will determine how It is no longer possible our scarce resources are allocated for leaders to have and set the course for our futures, both at the national level and within all of the information our organizations. In today’s society of uncertainty, required to make the ambiguity, globalization, information overload and rapidly changing social, right decisions. political and economic environments, the job of a leader is becoming more and more complex. It is no longer possible for leaders to have all of the information required to make the right decisions. Instead, leaders have to be able to adapt quickly to change, know when to hold fast and when to change course, and most important, command the respect and dedication of their followership — those who will execute the leader’s plan. Through extensive research involving current leadership theories, interviews with current and former leaders, and analysis of existing models 2008 issue 3 FMI QUARTERLY ■ 25

of individual and organizational leadership, FMI has developed a formal, comprehensive leadership model. In its simplest form, the model categorizes the many behaviors and skills required for leaders to perform at their peak of personal effectiveness into eight areas. To perform at their peak, leaders must effectively set direction, align resources, motivate and inspire, Exhibit 1 hibit 1 think strategically, focus on others, eakPeak Leaders Leaders develop talent, execute and follow through, and lead within (lead them- lop Se ve t De t Dir len ecti selves effectively). (See Exhibit 1.) Ta on

S Our clients often ask us which T t r h a i d n t n a i e k g of these leadership behaviors is e h t i L i c

a W l

l

y “most important.” After all, most World

F E View leaders are better in some areas o P x l l e e s s o c e w r e u n c s r than in others and are far too busy t o d g T e u li u h n a it A o r a t s o n l t e u d V to attempt to grow in all eight areas a A R g lues and h

F e simultaneously. So we set out to oc vat on us Moti ire Ot nsp hers and I answer that question by reviewing assessment data collected through a variety of leadership programs our clients have attended. We reviewed personality profiles, ability batteries and 360˚ feedback instruments. (360˚ assessments collect feedback on leaders from their managers, peers, direct reports, customers and others whom they ask to rate their effectiveness as a leader). Based on this group of more than 2,000 leaders in the construction industry, the most important predictors of a leader’s overall effectiveness are the leader’s skill in focusing on others and ability to lead within, as assessed by those who work most closely with him or her. Initial analyses (conducted in 2004) indicated that more than 69% of the variability in a leader’s performance is directly related to his or her effectiveness at Leading Within and Focusing on Others. This was a surprising result, suggesting that only 31% of the remaining variance could be attributed to age, gender, experience, tenure, personality, natural abilities and all other leadership skills combined! Results from a new study of more than 20,000 360˚ assessments of construction industry leaders are even more compelling. Recent analyses suggest that behaviors associated with Lead Within and Focus on Others account for more than three- quarters, or 77%, of the variability Exhibit 2 in overall leadership performance. Overall Leadership Performance (See Exhibit 2.) 100% = >20,000 respondents

This research suggests that if you Other factors want to fundamentally enhance your 23% effectiveness as a leader, you should focus your leader development 77% efforts on how effectively you are Lead Within and Focus On Others leading within and focusing on others. These two elements, more than any 26 ■ departments

other leadership behaviors, are foundational to creating trust, respect and a following of those around you — the predecessors to a motivated execution of the strategies you are leading your charges toward. FMI’s research shows that in order to reach your maximum potential as a leader, your leader development time and effort should be focused on mastering the following seven areas, components of leading within and focusing on others:

Personal mission — Does your company have a mission statement? Do you have a personal mission? Where are you headed in your life? What do you stand for? What are your convictions? Clarity around personal mission leads to clarity in your actions and an increased feeling of trust from your followers. Personal character — Leadership character is defined by honesty, integrity, authenticity, tenacity and accountability. How open and honest are you with the people around you? Do you fulfill your commitments every time, no matter how difficult? Do you stand behind what you say? Do you truly open yourself up to others, admitting to both successes and failures? Do you stay in the fight when the going gets tough? Do you take personal responsibility for making things better? Are there areas of your leadership where you could be more open, honest, loyal or trustworthy? This is a cornerstone of effective leadership at all levels. The best leaders Self-awareness — The best have heightened self- leaders have heightened self- awareness. They know their awareness. They know strengths and weaknesses. They are aware of how they are viewed by their strengths and others through consistent collection of feedback. Often leaders lack weaknesses. They are good mechanisms for collecting aware of how they are feedback from others and may be functioning with blind spots in their viewed by others through performance. When is the last time someone gave you really difficult consistent collection feedback about your performance? If it’s been a while, it might be time of feedback. to seek some out. Personal disciplines — People respect leaders who role model effective personal and professional habits, who take care of themselves, who have disciplines and structures to support them. What are your personal habits? How is your health? Do you maintain your mental, physical, emotional, financial and spiritual health on a regular basis? Do you have the physical, mental and emotional energy to effectively manage your daily tasks and support others? Emotional intelligence — Beyond cognitive intelligence, leaders who are able to recognize and harness the power of their own and others’ emotions find them to be a powerful source of connection, energy, information and 2008 issue 3 FMI QUARTERLY ■ 27

influence, all of which are critical to success in today’s volatile markets. Could you be more effective in your emotional responses to the people who work around you? Humility — Great leaders get their ego out of the way! People often misunderstand this term. Humility is not thinking less of yourself, but thinking of yourself less. Leadership is about doing what is in the best interest of the organization, the shareholders, the employees, the customers and Agapao is doing others — without focus on potential personal payoffs or costs. what’s in the best interest Agapao — If you are looking for the single-greatest influencer of of others, with or leadership effectiveness as seen by without their knowledge, those who work with the leader, this is it. Agapao is doing what’s in the consistently over time, best interest of others, with or with- out their knowledge, consistently unconditionally. over time, unconditionally. How much of your behavior is really focused on the best interest of others versus what is the easiest? Sometimes keeping a bad employee is easier than letting him or her go, even though letting the employee go is in everyone’s best interest. Is your goodwill conditional? What if employees let you down? Do you still do what is in their best interest? Or do they somehow have to earn this? Leaders who are able to consistently do what is in the best interest of others earn loyalty, trust and respect, which pays large and lasting dividends to the leader and the organization.

It is no doubt easy (and maybe even “normal”) to boil leadership down to the ability to set strategy, make tough decisions and execute on goals. Without question, these are some of the skills of highly developed leaders. Our data, however, suggest that intentionally working to become more skillful at leading within and focusing on others gives you greater long-term results as a leader. It is very possible that delving into these areas — Lead Within and Focus on Others — will require help from others. Seek out role models who do these well. Ask for feedback on your own leadership performance in leading within and focusing on others from those more accomplished in these areas and, even if you are feeling brave, from those around you. Consider finding a coach, someone who can work alongside you to help you develop these skills and behaviors. Diving into conversation about such topics as self-awareness, personal disciplines, humility and the like may very well be unfamiliar and uncomfortable territory for you. If it is, you are not alone; this is difficult work for nearly all leaders who are willing to explore these areas. Perhaps that is why we so rarely encounter truly great leadership in life; few people are willing do the challenging, long-term development work needed to better lead within and focus on others. Those who do give themselves the opportunity to reach their peak potential as 28 ■ departments

leaders. Not only will they be glad that they did, but so will those A leader’s worldview is whom they lead. At the center of our Peak Leader the set of assumptions model is the term “Worldview.” A leader’s worldview is the set of he or she holds, assumptions he or she holds, consciously and unconsciously, about consciously and how the world operates and how unconsciously, about he or she operates in the world. Fundamentally, a leader’s worldview how the world operates influences his or her values and beliefs as well as how he or she and how he or she behaves. To truly develop personal operates in the world. character, for example, a leader must believe that it is right to be open, honest and truthful. Leaders who believe that people should be manipulated by withholding information, telling lies and working around the system will only be seen as manipulative and phony if they attempt to engage in work to be seen as a person with deeper character without first addressing the fundamental beliefs that underlie these behaviors. Therefore, it is also important to ask yourself what it is that is at the core of your current behaviors. Is it a lack of skill or experience, or is there a belief about people, yourself or the world that is preventing you from reaching your peak potential as a leader? Why does this matter? While a leader can have the greatest strategy, the most innovative ideas, the best network of connections, all the knowl- edge and insight in the world, and even the best plan to make it all a reality, if the leader cannot get others to execute the ideas, it is somewhat irrelevant. Once heard: A leader is only a leader if someone is walking behind him. Otherwise, he is just a man out for a stroll. ■

Vanessa Winzenburg is a senior consultant in FMI’s Tampa office. She may be reached at 303.809.0299 or via e-mail at [email protected].

PLANNING Plans That Get Action

Action plans are the initial work product of many planning sessions, strategy explanations, committee meetings and informal discussions. Action plans serve to instruct, to remind, to help create accountability, to establish completion schedules and to track what works and what doesn’t. Good action plans maintain focus and help increase organizational efficiency. Plans don’t make changes; actions do. Writing action plans is a bit of both art and science. Thought fragments 2008 issue 3 FMI QUARTERLY ■ 29

and abstract notes may serve to remind authors as to what they were thinking about at an earlier point in time. However, future readers require more complete communication than hints at what authors intended. Even authors’ memories become rusty over time, and it is easy to look back at fragmentary action plans and ask, “What the heck did we mean by this?” A very simple action plan format has three parts: a task to be performed, an individual who is responsible for ensuring that the action is taken and a specific completion date when the task will be concluded. You can expand upon this brief structure by including elements such as a further description or commentary regarding the intended work product, resources required, budgetary impact and such. Here are some keys to writing better action plans.

Use action words (verbs) to begin each action item. “Build, create, deliver, train, assemble, document, assign” are examples of the sort of action words that should begin every task in effective action plans. Define a work product intended by the action. Examples of work products include such output as a training curriculum, a new or improved process, a specific number of new contacts to be made by business development, a documented procedure, the intended changed condition, addition of specific resources or the achievement of a measurable outcome (such as improving a hit rate to 30% or greater). Select a completion date. If you find it difficult to assign a completion date, you may have written an operating procedure or a behavioral instruction rather than an action item. “Continuously evaluate performance of direct reports,” is not a task for an action plan. While it may be a good idea, that instruction comes closer to being an operating procedure than a task with a specific work product. “Complete the first- quarter evaluation of all direct reports,” comes closer to the definition of an action item. “Develop an improved employee evaluation process that links performance measurement factors to our corporate strategies,” is a much better action item. When the process has been developed (or installed or the first iteration is completed), then the work product for the action item has been delivered and the action can be marked, “Completed.” Select a reasonable completion date. Many action plans are flawed by cramming most of the scheduled completion dates into the next 90 days from the date of authorship. It is almost irresistible to action-biased people to set short deadlines as soon as a fix is identified. That way almost ensures frustration. It has taken months or even years to arrive at the current condition. We don’t have to fix everything right away. Most people have day-jobs to 30 ■ departments

perform, not just the completion of new action tasks. By putting plenty of float or slack time into the schedule of task completions, you will establish more reasonable deadlines. If you are building action plans to implement new strategies, try to spread the action items over a full nine- to 12-month period so that both normal work and completion of action plan tasks can be accomplished. If the action plans result from crisis-driven planning efforts, then shorter completion times will be necessary. Assign a single individual as the party responsible for ensuring the achievement of the action item. While most action items may take a task force, a committee or even an organizational element to perform the work, accountability is initiated by assigning a single individual the responsibility for ensuring that performance and reporting on the progress of the action item. If necessary to memorialize the participation of other individuals, do it in a resources, comment or description element that will be the fourth ingredient of your action plan. The essential three, of course, are the task, the individual responsible for its completion and the intended completion date. By making a single individual responsible, you improve communication, enhance accountability and enable a sense of ownership over the task. Maintain the language. While you could call tasks of an action plan “tactics” or “action items” and no harm would occur, calling those same tasks “strategies” mucks up the communications rather seriously. Hold the label “strategy” for the high-level, costly and relatively few methods by which you intend to accomplish your goals. The things that can be done by a Highly detailed action precise point in time are the things to call action items, tasks or tactics. plans should be Keep the language consistent. This unnecessary for most helps to build a culture of clear thinking and organized planning. applications. Resist the Avoid the “wordiness” trap. When the action item is “Organize temptation to provide a a committee to develop the training curriculum,” why not say, “Develop detailed, step-by-step the training curriculum”? The fact recipe for the action plan. that you intend to use a committee to accomplish that development can be noted in the comments or description element of your action plan. Be suspicious of any action item or task that cannot be defined in a single line of type. If the action wraps over two lines, there is a simpler way of stating the task. Keep the action plans lean. Highly detailed action plans should be unnecessary for most applications. Resist the temptation to provide a detailed, step-by-step recipe for the action plan. Such recipes lead to a “Betty Crocker” approach to action planning that is tedious to read and burdensome to communicate. Rather than setting up 12 steps to creating a marketing plan just say, “Produce and deliver a marketing plan for the Utility Division.” You 2008 issue 3 FMI QUARTERLY ■ 31

would likely assign that task to someone who had some knowledge and skill in the marketing arena. That person and his or her team can work out the details. If there is a particular feature that you want included, list that in the comments or description section. Don’t add unnecessary detail to the action task itself. Report with witnesses. You could maintain progress reporting through periodic written reports from the individuals responsible. That would be a mistake. Accountability, ownership and peer pressure that improves performance occurs when responsible individuals are asked to stand and deliver progress reports to a group of people. The more frequently such reports are delivered, the greater the likelihood of performance of Job planning is the most plans. Such sessions should be aimed at reporting achievements, critical control tool in the identifying obstacles to performance and seeking solutions and assistance. construction toolbox. Reporting sessions are not intended to create a public embarrassment, although fear of being embarrassed does drive some people’s behavior. For long-term plans, no less frequent than monthly sessions should be held. For more urgent plans, weekly or even shorter intervals may be appropriate. Celebrate successes. Make a big deal about achievements. Make sure that the organization at large is aware of these achievements. Be sure to identify events as results from action plans, operational plans and strategic plans. Tying events to plans helps reassure the organization that plans matter, that plans do produce results and that the organization is on course with its intended directions. Make sure that failures are confronted, but keep those confrontations on a private, nonemotional level. Work toward modifications and solutions rather than humiliations. High performance, on the other hand, demands publicity. ■

Jerry Jackson is the senior editor and publisher of FMI Quarterly. He may be reached at 919.785.9222 or via e-mail at [email protected].

PLANNING Twelve Reasons (Excuses) For Poor Job Planning

Job planning is the most critical control tool in the construction toolbox. Job selection also ranks high as a success/failure determinant, but this article focuses on cost control after job selection. Whether we plan is within our control even if it adds more time to production upfront. Planning enables improved communication of expectations, optimal use of resources, less waste in waiting for other actions and overall reduction of projection completion time through proper attention to critical-path activities. As 32 ■ departments

Gen. Eisenhower famously said, “It’s not the plan, but the planning.” Planning is not an event; it’s a process. It continues throughout the job. The need for good planning is seldom finished until the work is finished. Our best-laid plans to plan often don’t work. We have “reasons” for not doing an excellent plan — and these reasons (read: excuses) are a major cause of the failure to plan.

1. “Why plan? They will change it anyway.” “They” may be other contractors, owners, inspectors and even designers. And of course they do change our plans. But when we think of planning as an ongoing process, their changes become part of the dynamic our planning seeks to corral. Sometimes planning is like herding cats. We can never expect perfect execution of the original plan. Remembering this helps us adjust our attitude toward changing conditions. Indeed, if things did not Sometimes planning change, we would need less planning! is like herding cats. But since change is part of our reality, we must saddle it with our We can never expect planning process. Planning becomes an opportunity to control the perfect execution of impacts of change.

the original plan. 2. “Planning is just more paperwork.” Dislike of paperwork runs deep in the hearts of most foremen, super- intendents and even some project managers. They like being outside, not inside filling out reports. This attitude splashes over on the planning process since, to be a plan, it must be written. One solution is to structure the paperwork side of planning to make it easier and more systematic. Use standard forms. Set regular planning time. Schedule planners. Establish planning goals. Structure also helps prevent missing important details, especially when checklists are used. When all else fails, provide valuable field leaders with office assistance for planning.

3. “Circumstances will change.” Recalling that planning is a process, we can address this attitude problem by making the process work. If Superintendent Larry Jones attends the internal pre-job meeting, he will be much better prepared for the preconstruction meeting with the customer. Larry literally sees the planning process as a process for dealing with changing circumstances when the customer asks for modifications with which he must cope. After the job starts, the updating of Larry’s three-week, look-ahead schedule further demonstrates how the planning process defeats the “circumstances will change” objection.

4. “How do they expect me to plan when most of my team is still on other jobs?” This logistical obstacle will challenge management’s commitment to planning, but a contractor truly devoted to planning will find ways to get the 2008 issue 3 FMI QUARTERLY ■ 33

planning team together. One method is to ask a needed field leader to delegate responsibilities to a lead team member. Another method is to call the planning meeting on a forecast bad-weather day. Logistics can be solved if commitment is real.

5. “How can I do my plan on such short notice?” Cursing short notice accomplishes little. Construction is the kind of business in which a customer may demand something happen on the job tomorrow morning — and call at 4 p.m. today. A post-supper or pre-breakfast planning meeting may be the only way to solve the short notice problem. This, of course, assumes the customer was stubborn about changing the demand. Sometimes the argument that work cannot start tomorrow morning because “it must be planned to ensure safety and quality” must prevail.

6. “How can I plan with so little information about the job?” Construction is a creative business. Creative planning ideas can be based on probable needs, which are typical. For example, if we know where the job is, we can start planning general conditions. We can organize our planning team. We can develop options on early, on-time and late starts, etc.

7. “Their drawing doesn’t look correct to me.” Experienced contractors have learned to check all drawings. Finding errors and omissions is part of the due diligence of construction. Error and omissions detection is part of the construction planning process, not the defeat of the process. Early detection can be facilitated by the use of checklists, but nothing beats “experienced eyes,” even though 3D CAD and BIM are making strides in that direction. Drawing errors and omissions increase the need for detailed planning.

8. “They want us to plan without a contract?” The handling of this obstacle depends on your company’s contract policy. Some contractors’ policy allows the job to start before the signed contract is received. Others have a “no-contract, no-work” policy. Notices to proceed are often used in the first case and may be evaluated in terms of the nature of the relationship between contractor and customer. But even in the “no-contract, no-work” case, we can plan to plan in anticipation. Indeed, the weakest part of many planning processes is not planning to plan. 34 ■ departments

9. “How can I plan with so little job-site access?” Access often becomes a problem in modern construction. Traffic congestion can spoil construction access, but it intensifies the need for job- site planning. In one materials handling experiment on a high-rise project, off-site storage/staging with timed deliveries, relative to traffic patterns, resulted in considerable savings. Good planning attacks stale access assumptions. “Our trucks can deliver everything we need on time.” In most cases, access difficulties block planning only when we fail to use imagination.

10. “If I make a schedule, somebody will club me with it.” This fear has been justified on many blame-infected jobs. Although scheduling is only part of the planning process, it has been used as a club too often by owners and managers. Scheduling is a vital part of the planning process. Like planning, scheduling is a process, not an event. Viewed from a process perspective, with regular updates, it becomes a vital tool, not a club. But owners and managers must remain vigilant in keeping clubbing out, so scheduling and planning proceed without fear.

11. “I like action; planning feels like inaction.” In one case, a contractor expected each foreman to update a weekly plan at the end of the day based on the day’s accomplishments. One foreman repeatedly had incomplete updates. When asked, he said the only place to work on it was in his truck. But when he sat down in his truck, crew members razzed him. In their view, he was not working. The crew members identified work with physical activity. To them, planning looked like inaction. But the foreman himself may have felt planning to be inactive/non-work. Recognizing when others identify planning as inactive or non-work may be the first step in attacking this psychology. Scheduling is a vital 12. “The only thing my boss cares about is production, not planning.” part of the planning Managers can address this perception by asking the right process. Like planning, questions. If the only question is scheduling is a process, “How many tons?” or its equivalent, team members naturally assume not an event. this to be management’s only care. Corrective action therefore 2008 issue 3 FMI QUARTERLY ■ 35

becomes safety compliance today or “rework tomorrow.” Adding safety and quality questions to productivity questions steers perceptions toward more comprehensive behavior that can include good planning. “Did you complete your weekly plan?” might improve results better than single-topic questions, especially those that limit feelings of comprehensive responsibility. We must be careful what we ask for … it might be exactly what we get!

Excuses are not acceptable reasons, even if they are frequently used. Better understanding of these 12 excuses will lead to better plans. Discovery of the underlying reasons can also result in planning improvement. ■

Ralph E. James, Ph.D. is a director with FMI Corporation. He may be reached at 919.785.9227 or via e-mail at [email protected]. Quarterly Interview Credit, Risk, Insurance and Surety

An Interview with Zurich’s Terry Gray and Bill Cheatham

“The construction industry is one that continues to evolve and innovate. Zurich is well-positioned to continue to innovate, evolve and provide meaningful support for this industry going forward.”

— Terry Gray 2008 issue 1 FMI QUARTERLY ■ 37

FMI Quarterly sponsor, Zurich NA Construction, provides risk management services to builders, general contractors, subcontractors, constructions managers, design/ build firms, owners and sponsors of pubic and private construction

projects. Through its daily contact Gray Terry with these construction industry players, Zurich is well-positioned to comment on how the current construction environment and the credit market crunch are impacting the insurance and surety markets. Recently, Tim Sznewajs, a senior associate with FMI’s Investment Banking group and FMI Quarterly’s Bill Cheatham Insurance and Surety departmental editor, spoke with Terry Gray and Bill Cheatham of Zurich about their perspectives on these market shifts and their impact on Zurich.

Here, Terry Gray comments specifically on the impact on the insurance industry and related current and future trends. Gray recently assumed responsibility for a new position within Zurich as the global head of construction, General Insurance for Zurich. In this role, Terry is leading the company’s global growth efforts in the construction sector. As president of Zurich’s Surety Group, Bill Cheatham provides insights on the related impact on the surety industry.

FMI Quarterly: Terry, you are in a new role with Zurich. Will you tell our readers about your current work?

Gray: To clarify, I was previously responsible for the construction business within Zurich North American Commercial, which is essentially the United States and Canada. I’ve been in the construction business here in North America for about 13 years and finished up the last five years as the president of that business unit.

At the beginning of this year, I transitioned to a new position that Zurich created as part of an overall initiative to become more customer-focused on a global basis. At the end of 2007, we announced that we were developing “industry practice groups” and creating industry practice leadership for the organization on a global basis. As a part of this customer-centric practice group strategy, we decided to start by focusing on three global industries: 38 ■ quarterly interview: zurich’s terry gray and bill cheatham

automotive, real estate owners and construction. I was named global head of the construction industry practice for Zurich and started working in this new role at the beginning of the year.

What does that mean? Zurich is keen on growing its global construction business. We are a leader here in the U.S./North American market, and we have been for several years, both from a size and leadership perspective. Quite simply, we want to have that same position on a global basis. Equally important, we want to be recognized as the thought leader around risk management and insurance issues for the global construction industry. My work involves strategy, resource management and other items needed to help us achieve these objectives.

FMI Quarterly: Are you focused on specific geographies, and where do you see the biggest growth opportunity?

Gray: We are still in the process of identifying those areas through research, but it is truly a global job. Initially, I am focusing on the Middle East, since there is a tremendous amount of construction activity in that region being driven by the high price per barrel of oil. In general, the Middle East has been doing a great deal of construction over the past few years. That trend will continue for the near term due to the oil industry as well as projects to improve the quality of life. Construction will create infrastructure to support homes, tourism and other quality-of-life items for the population. So, the Middle East is clearly an area that we are focusing on.

Asia Pacific is also an area with tremendous construction activity and growth. An enormous percentage of the world’s population resides in India, China and the other countries in that region. That population is going to be modernizing, and we believe there will be continued dramatic Zurich is keen on investment in infrastructure, housing and all of the things that growing its global support a transition to a modern construction business. world economy. —TERRY GRAY Another region of the world in which we see an increasing opportunity is Latin America. There are changes in the insurance and reinsurance regulations going on in Brazil that will make the country’s marketplace more appealing and available to insurers. Another area is Eastern Europe. It continues to modernize, and there is ongoing investment in infrastructure and facilities, which will present opportunities to us.

While certain areas will present more opportunities for us in the next one 2008 issue 1 FMI QUARTERLY ■ 39

to three years, such as China and the Middle East, we will be looking to improve our position in all geographic areas.

FMI Quarterly: What impact does the current credit crisis and overall financial turmoil have on Zurich’s construction insurance business?

Gray: Overall, today’s market environment is challenging. The current credit crisis highlights the importance of fundamental risk-management practices as well as how interconnected today’s global economy really is. Financial innovation and the emergence of large, complex financial institutions have made our world much riskier. To be successful in such an environment requires a strong balance sheet, a The credit crisis and, diverse risk portfolio and the ability to execute on a clear strategy, coupled in even broader terms, with a deep commitment to financial the slowing down of discipline and risk management. Zurich has a disciplined strategy in the economy, which is place that aims for profitability no matter what the financial markets arguably directly or competition present us with. Five straight years of increased connected to this credit profitability demonstrate the success issue, have had a very of that strategy. conspicuous impact on The credit crisis and, in even broader terms, the slowing down residential construction. of the economy, which is arguably —TERRY GRAY directly connected to this credit issue, have had a very conspicuous impact on residential construction. As one of the largest insurers of single family residential construction in the United States, we provide coverage to a lot of the larger regional and national homebuilders. They have seen dramatic drops in their business. Their revenues are down, which is driven by the number of homes that they are constructing and selling. We’ve seen some of our customers shrink by as much as 50% from where they were in 2006. They are just unable to sell the number of new homes that they had planned. So our 2007 revenues from those customers have shrunk as well.

The outlook for U.S residential construction in 2008 continues to be slow, with volumes and sales expected to stay at 2007 levels. As we move towards the end of 2008, we should begin to see a recovery in the new homes sales environment. We hope this will continue to improve as we get into 2009. This is what we are hearing from our customers. They are not optimistic about seeing a recovery in 2008, and I don’t think any of them expect the recovery to be as fast as the descent was in 2007. 40 ■ quarterly interview: zurich’s terry gray and bill cheatham

So what does that mean? That section of the construction The construction economy is hurting, and it has a direct impact on the homebuilders industry has benefited and subcontractors who work in that industry. They are feeling the pinch from a significant growth as well. Some of the subdivision work has been postponed or canceled, cycle and strong and so the general contractors who construction economy. would have been working on those subdivision infrastructure projects I think we will see that are not getting that business opportunity. It has had an immediate continue through the rest impact on those working in and of 2008 and probably around the residential market. That’s the bad news. For us, that’s a into early 2009. significant, but not an enormous, part of our overall operation. —TERRY GRAY We have a proprietary product in the market — our Home Builder’s Protective product — and we remain excited about that market. We think we have a great insurance proposition for that marketplace. We believe most of our customers are repositioning themselves and will weather the storm and come out the other side as healthy contractors, prepared to go forward. This will be good for Zurich, as we expect our relationships with these customers will be stronger. We will grow with them as they continue to build more homes in 2009 and beyond.

The impact on the macro-construction environment has not been that dramatic yet. In talking with our customers in commercial construction and government-infrastructure construction and looking at their renewal volumes and projections for the rest of 2008 and into early 2009, they still have very robust backlogs. In general, these customers are happy with the level and quality of work in those backlogs, and they continue to be optimistic about the immediate future. That’s terrific, and it’s been that way for the last two or three years. The construction industry has benefited from a significant growth cycle and strong construction economy. I think we will see that continue through the rest of 2008 and probably into early 2009. We expect a little bit of a slowdown as a result of the residential marketplace and the credit crisis, but not a dramatic slowdown in the short term.

The question is how the rest of 2009 and beyond will look? Construction tends to lag the general economy by 12 to 24 months. So if we are truly in a general economic slowdown right now with any real depth to it, the impact won’t be realized fully in the construction economy until sometime later. I think there are a lot of yellow flags starting to pop up with some of the construction executives who are beginning to wonder how things will look 2008 issue 1 FMI QUARTERLY ■ 41

later in 2009 and 2010. I feel good knowing our customers are thinking through these issues, developing what-if scenarios and making contingency plans.

FMI Quarterly: What trends are you seeing in the construction marketplace?

Gray: A good source of trends is a contractor with a history of being both a leader in his industry as well as a good business manager. Our discussions with these contractors and the product and service selections they are making are a good indicator of trends. In most cases, the construction industry will adopt what these industry-leading contractors are doing in the near term. We are discussing and selling a lot of programs that support the notion of contractors accepting and retaining more risk than they have historically. Specifically, we are seeing contractors who subcontract a majority of their work increasingly embrace contractor-controlled insurance programs, often called CCIPs or contractor wrap-ups. Historically, these contractors would push away the insurable risks through their subcontract agreement and have their subcontractors continue to buy their own insurance. These contractors are now effectively aggregating that risk, both the work the general contractor does and that performed by the subcontractors, and managing that risk at the general contractor level. To do that, they are buying appropriate insurance and risk-management tools at the general-contractor level. We are seeing an increasing number of single-project CCIPs and a significant increase in the number of rolling CCIPs, where contractors are really beginning to put increasing amounts of their project work into a program. A good source of This trend is getting real traction, and I see that continuing in trends is a contractor 2008 and beyond. Contractors who have subscribed to this with a history of being methodology are reaping great both a leader in his benefits from it. For example, there is less contentiousness on the industry as well as a projects, so that when there is an issue, there’s no need to point good business manager. fingers and go through subcontract —TERRY GRAY agreements for resolution. They are not trying to deal with many different insurers potentially on a single issue. By aggregating risk and procuring insurance for the entire project site, contractors are realizing a significant operational benefit as well as economies of scale in their insurance program. General contractors are embracing this in increasing numbers because of the benefits experienced across the board. I expect the CCIP and the rolling CCIP to be a trend that dramatically changes construction. I think we will look back in 10 years and see that it was a major turning point in how risks are managed in a construction environment. 42 ■ quarterly interview: zurich’s terry gray and bill cheatham

FMI Quarterly: Specifically, what changes will we see?

Gray: The whole notion is that general contractors are accepting that they can have a dramatic impact on the way risk is managed on a project site. By accepting that control, I think we will see improvements in project safety. We will see improvements in safety with the public. We will see better relations between subcontractors and general contractors because this process eliminates some of the potential contentiousness that historically exists through the assignment of risk to subcontractors and the requirement to procure insurance and manage it at those levels. There can be contentiousness when there is a claim in a traditional environment. You go through the process of having to figure out exactly who was responsible and engaging a number of parties and insurers in that process, which inevitably results in some strain on the relationships. The less tangible, or less expected, impact has been the improvement in productivity. We are seeing projects constructed in a much better way, and the parties are saving money on the cost of risk We are seeing projects and insurance.

constructed in a much Cheatham: I think Terry’s comments are accurate, and we are now better way, and the feeling the direct impact on surety parties are saving products. We’ve lost two major projects, one to credit-crisis issues money on the cost of and the other posted a letter of credit in lieu of a bond. Alternative risk and insurance. solutions are starting to impact our —TERRY GRAY premiums as we move toward 2009. Insurance exposures are a big issue for us today. I give kudos to Terry’s operation. We had a huge project, $750 million, where we needed a professional liability policy. People were having a problem securing adequate limits or proper coverage. Zurich Surety recommended Zurich Construction P&C to the contractor. A very large insurance policy was written to manage a specific exposure under the contract, which had to be covered for Zurich Surety to participate.

FMI Quarterly: That’s a good example of how having both sides of the house allows you to be a better provider.

Cheatham: There was another example in the Midwest where Zurich booked approximately $1.5 million to $2 million. This represents combined surety and insurance premium. The ultimate impact was very positive for Zurich.

Gray: Tim, you brought up a good point, which was my next trend. I think our customer base is increasingly seeing the value in a broader value proposition 2008 issue 3 FMI QUARTERLY ■ 43

from a company like Zurich, acknowledging that we have great surety capabilities and property casualty products. Again, I think we lead the marketplace in unique and propriety products for the construction industry. We really have the ability to address, if not all, certainly all of the major exposures that a contractor or project would have for a particular phase of construction. That value proposition has become much more recognized in the marketplace. It is less about playing in a commodity environment where the cheapest price wins. I’m not suggesting that we aren’t competitive in the marketplace, because we are; but we also bring a lot more product coverage, industry understanding and unique combinations of capabilities to the market. It’s my sense that these offerings are being valued by our customers in this environment. Clearly, the insurance market has softened in the last few years, and we’ve had to deal with that. I think we are in a much better position because of the broader value we bring, which helps our customers succeed in a softening insurance marketplace.

Cheatham: Let me expand on Terry’s comments a little further. Years back, surety people were always extremely concerned about a relationship between insurance and surety products. Some of that was to protect their own product line rather than adopting an approach that asks: What’s better for the customer? I hold a different view from this historical perception. Mine says: The company who can identify what the customer needs and deliver the solution will win in the market. We try to offer multiple products, Subguard® being one. I’ve never been an opponent of Subguard® since it’s another option for owners when considering their best protection. What I simply say is: It’s the responsibility of the insurance company to come up with alternative products and options. Customers should be allowed to make decisions that are best for them. What Terry is advocating as far as the relationship with surety and construction P&C is really nothing more complicated than providing what the customer wants.

FMI Quarterly: In terms of broader value proposition, do you see a difference between the large contractor market versus the midsize contractor market?

Gray: I would say that the more sophisticated the buyer, which generally correlates to size but not always, the more likely he is to recognize and appreciate the value proposition. The smaller end of the market — a guy with a pickup truck and a tool belt — is not really looking for a value proposition to be provided by his insurer or his surety. He has different issues and is buying a more standard offer in the market. As you move up the spectrum and get more sophisticated buyers, you increasingly find customers who want a relationship with their surety and insurer that’s more than a commodity relationship. They want an alliance that results in the full benefit of what an insurer, like Zurich, can provide. We get to know each other more deeply and are able to provide solutions in a more effective way. I really believe that’s true; and if you talk to our customer base, you will hear different articulations of that same message of appreciation and recognition of the value. 44 ■ quarterly interview: zurich’s terry gray and bill cheatham

FMI Quarterly: You’ve mentioned two trends — one, contractors are generally accepting more risk, and two, contractors are seeking a broader value proposition from their insurance provider. What other trends do you see?

Gray: We also see an increasing frequency in public/private partnerships. Often referred to as P3, or private finance initiatives (PFIs), it focuses on what have historically been government or quasi-government assets — roads, bridges and other types of infrastructure that typically either federal, state or local government has provided and paid for though its tax base. P3s move those assets to a quasi-public state in which the private sector provides the solution. This is a trend of privatizing public assets and providing a consortium with the opportunity to charge a user fee for them. It provides a huge opportunity for contractors as well as a lot of challenges. It also provides an opportunity for Zurich both on the insurance and surety side to design and aggregate products in new and different ways to respond to those issues. The arrangement presents a unique combination of construction risk — from the design and construction risks to the operational risks involved once the project is completed to the financial risk.

Cheatham: With the credit crisis today, the pressures are going to build on many parts of the financial industry to find other revenue streams. It is going to actually encourage the Wall Street spectrum of companies to engage these types of quasi-public ventures so that they can manage the financing and become bigger players generating a solid return on investment. The days of the subprime are gone. The credit crisis is going to add more Every new project is and more pressure to generate going to require revenue streams. That’s positive for the construction industry, but it can evaluation since the also be negative. If you analyze European projects, some of those cash flow projections quasi-public projects have failed. Every new project is going to are critical to the require evaluation since the cash- project's completion flow projections are critical to the project's completion and financial and financial package. package. This is an opportunity for a significant source of business for —BILL CHEATHAM Zurich, but at the same time, it may be a high risk for the construction industry and surety. This involves more than toll roads. In Europe, it’s moving all the way down through school systems, through health care buildings, through retirement villages — you name it. It’s truly generating a revenue stream all the way through the infrastructure system.

Gray: Europe is a great model for us to learn from. It also showcases Zurich’s 2008 issue 3 FMI QUARTERLY ■ 45

leadership in the market. We were early in the United Kingdom in providing a proposition to respond to projects. Many of these projects were insured by Zurich.

Cheatham: Zurich already writes a significant number of international accounts either for insurance and/or surety.

Gray: Absolutely. We are hoping that we can migrate some of the learning achieved through our leadership position in the United Kingdom to this type of work in the North American marketplace as we move forward. The further complication, of course, is that in the United States, with all the different state regulations, you end up with potentially 50 or more different types of solutions for essentially the same set of issues.

In the U.K., it tended to centralize around more of a single type of a solution as it has in other parts of the world where this has really taken off. We hope a few models will emerge here in the United States that the various public entities will coalesce around.

FMI Quarterly: Does Zurich expect to see the construction insurance market harden or soften in the near Europe is a great model to medium future? for us to learn from. It Gray: I’ll choose a completely also showcases Zurich’s different term. I think we are going to see it stabilize. By that, I mean we leadership in the market. are already seeing the marketplace —TERRY GRAY respond to the individual customer. We are seeing contractors who have had good performance, managed their risks well and had a reduction in their losses get the benefit of that commitment and result. So these contractors will see rate decreases, and that’s appropriate. They have worked hard and demonstrated their ability to manage loss. On the other hand, contractors who haven’t made improvements are seeing flat to modest rate increases. The rate increase comes from inflation, which pushes some additional price. We have some customers who have poor loss experience, and those customers are receiving rate increases. So if you were to look across our entire book of business, there are a lot of ups and downs in there. We have customers receiving decreases, customers receiving increases and some renewing at a flat or modest rate increase or decrease. There is a great spread in our book of business. The key to it really goes back to the customer’s experience.

Even though the insurance marketplace has softened, in broad terms, the last few years, there is still tremendous value for our contractors to be actively and aggressively managing their risk and losses. 46 ■ quarterly interview: zurich’s terry gray and bill cheatham

FMI Quarterly: Then there is always reward in the marketplace for contractors doing that?

Gray: Always. The reward may not be as much today as it was five years ago, but it is absolutely important and essential for contractors to continue to manage those losses down. If you extend that out into the future and look at an insurance market that may be in a hardening trend, those contractors who have managed their losses aggressively down through all parts of the insurance cycle will receive even more benefit. Their rates will not be as dramatically affected as those contractors who have not done as good a job in managing their risk.

FMI Quarterly: What trends or innovative products can you highlight for our readers?

Gray: Though Subguard® has been in the market since 1996, it is still often referred to as a new product in the insurance marketplace. It is a well- established, accepted and clearly credible product. Subguard® has performed very well for us, as we hoped and expected it would. We have seen a significant increase in the product’s customer base in every year since its introduction. Our customers are very satisfied with the results that they are achieving — both directly, in their ability to manage their contractors and to follow up exposures more effectively and efficiently and indirectly, in their operations. These customers typically have fine-tuned their processes around the selection and management of subcontractors that have given them a broader operational improvement (a direct benefit they receive from the product). So the direct and indirect benefits to our customers have met or exceeded their expectations in almost all cases.

Another thing we sometimes hear in the market is that there have been claims in Subguard®. We actually expected there would be claims, and the fact that we have had claims and successfully paid those claims helps to build the product’s credibility because it does what we said it would do. It is not surety, and there should be no confusion about that. Our customers, like all customers, can vote with their feet. Our retention in Subguard® is very high. We almost never lose a Subguard® customer. The only cases where we have are ones in which the customer has been acquired by somebody who didn’t have the product and we haven’t been able to sell to the acquiring company yet.

Overall, the product is performing as we expected it would, and our customers’ satisfaction levels and benefits realized exceed expectations. We continue to be very bullish on the future of Subguard® as an alternative tool for general contractors to manage the risk of subcontractor nonperformance.

The construction industry is one that continues to evolve and innovate. Zurich is well-positioned to continue to innovate, evolve and provide meaningful support for this industry going forward. We are committed to continuing to 2008 issue 3 FMI QUARTERLY ■ 47

be an insurer and a surety to the construction industry. The creation of the industry practice group at the beginning of this year is just one more clear example of our commitment to construction — Zurich’s commitment to construction not only on a North American basis, but also on a worldwide basis.

FMI Quarterly: What is Zurich’s view of the current market direction of surety of large and midsize contractors?

Cheatham: Overall, the industry’s results are very favorable. I think it shows the efforts of two or three years of the industry trying to correct a cycle mentality. Zurich Surety has merely experienced an extension of the consistency and stability that it provides customers. It is because of a very focused approach in trying to manage the business and listening Our customers told us: to our customers. Our customers told us: “Don’t take losses because “Don’t take losses we need your capacity.” We tried to because we need your listen to our customers and develop a program that complements the capacity.” We tried to construction trade industry overall. listen to our customers As far as direction for the large to midsize market, we’re not changing. and develop a program We are a consistent player in the that complements the market. We want broad-based customer segmentation. We construction trade designed our entire infrastructure and field operations around the industry overall. customer. Our senior management —BILL CHEATHAM team is focused around customer segments. Everything is built around identifying customer needs, taking a product to the market that meets those needs and then executing it. As a result, we are still growing. We grew last year by approximately 5%. Our average growth over the last eight years is approaching 16%. The profitability is very strong.

FMI Quarterly: What impact is the credit crisis having on the construction marketplace as it relates to surety?

Cheatham: I’ll break it into segments. Let’s start with the contractor customers themselves. Very simply, the terms and conditions in their loan agreements are much harsher than they were a few years ago. Lending institutions are tightening their covenants, placing more restrictions on the contractor. That forces us to manage our relationship a bit closer. Actually, that’s how we build our base, through close relationships with our customers. We are literally 48 ■ quarterly interview: zurich’s terry gray and bill cheatham

drilling into and reviewing the loans and security documents with the customer so that we understand what the risk is to the customer and us. Then we advise them appropriately.

Next, we look at it from the owner’s perspective and think through their interest in building projects. I will tell you that, from the public side, 2008 is an ongoing strong market at the local, state and federal levels. But there are 25 states that have already projected deficit budgets in 2009. They will have to make adjustments. So we are monitoring closely, because we have to understand that risk. We are already seeing geographical segments of the market with increases in the number of bidders on projects because of the tightening homebuilding residential-market segments and Properly managed, the slowing economy. The competition is driving down the margins in the better contractors weather mid-market segment. We think that good or bad times. places more risk on the surety. I am not as concerned Large projects continue to be available. Most of our large accounts about our surety are saying there remain strong demands. They are in a better position or results as position to manage the opportunities much as our process and and focus on individual projects. Actually, I see this as an opportunity selectivity in identifying for contractors in a slowing economic cycle to evaluate their the right customers. organization and strengthen —BILL CHEATHAM themselves by analyzing their strengths and weaknesses, be it people, infrastructure or whatever. It’s a chance to regroup and look for the next cycle opportunity. Properly managed, the better contractors weather good or bad times. I am not as concerned about our surety position or results as much as our process and selectivity in identifying the right customers.

FMI Quarterly: So the impact is being felt in the area of the financial market that provides the liquidity that enables the financing of these projects?

Cheatham: Absolutely.

FMI Quarterly: Have you seen an increase in losses yet?

Cheatham: I think Zurich Surety is an anomaly. We are proactively managing our risk exposures. Obviously, we didn’t anticipate what subprime and CDOs contributed, but at the same time, we recognized that there were financial 2008 issue 3 FMI QUARTERLY ■ 49

issues out there. We honestly are not experiencing the frequency One area that helps increase that we hear about. We are still managing our portfolio differentiate Zurich profitably. It is primarily because of careful selection and wanting to from our competitors is bring a product to a select group of people. We are trying to be cautious our claim department. about how we manage it because We have the best claim we see this as credit not insurance. Zurich is not experiencing the influx people in the industry. of problems. We are monitoring the homebuilders segment extremely —BILL CHEATHAM closely. We still don’t have a good read on the impact that this is going to have on the surety industry. I do have some concerns about it because of the aggregation of exposures by re-insurers on some accounts. All the regulatory bodies have different statutes and ordinances that have to be interpreted as to each individual bond. Right now we are managing that, and that line is still profitable for us.

FMI Quarterly: Are there specific sectors or geographic areas with significant deviation from the overall market or more than what you expected?

Cheatham: Not really. We anticipated geographical impact. We have a solid group of senior people, and we analyzed our accounts very early on recognizing what the risks were, and we managed them appropriately. There are regions that are obviously being more adversely impacted by residential because of the aggressiveness of the owners and developers in those markets. News media covers all of this for you openly. We approached it understanding very clearly what we had in front of us. However, our marketing position started with a defined strategy, and we did not waiver.

One area that helps differentiate Zurich from our competitors is our claim department. We have the best claim people in the industry. Jointly, through underwriting and claim working closely, we provide a risk management approach to the business.

FMI Quarterly: How do you see the next six to 12 months in the construction market? What is Zurich’s approach?

Cheatham: I don’t see our underwriting posture changing, as we are very consistent. We are still growing. I do see the surety industry itself potentially at risk. As the product is identified for its strong results over the last two years, there will be added pressure to grow that line of business. We are already seeing some adjustments in terms, conditions and rates on an individual-case basis. It does not appear to be an underwriting policy change by any one 50 ■ quarterly interview: zurich’s terry gray and bill cheatham

company. It has been a very favorable market over the last seven or eight years for Zurich Surety. We are still picking up the best accounts in the construction industry as customers.

Will the industry have problems? I’m expecting it will. I see the problems for those who play more in the small- to mid-market and for those who don’t have a balanced book of business. One of the reasons reinsurers like us is because we have a very diversified book of business. As a result, we weather underwriting cycles better. That’s a management philosophy based on leadership that has been with Zurich Surety over many decades.

FMI Quarterly: You mentioned a specific project where letter of credit was used instead of surety. Talk about the impact of competitive products and in what niches they are more competitive than your product.

Cheatham: I must admit I am probably naive and biased on this subject. First of all, I don’t think alternative products like personal surety can compete with corporate surety. I don’t see the protection to the owner or the contractor. I think it is high-risk, but it is an alternative product and an option for the customer. In regards to other alternative products out there, LOCs have always been there. The problem you have managing businesses to LOCs is that they really don’t provide the same protection. They don’t have claim departments. They don’t protect subcontractors. A bond provides much broader protection than most of these other alternative products. It’s a matter of sitting down and really analyzing what a bond does compared with alternative products. That’s why I am not in fear of competing with We are seeing more alternative products.

joint ventures because FMI Quarterly: Will the trend of large contractors using permanent projects are jumbo. We arrangements continue? If so, what are seeing more co-surety is the impact to Zurich? because projects are Cheatham: I don’t see it as a trend. I think it is used more commonly requiring larger capacity. today because the projects are so large that contractors want to —BILL CHEATHAM spread the risk, just like Zurich uses reinsurance to de-leverage risk exposure. It’s just a common-sense approach to protecting your business. We are seeing more joint ventures because projects are jumbo. We are seeing more co-surety because projects are requiring larger capacity. An account can require up to $5 billion or $6 billion of surety capacity. So the sureties are managing risk exposure just like the contractors. They are spreading the risk by having co-surety and then layering it off through reinsurance. The 2008 issue 3 FMI QUARTERLY ■ 51

contractors simply are applying the same principles by de-leveraging the risk in the projects. Honestly, it gives more protection to the owner because he has multiple large contractors or sureties participating. It is a joint and several-type position, so all parties are participating at a high risk if there is a failure by any joint venture or co-surety participant. Our whole concept is FMI Quarterly: How does we make more money Zurich participate in that end of the market? when our customers grow

Cheatham: We are a significant and make more money. player. We are very selective on —BILL CHEATHAM who we will chose for a co-surety partner. It goes through several different levels of scrutiny within Zurich. You have to be extremely careful because of the joint and several aspects. We are just as careful in reviewing joint ventures because we want the joint-venture partners to complement one another. There are few surety companies that have the technical skills to manage joint venture and co-surety risk. You don’t see many surety companies competing for joint venture/co-surety because, from their perspective, you have to have a tremendous amount of capital. A loss with a large-contract customer could have material impact on a company’s financial results.

FMI Quarterly: Bill, any closing comments?

Cheatham: Zurich Surety is trying to provide a very professional, high-level service to all sureties that require surety credit. We are expanding our cadre of high-end experienced people who provide the absolute best service for the customers and help them grow their business. Our whole concept is we make more money when our customers grow and make more money. What we try to do is build a relationship so there is total confidence and the customers want to communicate with us. We are very upfront with the customers in trying to manage the risk exposure with them to de-leverage the risk for both them and Zurich Surety. At the same time, we balance it against the owner’s needs. I just wish more of the surety industry felt the same way.

FMI Quarterly: Terry and Bill, we thank you both for sharing your insights with our readers regarding market shifts and Zurich’s response to those changing needs. ■ Saving the Planet, One Building at a Time: Is LEED Accreditation Worth It?

Two companies experienced in green building help to answer the question: Should your company start taking on green projects if it hasn’t already? By Kelley Chisholm

ustainable building. Going green. LEED. Eco-advantage. S All of these are hot buzzwords in today’s construction industry. As green building becomes more socially and economically popular, and, in many cases, required by some cities and municipalities, chances are your company is providing training to some of your employees to become LEED (Leadership in Energy and Environmental Design) certified. But what sort of return on investment will your company realize, if any? Can your company be a good custodian of the earth while still building its bottom line?

The U.S. Green Building Council (USGBC) developed LEED in 2000 through a consensus-based process. The program is a green building rating system for buildings of all types and size. LEED certification offers third-party validation of a project’s green features and verifies that the building is operating the way in which it was designed. According to the USGBC, “LEED is a point-based system where projects earn LEED points for satisfying specific green building criteria. Within each of the six LEED credit categories, projects must satisfy particular 54 ■ saving the planet, one building at a time: is leed accreditation worth it?

prerequisites and earn points. The six categories include Sustainable Sites, Water Efficiency, Energy & Atmosphere, Materials and Resources, Indoor Environmental Quality and Innovation in Design. (Projects can earn ID points for green building innovations.)The number of points the project earns determines the level of LEED certification the project receives. LEED certification is available in four progressive levels: Certified, Silver, Gold and Platinum.1 There are 69 possible points.

• Certified — 26–32 points • Silver — 33–38 points • Gold — 39–51 points • Platinum — 52–69 points

GREEN DRIVERS What are the key drivers for going green on certain projects? There are a number of them — some of which have very tangible paybacks and others with intangible benefits that are significant just the same: Cities require it. In the past few years, many cities such as Atlanta, Boston, Las Vegas, Dallas, Portland, etc., now require builders to adhere to LEED green building standards if they are financed or funded by the city. For example, in December 2003, the city of Atlanta passed Ordinance No.03-0-1693, requiring all city-funded projects greater than 5,000 square feet or costing $2 million to meet a LEED Silver rating level.2 The permitting process is fast-tracked. Some cities and municipalities fast track the permitting process for green buildings. For example, San Diego; Los Angeles; Arlington Co., Va.; and Gainesville, Fla., all expedite permitting, just to name a few.3 Some states offer tax incentives. The development of LEED provides states like Connecticut, Maryland, New York and Oregon with a way to define green building and promote it through their tax codes. For instance, in 2004, Honolulu passed an ordinance that provides an exemption from real property taxes for one year on all new commercial, resort, hotel and industrial construction that achieves LEED certification.4 Tenants demand it. People want to live and work in buildings that have proper ventilation, temperature and noise control, and good light levels. Green builders take these features into account, address the fact that different people have different needs and guarantee that buildings are designed, constructed and commissioned to ensure they are healthy and energy-efficient for their occupants. There is increased social and environmental pressure. As water and energy continue to become constrained resources, people are increasingly selecting builders that are environmentally sensitive. Green buildings generally have less negative 2008 issue 3 FMI QUARTERLY ■ 55

impact on the environment than standard building. According to an article in The Harvard Business Review, the construction of green buildings, “minimizes on-site grading, saves natural resources by using alternative building materials and recycles construction waste rather than sending truck after truck to landfills. A majority of a green building’s interior spaces have natural lighting and outdoor views, while highly efficient HVAC (heating, ventilating and air-conditioning) systems and low-VOC (volatile organic compound) materials like paint, flooring and furniture create a superior indoor air quality.”5 Although green Going green lowers operating costs. Although green buildings may be buildings may be more more expensive to build, they cost less to run, in terms of maintenance, water expensive to build, usage and energy consumption. According to the Autodesk/AIA 2007 they cost less to run, in Green Index (a survey of members of terms of maintenance, the American Institute of Architects on the practices and processes water usage and architects use that support the design of sustainable buildings), “70% of energy consumption. architects say client demand is the leading driver of green building as owners and developers seek to reduce operating costs. Architects are responding by significantly increasing their use of high-efficiency HVAC systems and recycled building materials and turning to software to model energy usage.”6 The Genzyme Center in Cambridge, Mass., is a good example of how green buildings have lower operating costs. In its first year of operation, the 12-story LEED-Platinum building used 42% less energy and had 34% less water consumption than standard buildings of comparable size.7 Green outperforms non-green in key areas such as occupancy, sale price and rental rates. According to a recent study by the CoStar Group, a commercial real estate information company in the United States and United Kingdom, LEED buildings command rent premiums of $11.24 per square foot over their non-LEED peers and have 3.8% higher occupancy. The study also indicates that Energy Star buildings are selling for an average of $61 per square foot more than their peers, while LEED buildings command a remarkable $171 more per square foot.8 Green is a recruiting magnet. Some of the best young talent is going to the greenest companies. According to an online survey of 1,800 young people conducted by two Boston-based companies, Cone Inc. and AMP Insights, 69% consider a company’s social and environmental commitment when deciding where to shop, and 83% will trust a company more if it is socially/environmentally responsible.9

INDIVIDUAL EXPERIENCES FMI interviewed two construction firms dedicating themselves to sustainable building to learn what ROI these companies are experiencing. Greg Cosko, president and CEO of Hathaway Dinwiddie, based in California, and 56 ■ saving the planet, one building at a time: is leed accreditation worth it?

Craig Datema, AIA, president of Hathaway Dinwiddie is one of Triangle Associates Inc., headquartered California’s oldest and most respected in Grand Rapids, Mich., offered their builders: Hathaway (established in 1923) and Dinwiddie (established in 1911). A insights on how building green has leader in the construction of advanced impacted their business. technology facilities, its expertise lies in sophisticated commercial office FMI Quarterly: How long have buildings, higher education and you been involved in sustainable bio/pharmaceutical facilities as well as continuing the tradition of quality building? construction of office buildings, interior Cosko: Hathaway Dinwiddie improvements, restorations and special started implementing formal recycling purpose facilities. With approximately programs in the 1980s. Specifically, 500 employees and $835 million in sales we implemented a sophisticated in 2007, Hathaway Dinwiddie has long committed itself to sustainable and waste management process when efficient building practices. constructing The Getty Center in Los Angeles, which started in 1989. In 1991, we started work on our first major project with a formal sustainable emphasis. It was a prototype for energy- efficient buildings constructed for California State Automobile Association and PG&E, called ACT2. Datema: We completed our first sustainable project in 2000, which was the LEED certified Herman Miller Marketplace office building. Since that time, Triangle has grown to become a leader in sustainable building practices. Our list of completed LEED certified projects has grown to become the largest in west Michigan and one of the largest in the country. We are proud of our accomplishments with notable projects including Michigan’s first LEED certified apartment complex, educational facility and hospital along with the nation’s first LEED certified Hope Lodge for the American Cancer Society.

FMI Quarterly: Overall, what percent of your projects are green? Cosko: Almost all of our projects now involve green and sustainable practices and approximately 30% to 50% of our annual revenue is from LEED Certified, Silver, Gold or Platinum projects. Datema: On the majority of our projects, we discuss and include Triangle Associates Inc. is headquartered sustainable building practices. This has in Grand Rapids, Mich., and is a leading become part of our normal course of provider of construction in Michigan operation. However, in 2007 projects with more than $100 million in annual sales. Triangle provides construction seeking LEED certification accounted services to meet the unique needs of for 25% of our construction work. each client specializing in health care, This percentage has been steadily K-12, higher education, commercial, increasing over the last several years. industrial, water plants and government facilities. More than 180 employees, including 40 professionals, 8 LEED FMI Quarterly: What are the Certified Professionals and more than main drivers to go green with some of 100 field associates serve Triangle’s your projects? customers throughout Michigan. Cosko: Hathaway Dinwiddie has 2008 issue 3 FMI QUARTERLY ■ 57

gravitated toward green projects as part of a corporate culture grounded in integrity and social responsibility. We help our clients to build “sustainably” by emphasizing that green development offers owners and tenants reduced operating costs, improved sales and leasing rates, higher property values, reduced liability risks, better health and productivity of workers, smoother permitting processes and improved environmental conditions. Datema: Along with many of our clients, Triangle is dedicated to the protection of the environment and conservation of natural resources. The primary objective in adhering to green principles is that it is simply the right thing to do for our environment. As part of our normal project planning process on all Triangle projects, we review green strategies and choices with our clients even if a client is not specifically interested in pursuing LEED certification. We will use and implement green building practices to the extent that is beneficial to each individual project and client. As a normal course of operation, we implement many basic green strategies such as building material recycling on all of our construction sites.

FMI Quarterly: Do you find that you have to convince your clients to go green, or are they choosing to work with you based on your previous experience? Cosko: Most decisions to incorporate green elements are initiated by the customer, their tenants, the design professionals and us. Clients interested in sustainable features choose Hathaway Dinwiddie based on our past experience, our qualified teams, our ability to deliver projects at outstanding value and our demonstrable knowledge of sustainable (green) practices. Datema: Many of our clients who are interested in LEED certification for their projects choose Triangle for our vast experience and team expertise in this area. They rely on our expertise to ensure that the project not only meets but surpasses the requirements of certification while maintaining control of their budget constraints. However, often following the selection process and during pre-construction discussions, we learn that while our clients may not be interested in gaining LEED certification, they are interested in using green or sustainable design and construction practices where it is appropriate for their project. This has led us to implement a pre-construction process that always includes discussion on sustainable building practices.

FMI Quarterly: How many of your employees are LEED certified? Do you plan to have any others certified in the near future? Please expound on the training they receive and the certification process. 58 ■ saving the planet, one building at a time: is leed accreditation worth it?

Cosko: We have 51 LEED accredited professionals on staff, which amounts to nearly 20% of our total staff. We have an ongoing education process and incentive program to encourage continued growth and participation. Our accredited “Green Team” includes corporate officers, project managers, project engineers and superintendents. Our training program starts with provision of an extensive information package, which has USGBC guides and internal Hathaway Dinwiddie training material. We often set up study groups that work together over about four to six weeks. Since 2003, we have had ongoing training sessions with employees that discuss green construction and review all of the LEED credits so that even non- accredited employees are familiar with the concepts and understand the impact of green building. Datema: Eight of our team members are accredited, and we also currently have another group of team members studying for upcoming testing. As the green building movement continues to spread, LEED certification for buildings will become more commonplace in our industry. In the future, this demand will drive LEED accreditation to become more of a professional expectation than a differentiator for staff members. It has always been our ultimate plan to have all project-related associates become LEED accredited. The certification process is a rigorous one, so to meet this goal, we have been working with our key project staff to assist them in their pursuit of accreditation. Our approach has been focused on internal group training and providing the time and tools to assist our team members in this process. We have a LEED committee led by our LEED manager. In addition to other duties, the committee is responsible for staff LEED training. Working together, the committee monitors staff progress in the testing and accreditation process. The committee develops training manuals for use by team members, conducts internal training sessions and coordinates group study efforts. We also have sample USGBC tests that employees can use in preparation for testing.

FMI Quarterly: What is the ROI for having LEED certified staff? Cosko: The ROI is difficult to quantify as our training/accreditation costs are direct expenses, yet the benefits are indirect. We believe green and sustainable building practices are an integral part of excelling in the industry in the future, and we are incurring these costs regardless of immediate ROI. Datema: The ROI is fourfold:

1. Having greater depth of expertise in this area gives us more credibility when we discuss our capabilities to our current and potential clients. 2. We are better equipped to handle the growing number of projects embracing sustainable practices or LEED certification. 2008 issue 3 FMI QUARTERLY ■ 59

3. Identifying and working towards 100% team member accreditation allows us to maintain our leadership role in the industry. 4. Our LEED manager and each accredited team member are able to properly communicate and document all aspects of the project certification process to ensure consistency and implementation of all LEED requirements.

This gives our clients the confidence that they have the most experienced and knowledgeable team to ensure their project gains LEED certification.

FMI Quarterly: What have been your biggest challenges? Cosko: Although many clients are eager to build green, many do not start the process early enough to maximize effectiveness. To avoid redesign or just to consider all alternatives, the goal of building green should be included on Day No. 1 of design and contracting. Costs are minimized the earlier green methods are implemented. Datema: The Lacks Cancer Center at St. Mary’s Health Hospital in Grand Rapids posed unique challenges. As Michigan’s first hospital seeking LEED certification, the project was being designed and constructed at a time when the LEED certification process was still being developed and refined. Early on it was clear to the project team that the criteria and documentation requirements from the USGBC had not been structured to accommodate a health care setting. The specialized Although many clients nature of the health care setting created are eager to build green, restrictions for the project team as it attempted to implement many of many do not start the the green strategies. Extensive product research as well as development of process early enough to unique building systems had to be maximize effectiveness. accomplished to meet the sometimes conflicting needs of the hospital and —GREG COSKO requirements of the USGBC. One of the most challenging types of projects on which to gain certification is historic renovations/restoration projects. The existing conditions and established building design inherent with this type of project, as well as the amount of work performed, type of existing and new products used and strict requirements of meeting historical tax credit goals, are key factors affecting certification on historic renovations.

FMI Quarterly: What are your biggest success stories in terms of sustainable building? Cosko: Specifically, Stanford’s Y2E2 Building, the first of four buildings in Stanford’s SEQ2, has been so successful that Stanford said, “This building brought a mandate from senior university management to design the three remaining buildings in this new quad to the same level of sustainability.” The project has been 60 ■ saving the planet, one building at a time: is leed accreditation worth it?

awarded the San Francisco Business Times’ “Best Green Building of the Year Award,” announced on Thursday, March 27, 2008, and written about nationally. Datema: We consider our “biggest success” to be our first LEED project. At the time of the Herman Miller Marketplace office building project, we were new to the process and did not have a full understanding of the details surrounding green construction, sustainable building practices, the LEED process and what was required to meet the requirements of certification. There was a huge learning curve and investment of time and resources to guarantee success and ensure our client’s satisfaction. We are proud to say that our efforts achieved these goals, and the project was awarded a gold-level certification. We have Our success stems since implemented many company from our culture and our strategies to make both certification and implementation easier and more client-centered approach cost-effective.

to green building. FMI Quarterly: Is there anything We work closely with else you would like to share with FMI Quarterly readers? our clients and their Cosko: Based on proposals and talking with others in the business, design professionals on sustainable construction has become every aspect of creating a significant part of the design and construction industries. Almost every an environmentally prospective customer is requesting information on our experience with friendly facility. sustainable building and soliciting —CRAIG DATEMA our ideas and help in evaluating its options. Datema: Triangle has embraced a sustainable building approach within our corporate culture. Our success stems from our culture and our client-centered approach to green building. We work closely with our clients and their design professionals on every aspect of creating an environmentally friendly facility. We believe that green building is an opportunity to use resources efficiently while creating and constructing healthier buildings. The process provides cost savings for our clients through improved human health and productivity, lower-cost building operations and resource efficiency as it moves us closer to a sustainable future. We are proud of our green building accomplishments, our long list of LEED certified projects and our role as a leader in the green building movement in west Michigan and across the country.

DECISIONS, DECISIONS Should your company start taking on green projects if it hasn’t already? Here are some things to consider. The direct costs of becoming LEED certified are easy 2008 issue 3 FMI QUARTERLY ■ 61

enough to quantify. To determine how much it will cost to become LEED certified per employee, calculate training expenses, which include, but are not limited to, items such as instructor fees, training facilities, the employee’s salary while in training, any materials needed and exam costs. After that, the ROI becomes harder to quantify since the benefits are less tangible and harder to measure. It is not easy to put an exact figure on client confidence or a company’s credibility or leadership role due to LEED accreditation alone. Green buildings initially cost more upfront to design and to build. Ultimately, the building owner may look strictly at the bottom-line financials in deciding whether to go green. Green is here to stay, and it’s quickly becoming the norm. Smart companies realize this and are taking the necessary steps to become competitive in this arena. Those companies that totally embrace sustainable building within their culture will not only help their bottom lines, but also the environment. ■

Kelley Chisholm is a talent development consultant with FMI Corporation. She may be reached at 919.785.9215 or via e-mail at [email protected]

1 USGBC FAQ (http://www.usgbc.org/DisplayPage.aspx?CMSPageID=201) 2 AIA. (2006). List of Cities Requiring LEED. Retrieved on April 14, 2008, from: http://www.aia.org/static/state_local_resources/adv_sustainability/Green%20Rating%20Systems/Cities%20using%20LEED.pdf 3 USGBC. (2008.) Summary of Government LEED® Incentives, February 2008. Retrieved on April 7, 2008 from: https://www.usgbc.org/ShowFile.aspx?DocumentID=2021 4 USBG. (2008) 5 Lockwood, C. (2006.) Building the Green Way. Harvard Business Review. 6 Autodesk (2007). Sustainable by Design. Retrieved on April 14, 2008 from: http://usa.autodesk.com/adsk/servlet/index?id=9484418&siteID=123112 7 Lockwood, C. (2006). Building the Green Way. Harvard Business Review. 8 Burr, A. (2008). CoStar Study Finds LEED, Energy Star Bldgs. Outperform Peers. USGBC. Retrieved on 4⁄15⁄08from: http://www.usgbc.org/News/USGBCInTheNewsDetails.aspx?ID=3637 9 Jayson, S. (2006). Generation Y Gets Involved. USA Today. Forecast Calls for Building Green in U.S. Nonresidential Markets

Growth rates across the nonresidential building segments reveal construction industry stakeholders are beginning to embrace the green movement. By Kevin Haynes and Heather Jones

he concept of green building has gone from a relative T new phenomenon just a decade ago to a major industry topic in the last few years. The rapid growth of this trend is due to increased interest in green building from both public and private companies. In fact, between 2001 and 2008, U.S. Green Building

Council (USGBC) membership increased from 500 to 15,000 members.

Advances in the green building movement have been led in part by the development of the USGBC’s Leadership in Energy and Environmental Design (LEED) certification program. In 2002, LEED projects totaled 35 million square feet, while in 2007, this figure increased to more than 3.2 billion square feet. LEED provides a framework and guidelines for assessing building performance and meeting sustainability goals in site development, water management, energy efficiency, materials selection and indoor air quality as well as innovation in design. Different LEED versions have varied scoring systems based on a set of required prerequisites and a variety of credits in each previously mentioned category. Buildings can qualify for four levels of certification: Certified, Silver, Gold or Platinum. Buildings can be LEED registered during construction but cannot be LEED certified until they are completed. (See Exhibit 1.) 64 ■ forecast calls for building green in u.s. nonresidential markets

FMI predicts most nonresidential building segments will see double-digit growth rates for green construction in 2008. Between 2008 and 2012, total nonresidential green construction will grow by 32% to reach $26 billion in 2012. The three largest segments for nonresidential green building are office, educational and health care. In 2008, these three segments will account for more than 80% of total nonresidential green construction. Green lodging will grow by 28% in 2008 to reach $458 million. This growth in lodging represents the largest increase for nonresidential green construction in 2008. (See Exhibit 2.)

Exhibit 1 Green Construction Value of Total Market Segmentation Green Construction In millions of current dollars 100% = All Markets 25,000 2% 2% 2% 2% 44% 20,000 3% 7% 15,000 9%

29% 10,000

5,000

0 2001 02 03 04 05 06 07 2008

Office Amusement and Recreation Commercial Educational Transportation Public Safety Health Care Lodging Manufacturing

Exhibit 2 U.S. Geographical Distribution of LEED Certified Projects Combined total of these 4 states represent 33% of all U.S. LEED certified projects Combined total of these 7 states represent 2% of all U.S. LEED certified projects

78 4 11 0 12 68 8 5 6 0 30 38 48 1 60 0 6 86 11 6 3 31 30 14 52 8 1 46 25 149 1 35 7 19 9 25 9 30 3 10 9 15 2 5 51 43 1

26 2 9

Source: U.S. Green Building Council 2008 issue 3 FMI QUARTERLY ■ 65

Green construction will be prevalent on both the East and West Coasts as well as the Sun Belt region. California has the most LEED certified projects with 149 followed by Pennsylvania, Washington and Oregon. These four states represent nearly one-third of all U.S. LEED certified projects. Georgia with 51 projects, and Massachusetts with 48, are two of the next top-three states for certified projects. Interestingly, Michigan is the exception to this geographic distribution trend. The Great Lakes state has 60 LEED certified projects, which makes it the fifth highest total in the country. In contrast to the previously mentioned regions, green construction in the Great Plains is limited. Seven states (e.g., North Dakota, South Dakota, Nebraska, Kansas, Oklahoma, Montana and Wyoming) in the Great Plains have a combined 18 LEED certified projects or 2% of the nation’s total.

GREEN OFFICE Green office construction is the largest nonresidential green building segment. FMI expects total green office construction to be $8.7 billion in 2008. As the nation’s largest owner and operator of office buildings, the U.S. government has significantly influenced the green movement in the construction industry. For example, the government played a major role in the creation of the USGBC’s LEED guidelines, including funding a grant during its development stages. Federal, state and local governments own nearly 50% of all LEED certified projects, and more than 2,000 LEED registered government projects total more than 400 million square feet. Twelve federal agencies, including the U.S. General Services Administration (GSA), have adopted LEED standards for their projects. Green office construction will continue to increase as public buildings continue to serve as models of sustainability for the private sector. (See Exhibit 3.) In addition to government office buildings, corporate office construction has experienced increased green building activity since 2002. This increase is a direct result of industry stakeholders realizing the financial, environmental and health benefits of green building. According to the USGBC, green building may increase worker productivity by 15% and command rents 10% greater than average rates. Green building benefits, such as cleaner air and abundant natural light, will

Exhibit 3 Value of Green Office Construction

In millions of current dollars 10,000

8,000

6,000

4,000

2,000

0 2001 02 03 04 05 06 07 2008 66 ■ forecast calls for building green in u.s. nonresidential markets

decrease employee sick days due to allergies and colds. Regarding the environment, the heating, cooling and powering of office space is responsible for nearly 40% of carbon dioxide emissions in the United States and more than 70% of total electricity usage, while office computers burn $1 billion worth of electricity per year. Certain green building modifications, such as installation of automatic shut-offs for lighting and automatic settings to power down computers after 15 minutes of idle time, can reduce energy use. New York City is quickly becoming the nation’s center for green high-rise construction. The Bank of America Tower is the second tallest skyscraper in the city, and it may soon become the greenest skyscraper in the world. Its builders hope to earn USGBC Platinum certification. Building components include bamboo floors; large windows and glass inner walls that reduce lighting bills; rooftop rainwater collections that decrease water bills; and bike racks to encourage workers to bike to work rather than driving. The building’s green additions School buildings should pay for themselves within two to four years through energy savings. represent the largest Citi’s newly constructed office tower construction segment in in Queens earned LEED Gold certification. Additional green office the United States at projects under way include the World Trade Center site and the New York nearly $330 billion Times building. Rising construction through 2010. Buildings costs at a rate of 1% each month may be the major hindrance to green overall are responsible building. These increases will make it increasingly difficult to sway skeptical for 39% of carbon developers who are hesitant to pay a dioxide emissions in the green building premium. United States. GREEN EDUCATIONAL The education segment was one of the first building segments to implement green building practices for its construction programs. The “No Child Left Behind Act of 2001” with its section on healthy, high-performing schools was the first major piece of legislation to include a provision for green building. Education owners are investing in green building techniques based on this construction method’s positive environmental and health impacts as well as its cost effectiveness. Between 2008 and 2012, total green education construction will grow by 44% to reach $9 billion, according to FMI. (See Exhibit 4.) School buildings represent the largest construction segment in the United States at nearly $330 billion through 2010. Buildings overall are responsible for 39% of carbon dioxide emissions in the United States. The USGBC states that LEED certified buildings use 30% to 50% less energy, 40% less water and can reduce harmful carbon dioxide emissions. In addition to the environmental benefits, 2008 issue 3 FMI QUARTERLY ■ 67

Exhibit 4 Value of Green Educational Construction

In millions of current dollars 7,000

6,000

5,000

4,000

3,000

2,000

1,000

0 2001 02 03 04 05 06 07 2008 green facilities offer long-term cost savings and increase the well-being and productivity of students and teachers. According to the article, “Greening America’s Schools: Costs and Benefits 2006” by green building consultant Greg Kats, it costs, on average, less than 2%, or about $3 per square foot, more to build a green school than to build a conventional school. And the payback occurs within one year of construction, based on energy savings alone. Finally, green design and construction can increase natural light, which not only saves energy but also has been shown to improve student test scores. The average age of U.S. K-12 facilities since their last major renovation is more than 40 years. Aging facilities have prompted many school districts to undergo major renovation and new construction programs. Since green educational facilities are a lower total cost alternative to traditional building programs, both K-12 school districts and higher-education institutions have started to use green building techniques on their campuses. Example education programs include the Massachusetts Technology Collaborative (MTC) and the Massachusetts School Building Authority, which provide funding to help communities conserve energy and use clean-energy technologies to power schools. MTC’s Renewable Energy Trust offers $15 million in design and construction grants to fund solar electric panels, wind turbines and other clean-energy technologies as well as green building design and planning assistance at schools that meet new guidelines for energy efficiency. More than 20 schools have participated in the pilot phase of the Green Schools Initiative. In addition to K-12 schools, many colleges and universities are increasingly adopting green building programs. More than 30 higher-education institutions are committed to achieving LEED certification. These institutions include the University of Connecticut, which requires all constructed buildings and renovations costing more than $5 million to meet at least LEED Silver standards. At Clemson University, all facilities larger than 5,000 gross square feet and major capital renovations costing more than 50% of building replacement value must meet and acquire LEED Silver certification, at a minimum. A potential obstacle to green building in education is a traditional lack of 68 ■ forecast calls for building green in u.s. nonresidential markets

planning for long-term project costs. In addition, many education owners Green building is are still unaware of the benefits of green construction. For the movement attractive to health care to continue gaining momentum in educational construction, industry owners and operators groups must continue to promote for several reasons, the design and construction of green schools and its impact on student including its financial, health and performance, school operational and operational costs and the environment. environmental benefits GREEN HEALTH CARE There is an increasing trend as well as the positive toward building green health care facilities. FMI predicts total green impact on patient health health care construction will grow to and recovery times. almost $2 billion by 2009, a 70% increase from 2006. Green building is attractive to health care owners and operators for several reasons, including its financial, operational and environmental benefits as well as the positive impact on patient health and recovery times. For example, productivity increases from building green can lead to earlier patient discharges of two to three days. Increased industry awareness of these benefits and the continued development of best-practices guides and ratings systems, such as LEED for Health Care, will lead to more opportunities for green health care facilities. (See Exhibit 5.) The American Hospital Association reports that there are nearly 6,000 registered hospitals in the United States. The combined environmental impact of these hospitals is significant, ranking second only to manufacturing facilities in

Exhibit 5 Value of Green Health Care Construction

In millions of current dollars 2,500

2,000

1,500

1,000

500

0 2001 02 03 04 05 06 07 2008 2008 issue 3 FMI QUARTERLY ■ 69

electricity usage per square foot. The Consortium for Energy Efficiency reports that hospitals spend an average of $1.67 per square foot in electricity costs. Around-the-clock operations require high energy levels for ventilation, equipment, sterilization, laundry and food preparation and contribute to hospitals’ intensive energy use. Green buildings reduce the amount of energy used, which can reduce greenhouse gases and improve air quality. In addition to the environmental benefits, reducing energy use can strengthen a hospital’s bottom line and public image. Financial pressures constantly drive hospitals to seek ways to operate more efficiently. The Energy Star Financial Value Calculator estimates that each dollar of energy savings is equivalent to a $20 increase in revenue. In response, an increasing number of health care owners and operators are becoming aware of green building and its impact on financial savings. According to McGraw Hill Construction’s Healthcare Green Building SmartMarket Report, 19% of survey respondents expect that their organization will be significantly involved with green building in 2008, more than triple the 2007 level. Additional findings suggest that nearly 70% of health care and hospital administrators understand that green buildings reduce energy use by more than 10%. As with the educational segment, the primary obstacle facing green health care building is its perceived high costs. A high initial capital investment, often required by energy-efficiency measures, has contributed to this perception, which makes green building less attractive to hospitals with financial constraints. Low profit-margins and tight capital keep energy projects, which many view as optional, from being implemented. One way to overcome this obstacle is to promote the long-term energy savings of green building as a method to cut costs without cutting services.

GREEN AMUSEMENT AND RECREATION FMI expects green amusement and recreation construction will decrease in 2008 by 2% and continue to decline through 2011. In 2012, green amusement and recreation construction will increase 18% as more and more industry stakeholders address and adapt to the building interests of owners. For example, HOK Sport, one of the nation’s largest designers of major sports stadiums, in its guidebook to sustainable design included a section on sports arena design. The company has also advocated for the creation of a unique LEED program for stadiums and arenas. In response, the USGBC is working with several design firms to tailor LEED for stadium-specific design opportunities and is considering the adoption of an industry-specific program. This proposed program would make it easier for designers and builders to make a unique building type, like a stadium, meet LEED criteria. (See Exhibit 6.) Attracting corporate sponsorship of stadiums is another potential driver of green construction. Teams and organizations may look to implement sustainable 70 ■ forecast calls for building green in u.s. nonresidential markets

Exhibit 6 Value of Green Amusement and Recreation Construction

In millions of current dollars 1,600

1,400

1,200

1,000

800

600

400

200

0 2001 02 03 04 05 06 07 2008

features in new or existing venues to meet the interest of corporate sponsors in green building. Interestingly, the most sustainable part of a stadium may not have anything to do with the structure itself but with where it is located. Access to mass transit, reuse of an existing site and the overall impact on communities where projects are located will determine the stadium’s sustainability as much as its design. For example, the New Jersey Nets are planning to build a new stadium in Brooklyn, N.Y., that includes a $50 million cleanup of the existing, environmentally damaged site, which will create eight acres of open space, surrounded by environmentally sustainable mixed-income housing and office buildings. Finally, the new ballpark being constructed for the Washington Nationals may raise the bar for green stadiums. The $311 million Nationals Park will feature a 6,300-square-foot green roof over the concession stands, a field lighting system that achieves an energy savings of more than 20% and water systems that reduce water use by nearly 40% through low-flow fixtures. The most interesting feature may be the water-filtering mechanism underneath the stadium that mimics wetlands by naturally filtering pollutants from the water in an effort to assist the larger goal of restoring segments of the adjacent Anacostia River.

GREEN TRANSPORTATION Since 2004, green transportation construction has grown by nearly $200 million to reach $604 million in 2007. In 2008, green transportation construction will increase by 11% to $673 million, according to FMI forecast data. Similar to other building segments, a challenge facing the use of green construction in the transportation industry is its tendency to emphasize initial costs rather than long-term operational expenses. As with amusement and recreation, there is a lack of design standards and LEED guidelines, which complicates the green building process. In response to this need for incorporating sustainable development with transportation construction, several organizations have developed targeted programs. The Green Airport Initiative (GAI), which was developed by the Clean Air Partnership, is designed to help airports achieve quick and measurable benefits in environmental quality and energy savings, and reduce conflicts with local 2008 issue 3 FMI QUARTERLY ■ 71

communities. Its goal is not just to make airports greener but also to accommodate their growth in a Similar to other building manner illustrating the principles of sustainable development and creating segments, a challenge more livable communities. The U.S. Environmental Protection Agency and facing the use of green participating airports, as well as several construction in the other government agencies, support this program. (See Exhibit 7.) transportation industry In the past, environmental regulations and opposition from local is its tendency to communities have resulted in delayed emphasize initial costs or even canceled airport construction projects. For example, Boston’s Logan rather than long-term International Airport experienced a 20-year delay in its plan to expand. In operational expenses. an effort to accommodate community concerns over environmental issues, several of the recent airport expansion and improvement projects have used sustainable design strategies, most notably Logan International Airport. Logan’s new Terminal A is the first airport terminal in the country to be LEED certified. The terminal used green building techniques such as energy-efficient HVAC equipment, construction waste and demolition recycling, a heat-reflecting roof and windows, low-flow faucets and waterless urinals and stormwater filtration. The new technology will save the airport nearly $300,000 in electricity costs and almost 2 million gallons of water. The Seattle- Tacoma International Airport has also utilized sustainable strategies, such as lighting and HVAC control systems. Finally, at the new Indianapolis airport terminal, HOK and the Syska Hennessy Group have designed a radiant cooling system into the building’s floor.

Exhibit 7 Value of Green Transportation Construction

In millions of current dollars 800

700

600

500

400

300

200

100

0 2001 02 03 04 05 06 07 2008 72 ■ forecast calls for building green in u.s. nonresidential markets

GREEN MANUFACTURING Between 2003 and 2007, green manufacturing construction grew 322% to $354 million in 2007. During this time span, lodging and office were the only nonresidential segments to increase by a larger percentage. Cities such as New York, Chicago and Houston saw a growing number of green manufacturing warehouses. Several of these buildings are being constructed by real estate investment trusts (REIT). For example, Liberty Property Trust has broken ground on the first two LEED-registered industrial buildings in Houston. REITs, such as Liberty Property, ProLogis, IDI and AMP Property, are trying to attract tenants that are educated in LEED certification and are looking for green spaces since they can lower operating costs and improve productivity. FMI expects growth in green manufacturing construction will continue to increase by 12% in 2008. (See Exhibit 8.) Green manufacturing is about reducing or eliminating any harmful impact on the environment resulting from a company’s facilities. According to Larry Bliss, a LEED accredited professional working for General Motors, it also includes, “looking for new ways to increase energy efficiency, creating healthier spaces for our employees, minimizing our site disturbance and constructing with materials that are more beneficial to the environment.” General Motors’ Lansing Delta Township Assembly Plant in Lansing, Mich., was the first LEED Gold certified automotive manufacturing plant in the world. The plant, designed and constructed by the Alberici Group, produces General Motors’ crossover vehicles. Over the first 10 years of operations, the facility is expected to save more than 40 million gallons of water and 30 million kWh of electricity, compared to traditional construction. Energy efficiency was designed into every system, resulting in energy costs that are 45% lower than industry standards, with a projected savings of $1 million each year. On average, the initial investment of 2% in green building design, results in life-cycle savings of 20% of the total construction costs, more than 10 times the upfront investment. NRG Systems, a manufacturer of wind assessment systems, is another industrial company that has used green construction techniques. In 2004, the company built

Exhibit 8 Value of Green Manufacturing Construction

In millions of current dollars 500 450 400 350 300 250 200 150 100 50 0 2001 02 03 04 05 06 07 2008 2008 issue 3 FMI QUARTERLY ■ 73

a 46,000-square-feet facility in Hinesburg, Vt., which incorporates environmentally sustainable practices and materials. Occupancy sensors minimize lighting needs. The building only uses one-fourth the energy of a typical building its size. NRG produces 53% of its own electricity through solar photovoltaics and a wind turbine behind the building. The building is LEED Gold certified and is one of only six industrial buildings like it in the world.

GREEN COMMERCIAL Green commercial building has recently gained more momentum with the increased awareness and development of industry-specific standards for green construction. Both the U.S. EPA and the USGBC have developed standards for green commercial construction. The USGBC has created modified LEED certification pilot programs designed specifically for commercial construction, such as LEED for Retail and LEED for Retail Commercial Interiors. Justin Doak, manager of the USGBC’s LEED for Retail Program, has seen increased activity for green commercial construction over the last year and is working with participants on 70 projects that are LEED for Retail registered. Doak says that retailers are making moves to adopt sustainability and build it into their brand equity. Companies such as Target, REI, Subway and Whole Foods are leaders in commercial green building. In addition, there has been increased interest shown by retail developers, such as Regency Centers, Forest City, Macerich, Westfield and Federal Realty. Green commercial construction, according to FMI, will increase by 7% in 2008 to nearly $340 million. (See Exhibit 9.) Currently, the USGBC is working on its Portfolio Program, which could have a significant impact on the commercial industry. The program is designed to allow owners to integrate the LEED green building rating system into new and existing buildings in their portfolio in a cost-effective way without sacrificing the technical thoroughness and integrity of LEED. Participants in the program include Best Buy, Office Depot, Kohl’s, Starbucks, Bank of America, Wachovia, HSBC and Wells Fargo. Kohl’s recently announced that it will pursue LEED certification for each of its 80 stores in 28 states planned to break ground in 2008.

Exhibit 9 Value of Green Commercial Construction

In millions of current dollars 500 450 400 350 300 250 200 150 100 50 0 2001 02 03 04 05 06 07 2008 74 ■ forecast calls for building green in u.s. nonresidential markets

The challenge facing this program is trying to streamline LEED across an entire portfolio and deciding how to cost effectively monitor that LEED elements are followed at each location. In addition to multiretail establishments, large warehouse and distribution centers with continuous operation can have significantly lower utility costs with better temperature control and lighting efficiency. As a result, companies are demanding green facilities for their operating cost benefits. In response, many REITs are building green to meet increasing demand. According to the Progressive Investor, an industry newsletter, 41% of the 300 REITs in the United States are actively pursuing energy efficiency and green building upgrades and another 27% plan to do so. Tenant demand for green buildings is at a peak with occupancy rates expected to increase by almost 4% and rents by 3% in 2008. A lack of available data makes it difficult to analyze the return on investment of green commercial projects, especially from a customer sales standpoint. However, it can be expected that retailers that incorporate LEED will see increased sales. Customers are willing to stay longer in a store with good air and lighting. A heightened customer experience can lead to brand loyalty, which entices many retailers to consider green building. Until this data is produced, some developers will hesitate to produce sustainable building Customers are willing to designs, fearing that higher initial costs stay longer in a store will place them at a disadvantage for tenant competition. with good air and lighting. GREEN LODGING A heightened customer Since 2003, the lodging segment experience can lead to has experienced the largest growth rate in green nonresidential construction. brand loyalty, which FMI data shows that during the previous four years, green lodging entices many retailers to construction has grown from $24 consider green building. million to $359 million in 2007. This figure will continue to grow as more hotels become aware of green building techniques and requirements. For many hotel owners and operators, the decision to build green is a confusing and a difficult step to make. As is the case with several other nonresidential building segments, the lodging segment lacks a LEED rating system designed specifically for green lodging. In response to this void, Marriott International has established an internal green council to examine what constitutes a green hotel. In 2001, the hotel chain joined the U.S. EPA’s Energy Star program and has been given recognition for using lower-energy fluorescent lighting and reducing greenhouse-gas emissions. Marriott International has more than 200 properties with the Energy Star label, and it expects to increase that number by 33 percent in 2008. In addition to Marriott, there are more than 250 Energy Star-labeled hotels listed on the U.S. EPA’s Energy Star for Hospitality 2008 issue 3 FMI QUARTERLY ■ 75

web site. The majority of these listed hotels average 200 rooms but range from 60 to more than 2,000 rooms. (See Exhibit 10.) According to the International Ecotourism Society, an estimated 17 million U.S. travelers consider environmental factors when deciding which travel companies, including hotels, to patronize. In response to meeting increased customer demand, several worldwide hotel chains have constructed or plan to construct green hotels. Hilton Hotels has several LEED certified hotels in its portfolio, including the Hilton Vancouver Washington. Starwood Hotels & Resorts Worldwide announced that its new green brand, Element, which is described as an environmentally and socially conscious hotel, will open its first location in 2008 and plans to build 500 worldwide. In addition to the worldwide hotel chains, several smaller boutique hotels are also seeking LEED certification. For example, New York City’s Crosby Street Hotel will have 75 rooms and is expected to open by 2009. It will be one of the city’s first LEED certified hotel projects. Additional green lodging properties include Austin’s Habitat Suites and the Orchard Garden Hotel in San Francisco.

GREEN PUBLIC SAFETY Building green correctional facilities requires striking the right balance between sustainability and safety and security. Due to the highly secured and rigid nature of correctional facilities, green building can be difficult. In addition, lower maintenance and operational costs must offset initial higher construction costs in order to justify green building techniques. Many correctional owners and operators have used green construction practices. Since 2004, green public safety

Exhibit 10 Value of Green Lodging Construction

In millions of current dollars 450 400

350

300 250

200 150 100

50 0 2001 02 03 04 05 06 07 2008 76 ■ forecast calls for building green in u.s. nonresidential markets

Exhibit 11 Value of Green Public Safety Construction

In millions of current dollars 450 400

350

300 250

200 150 100

50 0 2001 02 03 04 05 06 07 2008 construction has grown 69% from $152 million to $257 million in 2007, according to FMI. (See Exhibit 11.) Currently there are nearly 200 LEED certified prisons in the United States. In 2005, the medium-security Federal Correctional Institute in Butner, N.C., became the first and only LEED certified federal prison. The total cost for the project was $98 million and included more than 530,000 square feet of new construction and more than 850 cells. LEED points were awarded in all six program categories. Moseley Architects worked with Hensel Phelps Construction on this design-build facility. In 2007, the first juvenile justice facility to be awarded LEED Gold certification was completed by Hensel Phelps Construction and HOK in San Leandro, Calif. Finally, the Washington Department of Corrections is committed to achieving LEED accreditation for all new construction projects larger than 5,000 square feet and has constructed four LEED certified buildings. The state’s largest prison, Monroe Correctional Complex, became Washington’s first LEED certified prison in 2007. The $40 million complex includes 75 buildings, covering nearly 300 acres, and houses 2,500 inmates. Energy- and resource-efficient design components of the facility include the utilization of natural lighting and As industry awareness rainwater harvesting. for green building and CONCLUSIONS AND IMPLICATIONS its benefits continues to Construction industry stakeholders are beginning to embrace the green increase, the amount of movement and sustainable design for green construction will its environmental, economic and social advantages that benefit everyone, continue to grow. including owners, occupants and the general public. According to FMI’s Nonresidential Construction Index 2008 issue 3 FMI QUARTERLY ■ 77

Exhibit 12 Construction Put in Place: Estimated for the United State — 3Q2007

Millions of current dollars

Nonresidential Buildings 2001 2002 2003 2004 2005 2006 2007 2008 Lodging 28 22 24 36 94 193 286 383 Office 1,564 1,232 1,719 2,748 3,700 5,102 6,942 9,460 Commercial 68 70 118 144 206 250 328 393 Health Care 241 406 516 670 878 1,182 1,552 1,921 Educational 644 1,586 2,439 3,061 3,696 4,365 5,399 6,084 Public Safety 125 150 171 196 232 272 334 389 Amusement and 437 500 534 580 606 1,197 1,315 1,412 Recreation Transportation 312 382 402 433 462 544 622 705 Manufacturing 51 60 84 138 224 307 379 440 Total Nonresidential 3,471 4,408 6,007 8,008 10,098 13,413 17,157 21,186 Buildings

Percent change from prior year—Current dollar basis

Nonresidential Buildings 2001 2002 2003 2004 2005 2006 2007 2008 Lodging –21 9 50 160 106 48 34 Office –21 39 60 35 38 36 36 Commercial 2 70 22 43 21 31 20 Health Care 69 27 30 31 35 31 24 Educational 146 54 25 21 18 24 13 Public Safety 20 14 14 18 17 23 17 Amusement and 14 7 9 4 97 10 7 Recreation Transportation 22 5 8 7 18 14 13 Manufacturing 17 41 65 62 37 23 16

(NRCI), contractors report backlogs for green construction projects will grow from 15% of total projects in 2008 to 40% in 2013. More owners than ever are demanding that their building partners use green building techniques. In response, contractors are training their employees in green construction methods, and there are an increasing number of LEED certified professionals. In 2007, more than 15,000 design and construction professionals in the U.S. became certified through USGBC’s LEED Accredited Professionals program. Contractors that understand and utilize green building practices and products will have a competitive advantage over those that lack this knowledge. As industry awareness for green building and its benefits continues to increase, the amount of green construction will continue to grow. (See Exhibit 12.) ■

Kevin Haynes is a senior research analyst with FMI Corporation. He may be reached at 919.785.9275 or via e-mail at [email protected]. Heather Jones is a construction economist with FMI Corporation. She may be reached at 919.785.9335 or via e-mail at [email protected]. Develop Them and They Will Stay

The greatest source of skilled labor and field leaders will come from within, requiring firms to cultivate their own leaders and technicians in order to meet future industry demands. By Gregg Schoppman

he construction industry has experienced its fair share T of shortages and scarcity. Concrete and steel shortages have both had recent deleterious effects on various aspects of the construction industry relative to project cost and schedule. Price stability is only one of the challenges a firm faces in a volatile marketplace. Managing schedules, meeting customer expectations and long-range planning are all examples of how material scarcity in the construction industry further complicates an already complicated process.

It is difficult to fathom that one of scarcest resources available to contractors today is not manufactured, mined or processed. The shortage of qualified field personnel represents the single greatest predicament facing contractors today. The effects of a diminished labor force are multi-faceted and extremely complex when considering how the problems affect other elements of the business. Poorly trained and poorly led crews leads to mounting quality, safety and schedule issues that then forces firms to address the attrition of key customers while continuing 80 ■ develop them and they will stay

to attract new ones. Training and developing talent in an organization appears a daunting and expensive affair when attempting to manage these increased costs. Unlike the aforementioned materials shortages where new mills and plants are constructed to accommodate the market demand, the supply of qualified field labor lacks such a bolstering injection.

THE SCARCITY OF LABOR AND ITS ROOTS Construction leaders also face a distinctive shortage in field leadership. In addition to the general shortage of field labor to do the work, firms are hamstrung with their lack of experienced field supervision and foremen to lead the work. While no one should dismiss the need for competent field workers, an urgency exists in identifying people to lead the field in a productive, efficient, safe and profitable manner. Interestingly enough, the decline in the number of competent field leaders is further exacerbated by aging and the impending retirement of many such individuals. The disparity in age amongst the personnel in the office and field is common. It is familiar to see an average of 10 years age difference between a firm’s project management and its field supervision. On one hand, the veteran, more seasoned field supervision serves as excellent teachers for entry-level project engineers and junior-level project managers. Conversely, this does nothing to help the shortfall that firms will continue to experience without careful scrutiny of how they recruit, attract, train and cultivate future field personnel. To under- stand the problem, it is important to look deep at the root causes of how this problem is perpetuated. In addition to the general Construction schools and engineering programs have done a shortage of field labor superb job in training and educating the current generation of project to do the work, firms engineers. Yet, it would be a fallacy to think that graduates of these programs are hamstrung with their enter the workforce completely armed lack of experienced field to deal with the challenging world of construction. Construction firms supervision and foremen are slowly realizing the benefits of mentoring and training in order to to lead the work. protect these highly coveted human assets. Compare this to the equivalent training grounds for the field. It would be false to say that vocational and apprenticeship programs across the country are doing a poor job in training carpenters, electricians, sheet metal workers, etc. In fact, one could argue that technology has enabled these programs to do a more effective job in teaching these tradesmen. Digging deeper, it becomes apparent that high school students do not lack the ability or the resources to do well in these programs. Rather, they simply lack the desire to enter these programs. Industry pundits have conducted studies on the attractiveness of the construction industry to graduating high school seniors. While attorney, doctor and engineer always surface as the most au courant 2008 issue 3 FMI QUARTERLY ■ 81

of professions, construction trades conspicuously dwell at the bottom of most lists. Not everyone is suited or skilled to endure medical school. However, it may be the increase in technology-related positions that have provided would-be construction tradesmen an alternative. Imagine the alternatives: Work in an air-conditioned office environment at a call center with a computer, consistent schedule and seemingly limitless personal growth potential or endure searing/chilling temperatures while exerting considerable energy-framing homes or installing sewer lines in 10-foot deep trenches complete with all of the safety hazards and lack of formal career path and upward mobility. It quickly becomes clear that the allure of being a construction worker does not carry the same charm as it did 50 years ago. Times are changing, and it would be a safe assumption to say that the supply of construction labor lags demand with no solution on the horizon. With supply on the decline, firms must realign their strategy. The construction industry is extremely competitive in terms of client acquisition, and the battle for labor resources is becoming equally as heated. Exhibit 1 embodies this struggle in a simple economic model. It is easy to see that as the demand for labor increases and the supply decreases over time, wages steadily increase commensurately. Over the long term, wages become inflated. It is important to note that the one point that this graph cannot account for is the quality of the labor. As wages increase for the high-quality producers, so does it for the lower-quality producer. Now firms are subjected to

Exhibit 1 Economic Model Demonstrating the Scarcity of Labor

Illustration Depicting the Decrease in the Supply of Qualified Field Illustration of Labor and the Increase in Demand of The Law of Supply and Demand Model Qualified Field Labor

New Supply Supply Supply

Increase Labor Costs

Price (dollars) Price (dollars) Price New Demand

Demand Demand

Quantity of Labor Quantity of Labor 82 ■ develop them and they will stay

endure this shortage while dealing with higher project costs. Fortunately, even as the firm experiences these wage increases, so does the competition. However, the opportunity to gain a competitive advantage disintegrates. Firms need to consider alternate methods to gain an edge on their competitors. This same phenomenon exists amongst the firm’s management. However, firms are engaging in a more proactive approach to deal with this challenge. Consider the annual spend of firms to train and cultivate project engineers and managers. Newer generations of college graduates are seeking much more than competitive salaries from their employers. Most want to know how Newer generations they are going to be developed and of college graduates trained and ultimately, their career path within the firm. Firms are forced are seeking much more to dedicate the appropriate resources to ensure they can attract and retain than competitive salaries these “superstar” graduates or lose from their employers. them to the competition. In practice, great firms that employ this tactic Most want to know typically have the best and brightest project managers. No one can argue, how they are going to a bright and competent project be developed and manager will have direct impact on the profitability of a project and the trained and ultimately, growth of the firm. However, firms need to recognize that the core purpose their career path of management is to support and within the firm. revolve around the actions taken in the field by the crews and their supervision. The project manager serves the crew. The accounting department serves the crew. The firm exists because of the crew. This paradigm is not new to the industry, but represents a hard concept to grasp. The builders of the project sustain the business. With this guiding principle in mind, what percentage of the budget is portioned to cultivate the core of the business? What is being done to invest in the field’s future and training?

EVALUATING FUTURE LEADERS More often than not, most construction superintendents did not enter the workforce as superintendents. They began as general laborers or carpenters, exhibited traits that separated them from their peers and rose through the ranks. Top producers may still continue to be identified and promoted in this manner. While the talent pool may appear thinner than it did 10, 20 or 30 years ago, the critical step that is missing is a consistent methodology to identify those individuals with potential. Often carpenters, operators, finishers, etc., that express some level of initiative or superior technical ability are promoted to foremen and so on. Their promotion often comes at the encouragement of some superintendent to 2008 issue 3 FMI QUARTERLY ■ 83

senior management or through the individual’s own tenaciousness and drive. However, other individuals with equal potential, but lacking the right forum to exhibit their talents, may be ignored or discarded. It is evident that this manner of promotion also has the potential to create an invidious environment amongst the rank and file. The same need for a career path exists at the field level as it does in the office. Some people will argue that this timeless method of hiring/promotion has worked for decades, and plenty of quality employees have been found in this manner. They themselves may have ascended in this fashion. Finding quality people in the future will require a more innovative approach. A “hit-or-miss” approach to finding future leaders is not only risky but may fail to identify many other master tradesmen. After all, if the firm is dependent on the field, why not invest in its growth? The first step to proactively managing the human resource component of the construction business is to plot a career path for every position within the firm. This means every position from laborer to superintendent has a defined set of expectations and guiding trajectory through the mastery of certain skill sets. The career path assists not only the individual but also the firm in identifying future leaders. Exhibit 2 provides a conceptual sketch of the skill set mastery process. Climbing this “career staircase” would require satisfactory completion of numerous critical skills sets complementary to the current position. A person’s foibles and inadequacies can be identified and appropriate training can take place to educate and reinforce. The key to a successful program will be to send the message that the firm is not only serious about the program but is committed to the development of every employee.

Exhibit 2 Career Path Skill Set Mastery

Foreman  Scheduling  Material ordering  Daily huddle  Advanced layout  Look-ahead planning

Operator/Carpenter  Basic layout  General welding  Basic maintenance of tools  Competent person and equipment

Laborer 3  Employee handbook  Tool and equipment usage 3  General OSHA  Cross-training opportunities 84 ■ develop them and they will stay

Measuring employee Exhibit 3 Operators: Career Development progress through compli- Completed ance graphics will be Target one way of providing the January necessary feedback to the February entire staff. An example March of a typical graph is April illustrated in Exhibit 3. May June This simple metric July demonstrates the August opportunities for field September development compared October to the firm’s actual November performance. For example, December the firm employs four 0 10 20 30 40 50 60 operators. Within the Total career development opportunities firm’s growth program, there are 15 modules or skill sets required to achieve a promotion of some kind. According to the data collected, within a year’s time, there are 60 total opportunities for growth (i.e. four operators x 15 modules = 60 opportunities). By the end of March, 10 modules were completed. Similar graphs can be developed for all positions to illustrate compliance. This aggregate total can be filtered further to examine specific position performance as well as individual performance. Exhibit 4 illustrates the performance of the operators on each skill set. In this case, three of the four operators have mastered skill sets four and eight. Upper management can quickly review this data and use it to examine the firm’s performance relative to the skill sets complete and not complete. For example, if the firm is continuing to perform unproductively because of poor daily planning

Exhibit 4 Operators: Skill Sets Mastery Graph Mastered skill sets

Number of Operators 4

3 Goal = 60 skill sets Total to date (March) = 10 skill sets 2

1

0 1235678911 4 10 12 13 14 15 Skill Set Number 2008 issue 3 FMI QUARTERLY ■ 85

Exhibit 5 Individual Performance – Operator, “Joe Digger”

Current 5/15 33% Employee Joe Digger Position Operator Accomplishment

Skill Set 1234 5 678 9 10 11 12 13 14 15 Status

and substandard short-interval planning, it may be because employees’ haven’t yet fully mastered this skill set. Exhibit 5 examines the performance of each individual. Keep in mind that this tool is as much a training and development tool for the individual as it is a tool to aid in identifying top producers within the firm. By monitoring individual performance, management can make conscious human resource decisions and mitigate the risk of using ill-trained personnel on complicated construction projects. Many people will reject this system, finding the strict adherence to their professional growth bothersome and too rigid. Their caviling is a flag that they are not only wrong for promotion and advancement but also wrong for the firm. Once again, this program is as much for them as it is for the good of the firm. This same structured program can be used as a recruiting tool to help capture some of the precious supply of labor. While some people may not be right for the firm and will filter themselves out through this process, not every person in the field is qualified to be a foreman or superintendent. The objective is not to simply pan for the most desirable candidates and toss away the rest. Rather, the aim is to build people, including those at the crew level in order to have the greatest technicians and leaders in The aim is to build all positions. It is an inalienable truth that some individuals can be great people, including those technicians, but lack the business acumen and communicative ability at the crew level in order required to be a leader. Years ago, to have the greatest it may have been acceptable to be a “great builder” but be a “weak technicians and leaders business person.” Now more than ever, superintendents need to be exceptional in all positions. business people. In light of the competitive margins, managing projects with the bottom line in mind is paramount. This doesn’t mean that a construction firm’s superintendents and foremen need to be enrolled in the local university’s MBA or CPA program. Simply put, the best leaders in the field understand that what they do in the field has a direct correlation to the profitability of the firm. Furthermore, we should not abandon those workers who do not have the desire or ability to reach the next level. It is just as important to continue to motivate and challenge people that 86 ■ develop them and they will stay

have their goals and futures aligned with the firm but cannot physically or mentally achieve the next level. Retention of these individuals is also important from a resource perspective. Further, by retaining these tradesmen, it promulgates the message that the firm is an employer of choice for those that are great at their trade, making the firm desirable to other tradesmen with equal ability. A career path, however high or low the target may be, will also require the investment of training.

CULTIVATING THE NEXT GENERATION OF FIELD LEADERS Training at the lowest levels within the firm provides employees at this level with incentive and growth opportunity while providing management with opportunities to screen the next generation of foremen and superintendents. All of the aforementioned skill sets require that employees receive some exposure to not only the basic principles but also to the organization’s procedures and protocol. Exhibit 6 demonstrates a three-tiered training methodology that gives tradesmen the opportunity to educate themselves while allowing management the opportunity to identify key producers and potential leaders. Within Tier 1, tradespeople are given the opportunity to learn specific operational skills. Tiers 2 and 3 begin to indoctrinate the next level of employee to more leadership/business skills directly associated with their position. The more technical subjects should include interpersonal training such as “communication” and “negotiating skills,” specifically suited to the needs of the position. Cross training is another beneficial training tactic. While not every company will be able to do this (for example, contractors operating under union guidelines),

Exhibit 6 Field Training Pyramid

Tier 3 Cultivate and Retain Leaders

Business Processes • Business Development • Contracts • Accounting Principles

Soft Skills I • Leadership • Motivation • Negotiation

Tier 2 Construction Processes Identify Motivated Leaders • Scheduling • Productivity Principles • Closeout • Integration/Coordination

Soft Skills I • Communication • Team Building

Tier 1 Identify Key Technical Skills Producers • Equipment Operation • Equipment/Tool Maintenance • General Construction Technologies 2008 issue 3 FMI QUARTERLY ■ 87

those that do reap several benefits. We have already illustrated the scarcity of labor and its affects on the various trades. By cross training individuals, firms can leverage their ability to do work while minimizing their reliance on multiple streams of tradesmen in short supply. Of course, we can’t expect concrete finishers to become expert trim carpenters or bulldozer operators to become electricians though a single training session. However, with their innate technical ability, these workers may be able to help mitigate problems and find solutions not easily seen by their counterparts. Further, this training gives individuals a chance to see if their true abilities fit better within another discipline that would ultimately serve the firm better. In some cases, people Exhibit 7 perform their current work simply Labor Scarcity Strategy because of their lack of knowledge Beco me t Employer he 7 s of about better options. Exhibit in er Ch ta c oic e du e R ro illustrates a firm-wide strategy for P p T o o T p A

P t developing talent. t r r o a d Successful Strategy c u t

c T

e Some will argue that spending r a for a

r

n

i s n d , Labor Scarcity time and money on career advancement M M e o a n s it u o r and training for their employees, e r n rs i e t c s u particularly in the field, is a waste of ve d In o De Pr C fine p energy and resources. Human resource are a To er Path departments may be viewed as unnecessary overhead that is only needed in large sophisticated companies. Regardless of whether the training and career path planning is conducted solely in-house or with the assistance of industry experts, some level of investment is required. However, this investment is in a precious resource that is one of the firm’s most important. In order to manage and lead construction firms in this generation, the greatest source of skilled labor and field leaders will come from within. It will be requisite for firms to cultivate their own leaders and technicians in order to meet the industry demands of the future. ■

Gregg Schoppman is a senior consultant with FMI’s Tampa office. He may be reached at 813.636.1259 or via e-mail at [email protected]. What Is All That Mumbo Jumbo About Vision and Mission Statements?

More than a wordsmith exercise, vision and mission statements are leadership tools that provide focus and motivation. By Ken Roper

oc Fails, founder of FMI, identified FMI’s “cause” in D the construction industry more than 50 years ago. He viewed the construction industry as very high risk with low return on investment. Simply stated, for the risk contractors take, they do not make enough money. He took up this industry condition and envisioned an organization that built value for the entire construction industry.

This central theme continues to evolve after more than 50 years and as industry conditions change. The organization that Doc and his partners built today is a consulting firm with offices in Raleigh, Tampa, Phoenix, Napa and Denver, focused on building value for the worldwide construction industry and its leading organizations. Doc inspired his employees with this vision. Several early employees became his partners and continue to build on this vision, inspiring people inside and outside of the company and the construction industry. Pause here and recall your company’s vision statement. If you cannot remember it or do not have a vision statement, this is your first sign of trouble. Vision statements need to be “unforgettable.” The following highlights vision and mission requirements and their purpose in the organizational development and the role of leadership. 90 ■ what is all that mumbo jumbo about vision and mission statements?

VISION Search the Internet for “vision statements” and you will receive almost one million hits. Sites include “simple methods for writing your vision statement” to “the three statements that will change your world.” For $24.95, you can buy software online to write your company’s vision. The Dilbert web site (http://www.dilbert.com/comics/dilbert/games/career/bin/ms.cgi) has a wonderful game to help you develop your vision and mission statement by simply rearranging, verbs, nouns and adjectives that provide a wordsmithing pundit’s dream. For some companies, the vision statement of the firm is nothing more than a motto on a wall or a statement in the employee manual. Some users have continued to marginalize the business vision, by failing to understand the power of a unifying and compelling vision in motivating and inspiring the people those users would lead. The vision is not simply wording, but the passion of the leaders that bring the vision to reality. The strategic direction of an organization is fundamental to corporate success; it all starts with answering the question of: What do we aspire to create and build with this business in the future? Vision is the foundation of strategy as well as the compass heading of your company. One client, in particular, began articulating its vision as being the first choice for construction services, with the aim of dominating the regional market. The client’s strategic initiatives aligned with its vision. Over a period of 10 years, the company’s commitment and passion around its vision continually elevated its market position. Its vision aligned customers, employees and stakeholders into a competitive advantage in the company’s target markets. Currently, this client dominates its regional market. Its vision was the starting point of their strategy. The strategic planning process begins with defining the organization’s culture and purpose as well as early thoughts about future possibilities. If we want all of our people headed in a common direction, it only makes sense to start with a common destiny. Jim Collins and Jerry Porras, Vision is the foundation authors of Good to Great, collaborated of strategy as well as on the article, “Building Your Company’s Vision.” In it, they coined the compass heading of the phrase BHAG or “Big, Hairy Audacious Goal.” The BHAG is “clear, your company. compelling, serves as a unifying focal point of effort and acts as a catalyst for team spirit … sets a clear finish line.”1 The BHAG is a critical element of a company’s core ideology that, when blended with a full understanding of your firm’s core purpose, sets the direction of your envisioned future. If you do not know where you are going or what your direction is, then why expend the energy to plan? Vision is more than a touchy-feely morass of words coupled with mystical predictions of our imagined self 30 years from today. The underpinnings of the vision should be set on plausible market forecasting and educated assumptions. 2008 issue 3 FMI QUARTERLY ■ 91

Yes, visions are idealistic and yes, they may never come to total fruition, but vision creates the far boundary of the strategic planning process and a clear notion of direction. As some firms begin the strategic planning process, they misconstrue the relationship of planning and vision. Strategic planning is not an alternative or replacement for vision or direction but a complement. A never-better- Yes, visions are than-mediocre company that now idealistic and yes, they contends its vision is to be No. 1 in an industry in a short time frame is may never come to total engaging in delusional fantasy. A client that participated in fruition, but vision the strategic planning process had creates the far boundary developed an exceptional vision: “Building a Company that is a Market of the strategic planning Leader.” The company sustained significant profit erosion resulting process and a clear from the competitive hard-bid market. notion of direction. The supporting strategy was to transition into the negotiated market. The leadership began its action plan just as the hard-bid market picked up. They won two projects and shelved the strategic plan to manage these projects. The plan and vision are currently sitting on the shelf, and they continue to struggle in the hard-bid market, even losing several key players in the process. John P. Kotter, a well-respected author on corporate culture and performance, says that bad vision negates the importance of your customers, your employees and your stockholders or is strategically unsound. Strong vision statements elicit passion, emotion, inspiration and energy, and are motivating. The minimum standard is that a vision should not invite cynicism or snarky internal comment. Professor Douglas Ready of the London Business School and Professor Jay Conger of Claremont McKenna College conducted a survey of 40 global companies to determine best-practice models for translating visions into reality. They found five best-practice phases that successfully enable organizations to make this leap. The first phase frames the agenda. Company leaders and employees are spending energy and time on competing initiatives, but the leadership of the firm creates the vision based on the core capabilities of the firm, culture, values, behaviors and the external brand of the firm. The leadership generates a requirement for urgent action through identifying priorities, assessing capabilities and analyzing alternatives given an unpredictable future. The leadership drives the vision to the top of all other priorities. In this phase, they take into account present and future performance and the current organization restraints that can be overcome by an inspirational vision. The company’s leadership engages the organization in the second phase. This is more than communicating what the vision is and where the company is going. This moves a leader beyond evangelizing the direction. Great visions 92 ■ what is all that mumbo jumbo about vision and mission statements?

create “tension and anxiety” with the status quo performers. In an effort for the vision to gain traction and minimize resistance, leaders encourage opportunities to listen to varying views and paradigms, appease legitimate arguments and build buy-in of the organization. Truly great visions require companies to expand and build mission-critical capabilities in the third phase. There will always be a gap of core capabilities between your current situation and your envisioned future. There may be missing resources, new markets or insufficient business process infrastructure. You may not currently be able to perform at a level demanded by the envisioned future. Addressing the missing capacities or processes prevents the vision from becoming hollow and merely words on a wall. A vision provides the direction and inspiration to build the capabilities and address obstacles that confront organizations in the environment. By developing the specific details in terms of customers and services and delivery, the leadership flows from the vision and defines the organization mission discussed below. In the fourth phase, leadership creates alignment with great visions. Visions are most often derailed by internal paradigms systems, processes or culture or are discordant with the very executives who are charged with enabling the vision to take root. One of the most difficult assignments for our clients is selling the message to top leadership. Being part of the creation of the vision truly helps senior leaders, but those that do not participate are subject to confusion and acceptance of the “new” vision. Aligning senior management teams to not just the vision but what it means and how to interpret the concept is fundamental to implementation. The vision energizes the A vision provides organization through the power of the direction and people in the final phase. The enthusiastic support of the employees inspiration to build the throughout the company, embracing and reinforcing the importance of the capabilities and address vision, moves it from “inspiration to obstacles that confront implementation.” Acclaimed leader Jack Welsh organizations in the said, “Good business leaders create a vision, articulate the vision, passionately environment. own the vision and relentlessly drive it to completion.” The vision should invoke passion, strong desire to 2008 issue 3 FMI QUARTERLY ■ 93

execute, excitement and dedication. Achieving superior performance from people in an organization is what great leadership is all about, and selling the vision is one tool to accomplish this objective. Senior leaders expect action. According to Joel Barker, a leadership theorist, “Vision without action is a dream. Action without vision is simply passing the time. Action with vision is making a positive difference.” Vision is the embodiment of the leadership of a company and its employees and also instills discipline and encourages execution. A survey, published in the Harvard Business Review, of 197 global companies with sales exceeding $500 million measured the translation of strategy to performance. Those companies that failed did not track performance against projections; the value of the vision was lost through poor communication, abysmally formulated plans and limited accountability. Most strategy performance breaks down at senior levels of the company, “which fosters a culture of underperformance.” Key survey points include:

• Keep it simple, and make it concrete. • Use a rigorous framework. • Identify and discuss resource deployments early. • Identify priorities. • Continuously monitor performance. • Reward and develop execution capabilities.

The survey ultimately discovered that vision, translated into action, propagates success. Passionate leaders like Bill Gates (“A computer on every desk and every home”) or Peter Kiewit (“The greatest contractor in the world”) have been able to translate their vision into success. Ironically, it does not just require vision or action to equate success. It takes strong vision and mission to facilitate the transition from being a “pickup-truck contractor” to a dominant competitor in your chosen markets.

Exhibit 1 Strategic Concepts Defined

Strategic Concept Definition

Vision Inspirational expression of where an organization desires to be in the future.

Mission Clarifies short-term strategic intent and defines organizational priorities.

Value Proposition Delivering a combination of unique products and services to customers that provides superior value and benefit.

Core Competence A bundle of skills and technologies that enables a company to provide a particular benefit to customers.2

Core Values Essential and enduring tenants that exist in an organization. A small set of timeless guiding principles.3

Core Purpose The organization’s reason for being.4

2 Gary Hamel and C.K. Prahalad. Competing for the Future. Harvard Business School Publishing. April 1996. 3 “Building your Company’s Vision.” 4 “Building your Company’s Vision.” 94 ■ what is all that mumbo jumbo about vision and mission statements?

MISSION A mission statement defines the purpose of the business. Some leaders and managers think that the mission statement is only for marketing to their customers and deal with the mission accordingly. Others take the mission as a valuable exercise in defining the business. To simplify this notion, Exhibit 1 presents an example with the basic elements of the mission for ease of comprehension. You need absolute clarity around the mission of the business. Some leaders prefer to frame these issues in a mission statement, and this is acceptable as well. The table condenses the key issues and enhances communication of the mission’s core components. The organizational mission should meet these objectives:

• Answers the question: “What is our business?” • Defines the foundation of organizational priorities and aligns resources. • Identifies key strategic elements. • Clarifies the short-term (three- to five-year) strategic intent. • States our reason to exist for stakeholders.

The mission defines the specific direction in the market that the business is pursuing. Three critical strategic questions to ask in formulating your mission are what customers, what services and how do we differentiate delivery to create a sustainable competitive advantage? Each one of these elements provides strategic and operational implications. An organization’s core purpose is the fundamental reason for the existence of the organization. An owner may initially think “providing for his own job” and “survival” his primary motivators, but ultimately something larger motivates an owner to start his own enterprise. The question, “What would be missing if this

Exhibit 2 Mission Now and the Future

Strategic Element Now Future (three- to five-year view)

Core purpose Creating opportunities, building Creating opportunities, building solutions and delivering value solutions and delivering value

Primary customers High-tech and industrial clients Medical clients and industrial

Primary services Design/build Building information modeling (BIM)

Geographic footprint California California and Pacific Northwest

Basis for differentiation Project specific knowledge and Design team and delivery capability service

Core competencies Design/build delivery and Three-dimensional design and conceptual estimating integration with all contract parties

Competitive advantage Relationship focus generating repeat Team member with full integration work opportunities of BIM

Market position Value-added provider Value-added provider

Earnings growth rate 5% 15% 2008 issue 3 FMI QUARTERLY ■ 95

organization ceased to exist?” is a leading discovery question for the The vision and mission core purpose, according to Collins and Porras. The vision and mission are dynamic and are dynamic and change with markets and leadership of the organization, but change with markets the core purpose remains the same and leadership of the and does not change. Ask the question, “Why do we exist?” and examine organization, but the what thoughts and answers this question generates. core purpose remains Primary customers are likely the same and does to change in the short term for the business, particularly due to the cyclical not change. nature of the construction industry. In early 2000 and 2001, the high-tech market crashed. Contractors that focused on this segment experienced severe downturns in this segment of their business, with concurrent erosion of profitability. Strategy development increases the likelihood that proper market assessments occur and anticipates market softness such as in the high-tech market of the early 2000s. In Exhibit 2, the blue highlighted client transition is one of the important strategic assignments for this contractor to transition from the high-tech market to the medical market where sector growth is in the future. In 2001, a client approached FMI for strategic planning assistance. Although the residential market (about 80% of its revenue and gross profit) had been strong for several years, there was concern about a potential downturn in the residential market. Its “mission” was to diversify into the commercial market sector, and from 2001 to 2007, the company transitioned to a mix of 60% commercial and 40% residential. It looks like a genius in today’s market. Service offerings are evolutionary. External market focus requires that future client offerings enhance clients’ service and satisfaction. The trends in design/build and building information modeling (BIM) are examples of new and unique ways to provide value to clients. Clients do not always know what they want. Part of the strategic assignment is to continue to innovate and package service offerings with higher value to clients. These offerings are detailed in the contractors’ mission. The basis for differentiation identifies the contractors’ uniqueness in the market. What new service enhancements for targeted clients will increase value to these clients and sustain a competitive advantage? In Exhibit 2, the orange- highlighted area represents the strategic intent to evolve from a design/build delivery 96 ■ what is all that mumbo jumbo about vision and mission statements?

contractor to a fully integrated BIM design partner. This transition requires development of new core competencies. Core competencies currently exist in the delivery of a design/build delivery method. What additional core competencies are required to become a BIM partner? How will the business develop and promote these new offerings in the market? The mission and subsequent strategy development depict the road map for the evolution of the organization. A competitive advantage exists in this example in the long-term relationships with existing clients. To sustain this advantage, service delivery must continue to be enhanced and new offerings that come online must fit and reinforce this competency. The strategic intent of becoming a fully integrated design partner with BIM capabilities supports this competitive advantage. Market position is the selection from a few viable choices: cost leader, value added or product offering. So many contractors believe that all three positions should be chosen to avoid missing opportunities in the construction market. Outside the construction industry, you rarely find a best-of-class company attempting this market positioning strategy. In Exhibit 2, the green-highlighted area indicates the contractor will continue to focus on the value-added provider market position and strengthen its value-added offerings using BIM. The growth rate targets the strategic intention for the stakeholders. Growth is fundamental to increasing the value of the enterprise. Stakeholders have a stake in ensuring that the leadership of the enterprise is sustaining the value creation process. As the strategy is deployed and actions are taken, the ultimate metric is growth in earnings and cash flow. Exhibit 2 enables an organization to summarize its mission (purpose) in clear strategic terms. Although only summary-level detail is available, it is easy for all members of the organization to comprehend their mission over the next five years. Whether in mission statement form or table form, all of these components are key aspects of the mission of the business. Stakeholders can readily see the anticipated transition and the steps required to support continued sustainable competitive advantage in the market. Vision statements and missions lead to the next step in the strategic planning framework: to create strategic goals. Exhibit 3 illustrates how the framework ties together. This is one of many planning models, but most models begin with the vision and mission of the enterprise. Collins and Porras in their book Built to Last identified a shared characteristic central theme in their visionary companies. Visionary companies experienced 2008 issue 3 FMI QUARTERLY ■ 97

Exhibit 3 Strategic Planning Framework

Vision

Values SWOT

Mission

Goal Goal Goal

Objectives Objectives Objectives

Strategy Strategy Strategy Strategy Strategy

Action Action Action Action Action

Action Action Action Action

Action

extraordinary success in their markets. These companies had a core ideology that was comprised of their core purpose and core values. They had inspired their organizations by creating a vision that moved the companies forward beyond their competitors. Rather than view visions and missions as a wordsmith exercise and waste of time, think about the vision and mission as invaluable leadership tools that provide focus and motivation and assist in building an enduring company. ■

Ken Roper is a principal with FMI Corporation. He may be reached at 303.398.7218 or via e-mail at [email protected].

1 James C. Collins and Jerry J. Porras. “Building Your Company’s Vision.” Harvard Business Review. September — October 1996. Blowing the Whistle: The Buzz on Executive Coaching

Executives who have been coached have found direction, purpose and confidence in achieving their goals more quickly than they would have without their coach. By Jennifer Jones and Jake Appelman

t’s priceless,” replied one of FMI’s clients when asked to describe “Ithe value he and his organization received from his coaching engagement. Then he added, “The construction industry is so

business-relationship-oriented. We build buildings and projects, but

it is as important for whom we build as what we build. Many of our

conflicts are based on people not being able to understand each other.

Communication is so important to us; it helps us have a successful

project and stay out of litigation. People get into problems because,

frankly, they do not communicate very well. A lot of us understand the

technical side — most of us are very good at bricks and sticks — but

the personal side is the tough part.”

Executives at companies throughout the nation are buzzing about the personal benefits they’ve gained from their coaching experiences. In addition to these personal accounts, the statistics are impressive and support the notion that coaching 100 ■ blowing the whistle: the buzz on executive coaching

helps executives find direction and purpose while helping them to achieve their goals faster. According to a 2008 Sherpa Executive Coaching Survey, 90% of HR professionals and coaching clients see the value of executive coaching as “very high” or “somewhat high.” Fast Company’s survey on the same subject, published April 10, 2006, found 92% of leaders being coached plan to use a coach again; 63% of organizations say they plan to increase their use of coaching over the next five years; and 71% of senior executives and 43% of CEOs have worked with a coach. Fifty executive coaching clients from FMI were surveyed. Of those, 96% said they will be able to make a greater contribution to their company as a result of coaching, while 98% were either “very satisfied” or “satisfied” with their overall engagement. Additionally, 94% believed that it was worth the financial investment their company made. The buzz about executive coaching is simple: When taken seriously, it can be an effective solution for many of the current issues facing construction companies.

WHAT COACHING IS Nowadays you can get a coach for just about any need or issue you have. There are “life” and “personal” coaches who help to resolve behavioral, spiritual and a variety of lifestyle issues. This form of coaching encompasses the broadest spectrum of client needs. There are also career coaches, financial coaches, health and nutrition coaches, fitness coaches and the list goes on. The type of coach who helps construction-industry professionals produce business results is referred to as an “executive coach.” Although there are tremendous benefits from executive coaching that will spill over into your personal life, the main distinction of executive coaching is that it helps clients achieve bottom line-business results. An executive coach helps to effectively bridge the gap between where the client is and where the client wants to be in terms of goals. It is a powerful one-on-one relationship where the coach helps an executive reach established goals more efficiently and, in many cases, helps the executive to reach heights simply not reachable on his or her own. The coach serves as a guide and partner to the executive. Although some companies have internal coaches (employees of an organization who coach colleagues), a key quality of external coaches is that they are an independent party not swayed by the politics of the organization — their viewpoint is not tainted by being a part of the company. The coach is An executive coach completely neutral and can more helps to effectively clearly see all sides of an issue, good and bad. Executive Vice President bridge the gap between Bob Ferguson of Hunter Roberts Construction Group understands this where the client is and well. He said he benefits from “having where the client wants somebody accessible to call and bounce things off, who is not vested in the to be in terms of goals. outcome. It is hard to be objective when you are fighting the fire. Having an outsider’s perspective is healthy 2008 issue 3 FMI QUARTERLY ■ 101

because sometimes we get caught up in the day-to-day running of the business versus strategically growing the business.” In time, similar results may be achieved without a coach, but this often comes through trial and error, confusion, regret and lost opportunities along the way. The cost of failure, lost opportunities and time is extremely high to organizations. This is especially important to construction companies who are finding it increasingly difficult to attract and In time, similar results retain talent and who want to decrease time spent on the learning curve. Not may be achieved without only is this cost high in dollars, but it is also a high price to pay in terms a coach, but this often of loss of individual motivation and comes through trial and lowered morale. Sometimes individuals, particularly in younger generations, error, confusion, regret may not have the patience to endure the trial-and-error approach, resulting and lost opportunities in higher turnover. Thus, more time and money are wasted. With the help along the way. of an executive coach, managers and leaders can ramp up their effectiveness in a new position much more quickly than they can without the assistance of a coach. Seasoned executives can create a well-thought-out succession plan, develop a team of rising stars, develop staff more intentionally or execute a plan for organizational change. In any case, motivation increases and new possibilities emerge faster with the help of an executive coach. For example, another executive in the construction industry gave credit to his executive coach for a career advancement. He explained, “Before coaching, I was all over the place — I had tons of different objectives and things to accomplish. My coach helped me weed through these tasks and come up with a set of goals, which I then had to achieve by a certain date. It was a big win.” Stephen Brague, COO of Casey Industrial Inc., echoed the executives’ comments: “To me, the value in coaching is having that other set of eyes to help me think through problems. I usually find the coach helps me come to the solution myself. The coach is not giving you the answer; he is just asking enough questions to help you get there. The coaching is not about gaining skills as much as it is about gaining insight.”

WHAT COACHING IS NOT Some tend to confuse executive coaching with prescriptive consulting, therapy or mentoring — each valuable fields, yet serving different purposes:

• In prescriptive consulting, an expert is hired to analyze a situation and advise the company about what to do. Prescriptive consultants are specialists in a given field and offer expert knowledge. In contrast, coaches ask provocative questions and bring clarity to an issue to help the client 102 ■ blowing the whistle: the buzz on executive coaching

discover the best answers for his or her unique situation. A similar approach is used for groups and organizations by process consultants. • Therapists help sort out past relationships and feelings so that they do not adversely affect the client’s ability to function today. Therapy is about recovery whereas coaching is about discovery. Coaching provides insight and focus so that a person can more efficiently move forward to where he or she wants to be. • A mentor teaches skills based on the mentor’s personal experience to one who is usually less experienced and often in the same profession. The coaching process does not rely on the coach’s experience or being in the same profession. Instead, the coach guides the client on a unique path in order to help the client meet his or her goals and objectives.

To illustrate these differences, pretend you want to hire someone to help you learn to ride a bike. You are not sure whether to choose a consultant, therapist, mentor or a coach. The prescriptive consultant would provide expert advice on the best bike to buy and how to balance yourself on the bike. He may touch on Newton’s laws of motion. He will help you understand the principles of bike riding and leave you with some documents about proven bike-riding programs that you could implement. The focus is on his expert advice about the topic. A therapist will want to discuss events that occurred in your past that may impact your ability to effectively ride a bike. He would explain why learning how to do this and being successful is crucial for your self-esteem. He would listen to all your fears about riding a bike and your fears around the possibility of falling. The focus is on your past experiences and feelings. A mentor would enjoy telling you about his own bike-riding experiences, why he chose his particular bike, how often he rides it and where he enjoys riding. He would tell you his version of proper maintenance and proper safety. You may pick up some good tips from him based on his experiences. The focus is on the mentor’s experiences. If you hired a coach, the coach would first take time to understand what you wanted to get out of bike riding — what your purpose and goals are. Then he would help you design a customized plan for learning to ride a bike. He would help you discover the best bike for your needs and would inquire as to what path you wanted to take. He may provide insight as you make your decisions. He would ride alongside you, helping you navigate the bumpy roads and dimly lit paths, mainly by requesting your input. Your coach would let you take control of where you wanted to head, challenge your thinking and pro- vide insight and awareness when needed. The focus is 100% on you, your goals and helping you to achieve them. 2008 issue 3 FMI QUARTERLY ■ 103

WHY USE EXECUTIVE COACHING? Most leaders are inundated with Leaders often end up in new demands, responsibilities and opportunities as they progress in survival mode, trying to their careers. Leaders often end up in survival mode, trying to keep their keep their heads above heads above water as they tread water as they tread through the learning of their new role. According to Manchester Consulting, through the learning of the failure rate of newly promoted executives is up to 40% in the first their new role. 18 months at a cost of two to five times their annual salary. High potentials (individuals whom senior executives perceive to be the future leaders of an organization) are especially vulnerable since they are often placed in high-profile or stretch roles without appropriate support. Given these statistics and a highly competitive marketplace, organizations cannot afford to make mistakes as they promote new executives. Without the proper support in place for these individuals, it becomes a gamble that can risk the financial stability of an organization. Christina Zeigler is a vice president at Hunter Roberts Construction Group. After her executive coaching experience, she believes that, “Coaching is for anyone who is transitioning into managing people. At this point, you are no longer just a tactician; you now have to be strategic and do different things with different people — one size does not fit all. Anytime you bring somebody on in a senior role that has never been in that role before, coaching would benefit him.” Christina’s comment that “one size does not fit all” is an important point. Large training conferences and seminars attempt to address specific development issues through a one-size-fits-all approach. Conferences and seminars have their place, but without follow- up coaching, their benefits can be short-lived. By their nature, seminars Conferences and are not personalized. Often, there is no follow-up, no accountability and seminars have their no focus on individual issues or place, but without organization-specific circumstances. One study showed that follow-up follow-up coaching, coaching after formal training led to an 87% increase in the effectiveness of their benefits can be training, compared to training alone. short-lived. By their Another study showed that team performance improved by 22% with nature, seminars are not training alone — but when coaching was added to the training program, personalized. day-to-day work performance improved by 88%. 104 ■ blowing the whistle: the buzz on executive coaching

“The construction industry needs to catch up about five decades, and coaching might be the only way to do it,” said another construction industry executive. “Senior leaders don’t know how to deal effectively with today’s employees, especially Generation Y. This industry needs to learn quickly because we can’t just use the old, ‘Do it my way or else’ anymore.” In order to continue to Those who do work with an advance and succeed at executive coach will likely find the experience tremendously beneficial. these higher levels, One industry executive reported that 85% of his communications were leaders need effective improved using the tools from his interpersonal skills in coach. He said, “I got so much more out of coaching than I thought I was order to impact a variety going to.” Mark Payne, vice president with Davis-Ulmer Sprinkler Company of personalities. Inc., commented, “I wasn’t properly grooming our company’s future leaders before, but now I am working to groom my junior managers and project managers for larger roles in the future. I would not have been able to accomplish this without my coach. Coaching has been very fruitful for me.” Similarly, George Pliml, senior project manager of APi Electric reported success with coaching. “I am passionate about a lighting program that I am doing, but I am very much an introvert. Through the techniques my coach helped me with, I am now able to get up in front of groups and share my passion about the program. I feel very comfortable using the techniques.” He continued, adding another benefit: “Being able to listen to my customers better has proved invaluable. Instead of going in, talking strictly about the job and getting ‘yes’ or ‘no’ answers, I am able to really listen and hear what they are saying about their project and their concerns. That was the biggest thing for me.” Why Use Executive Coaching? The importance of interpersonal • Leadership Transitions skills increases as the younger work • Personalized Leadership Development force takes on managerial roles and as • Communication • Talent Development seasoned managers transition into • Generational Differences more senior leadership positions. • Succession Planning (See Exhibit 1.) In order to continue • Team Building to advance and succeed at these • Strategic Goals • Work/Life Balance higher levels, leaders need effective • Derailment Issues interpersonal skills in order to impact • Burn Out a variety of personalities. Marshall • Stress Management Goldsmith, the prominent author and • High Potential Development • Purpose Creation executive coach, puts it this way, (the 2007 • Behavioral Issues title of his book), “What Got • Delegation You Here Won’t Get You There.” 2008 issue 3 FMI QUARTERLY ■ 105

Sherpa Coaching Exhibit 1 Relative Importance of Skills LLC trains and certifies Interpersonal skills executive coaches at Penn Management skills Technical skills State, Texas Christian and the University of Georgia. In January 2008, the company released its third annual survey on executive

Importance coaching. The report states, “Among those who purchase or use Low High 70 Low High coaching services, % Field Level Executive Level believe executive coaching is most appropriate for those who need leader- ship development.” This is an increasing trend. When coaching first developed in organizations, most efforts were geared toward helping problem employees in order to save their career. This use of executive coaching has dipped to 32% while the use of coaching for leadership development has increased to 50%. The 2008 survey states, “Compared to 2006, about 7% of coaching has moved from specific problem solving to general leadership development. In a billion-dollar business, that represents reallocation of $70 million dollars over 2006.”

CAUTION: COMMITMENT AHEAD Although executive coaching offers major benefits to executives who invest the time and energy required, it is not a catch-all, easy answer to development issues or conflict. Coaching will prove to be a waste of time and money unless the executive is committed to the process. This means making the time in your schedule for conversations with your coach, honoring that time with no distractions, being honest Clients who were less with yourself, being open to candid feedback and being open mentally than satisfied with their to doing and thinking about things coaching experience did differently. Clients who were less than satisfied with their coaching not blame the process experience did not blame the process or their coach — it came down to a or their coach — it lack of self-admitted dedication on came down to a lack of the client’s part. Executive coaching is only for those who are serious self-admitted dedication about change — individually and organizationally — and who are on the client’s part. willing to do the work needed to get to where they want to be. 106 ■ blowing the whistle: the buzz on executive coaching

THE BIGGER PICTURE To get the most out of an investment in coaching, coaches should understand first the bigger picture of the organization — the organization’s mission, vision, values and strategy — before focusing attention on their individual client. Once this occurs, then an experienced coach is able to address both individual and organizational goals to develop a more effective Exhibit 2 The Triangular Relationship work plan for the client. In other words, there is Coach Guides Individual Growth Executive a triangular relationship between the coach, the executive and the

Provides Context organization (stake- curs holders). See Exhibit 2. pport ge Oc n Here is an example Cha ides Su

Prov of how this triangular relationship works. Jim Sample, a vice president for a large general Organization contractor, was forward- thinking, rational, extremely competent — and volatile. Jim was being considered for a promotion, but the CEO, Charles Wilber, a strong supporter of Jim, perceived developmental issues. Jim was abrasive with colleagues at times and “too busy” to develop subordinates. Some colleagues were avoiding Jim in an unspoken standoff that was affecting important work. Charles asked the human resources director to find an executive coach for Jim. Initially, the coach met with Charles to identify organizational objectives that Charles wanted to achieve as a result of Jim’s coaching engagement. They also discussed the corporate culture as well as the values and vision of the organization. This gave the coach a good foundation from which to start Jim’s coaching. The initial assessment phase of coaching motivated Jim to take stock, and the 360° feedback confirmed the problems that Charles had observed. Analyzing the feedback with his coach, Jim realized that his behavior was holding him back from being as successful as he wanted to be. Although initially stung by the candid feedback of the 360°, with the coach’s insight and support, Jim was ready to change. With his coach, Jim focused on three areas of improvement: maintaining composure under pressure, mentoring direct reports and developing more trusting relationships with peers. Jim took his coaching development plan to Charles, and, after incorporating 2008 issue 3 FMI QUARTERLY ■ 107

Charles’ suggestions, his plan was approved. Then Jim and his coach started the next phase of the coaching process through private conversations they had together approximately two to three times a month. Jim’s coach suggested that he start a journal and record each time he lost his cool, along with the name of the persons involved, the provocation, his response and the outcome. By discussing his issues candidly with Charles and his colleagues, Jim created a network of people interested in supporting his ongoing growth. By the end of his coaching engagement, Jim mastered the basic mechanics of keeping his cool, mentoring his subordinates and strengthening relationships with peers. Also, Jim was able to monitor his own behavior consciously and make the needed adjustments. The coaching worked because the triangular nature of the coaching relationship was acknowledged right from the start. The coach focused on business objectives; Charles helped shape those objectives as well as provided support, and Jim was determined to learn and change.

THE BOTTOM LINE More and more executives are realizing the benefits of this relatively new way of influencing leader development and organizational change. Executives who have been coached have found direction, purpose and confidence in achieving their goals more quickly than they would have without their coach. The value in coaching is in “its ongoing value,” summarizes Ken Hilgert, chief estimator and marketing director for D.H. Blattner & Sons Inc. “It is an investment in the individual and his or her career, which will have ripple effects throughout the company.” ■

Jennifer Jones is the assistant director of Executive Coaching at FMI. She may be reached at 303.398.7236, or via e-mail at [email protected]. Jake Appelman is a consultant with FMI’s Leadership and Organization Development Group and co-director of the Executive Coaching practice. He may be reached at 303.398.7220 or via e-mail at [email protected]. Do Leveraged ESOPs Make Sense for E&C Companies?

While ESOPs offer a number of benefits, they are not the right organizational structure for all companies. If you are thinking about selling to an ESOP, consider the following criteria. By Curt Young

e have all heard the saying, “If it sounds too W good to be true, then it probably is,” and, in most instances, we are quite adept at identifying the shortcomings of opportunities that fall under this category. Of course, these “too-good-to-be-true” opportunities are generally presented to us by telemarketers or spammers rather than our trusted advisors.

Consequently, we find it easy to quickly dismiss these opportunities and hang up the phone or delete the e-mail.

However, what if one of your trusted advisors came to you with the following message: “Bob, when you are ready to sell some or all of your business, I know how you can sell at a fair price, defer or completely avoid taxes and keep the company employee-owned.” Would you be so quick to dismiss the opportunity? These benefits are generally available to those who chose to sell their companies to employee stock ownership programs (ESOPs), and as a result, ESOPs have become quite popular among engineering and construction companies over the past 10 years. However, as you may have imagined, there are a host of considerations that a business owner should weigh before acting on this “too-good- 110 ■ do leveraged esops make sense for e&c companies?

to-be-true” opportunity. The following will help you to decide if your company is an ideal candidate for an ESOP.

WHAT IS AN ESOP? An ESOP is a qualified defined benefit plan in which plan assets are invested primarily or exclusively in the securities of the sponsoring employer. As a qualified plan, ESOPs must satisfy certain requirements defined within the Internal Revenue Code and the Employee Retirement Income Security Act (ERISA). Setting up an ESOP entails establishing and funding a trust through annual contributions. Generally, these contributions must be allocated in a defined and equitable manner to all employees who have completed a full year of service with the company. If desired, the contributions may be subject to a vesting period, which, depending on the structure of the vesting schedule, may be no longer than three or six years in length. Employees receive the vested value of their accounts, via lump sum or installment, at the time of plan termination, disability, death or retirement. The concept of ESOPs has been in existence in one form or another for more than 50 years; however, ESOPs were not formally defined by federal legislation until Congress passed ERISA in 1974. Several new laws have been passed since ERISA, which have enhanced the benefits and appeal of ESOPs. Today, ESOPs offer an array of exemplary tax benefits to selling owners, employees An ESOP is a qualified as well as the company itself. An defined benefit plan overview of some of the primary tax in which plan assets benefits associated with ESOPs follows. SELLING OWNER(S) TAX BENEFITS are invested primarily Under Section 1042 of the Internal or exclusively in the Revenue Code, if an ESOP acquires 30% or more of the outstanding stock securities of the of a closely held C corporation, any capital gains tax on the transaction is sponsoring employer. deferred indefinitely, provided that the seller has held the stock for at least three years before the sale and reinvests the proceeds in “qualified replacement property1” within 12 months of the date of sale. Furthermore, sellers using the Section 1042 rollover can avoid taxation completely by retaining the replacement property until death, at which time the property transfers to their heirs with a stepped-up basis.

EMPLOYEE TAX BENEFITS Employees do not pay tax on the stock allocated to their ESOP accounts until they receive distributions. Beginning at age 59.5, employees are able to receive distributions, taxed as ordinary income, without incurring a 10% excise tax. In certain circumstances, such as death or disability, employees may make 2008 issue 3 FMI QUARTERLY ■ 111

distributions prior to age 59.5 without penalty. Upon termination of employment, an ESOP account can be rolled over into another qualified, tax-deferred plan, such as an IRA or successor ESOP, without incurring tax or penalty.

COMPANY TAX BENEFITS Employers can contribute up to 25% of covered compensation to an ESOP. Generally, these contributions are fully deductible, as the IRS allows companies to deduct up to 25% of their eligible pay2 to defined contribution plans (i.e., ESOPs, 401(k) plans, etc.). Furthermore, deductible contributions can be made to pay principal and interest on any debt that was used to establish the ESOP. Since 1998, S corporations have been allowed to have ESOPs as owners. As nontaxable entities, ESOPs do not pay federal income tax on their pro-rata share of corporate earnings. Consequently, S corporations that are 100% owned by an ESOP do not pay federal income tax, and, depending on the state of incorporation, may not pay any income tax whatsoever. However, unlike C corporation ESOPs, S corporation ESOPs do not qualify for Section 1042 treatment (discussed above) and do not allow for the deductibility of dividends.

IS YOUR COMPANY A CANDIDATE FOR AN ESOP? While ESOPs offer a number of compelling benefits, they are not the right organizational structure or exit alternative for most companies. In FMI’s opinion, companies that are considering establishing an ESOP should thoroughly consider the following seven criteria before making the plunge.

Criteria No. 1: Selling-Owner Prerogatives Selling owner(s) should carefully consider their objectives and options prior to adopting an ESOP. In circumstances in which there is no secondary market for a company, an ESOP provides a path to liquidity and diversification. Furthermore, an ESOP allows ownership to be transferred to employees, rather than outsiders. However, when a company is marketable to third parties, selling ownership to an ESOP generally does not maximize the company’s value, even under highly tax-advantaged circumstances. This is because ESOP valuations are generally conservative and do not capture the synergistic value that a strategic buyer may be willing to pay above fair market value. Selling a minority stake of your company to an ESOP may sound like a good idea, as, on the surface, it seems to fulfill a number of objectives. Specifically, selling a minority stake in your company would seem to provide liquidity and diversification, provide ownership incentives to employees and allow for a controlling stake of the company to be maintained. However, selling a minority stake of your company to an ESOP has a number of adverse consequences. First, you will lose some flexibility in your decision-making capabilities, as you will have a fiduciary 112 ■ do leveraged esops make sense for e&c companies?

responsibility to protect the interests of the ESOP shareholders. Second, selling a minority stake of your company may not make sense from a financial standpoint due to significant costs associated with establishing and maintaining an ESOP (discussed under criteria No. 3 below). Third, selling a minority stake to an ESOP can affect a company’s ability to effectively manage cash. For example, if you sell 30% of your company to an S corporation ESOP, and you want to dividend out enough earnings to cover your personal tax obligation, the dividends would be required to be proportionally received by the ESOP, even though the ESOP has no tax obligation. Thus, cash that may be much-needed would be unnecessarily stripped from the corporation.

Criteria No. 2: Corporate Structure While ESOPs are available for both C and S corporations, the tax advantages of establishing an ESOP vary significantly between the corporate structures. As previously mentioned, a 1042 rollover is only available for closely held C corporations, while the ability to have federal tax-free earnings is only available for ESOP-owned S corporations. Thus, two of the most significant While ESOPs are benefits of establishing an ESOP are available for both C not inherently compatible. However, these benefits may be jointly realized and S corporations, by converting from a C corporation to an S corporation upon establishment the tax advantages of of the ESOP. establishing an ESOP There are a number of potentially disadvantageous implications associated vary significantly with making this sort of a conversion however. For example, corporations between the corporate that convert from C to S status may be required to recognize certain structures. “built-in gains” upon disposition of assets for the 10-year period following the conversion. In addition, Congress instituted a number of fairly complex rules, relating to prohibited transactions with “disqualified persons,” in order to prevent abuses in converting from a C corporation to the S-corporation ESOP. Violation of these rules can result in severe tax penalties.

Criteria No. 3: Profitability Establishing and maintaining an ESOP can be a complicated and costly process. In addition to the initial design, feasibility and implementation processes 2008 issue 3 FMI QUARTERLY ■ 113

involved in establishing an ESOP, ESOPs require ongoing administration and oversight. Oftentimes, companies are overwhelmed by the administrative duties associated with an ESOP. Administration of an ESOP requires maintaining the details of each participant’s plan, keeping the plan current with any significant policy changes and orchestrating an annual valuation of the company’s stock. Furthermore, In order for an ESOP companies must ensure that ESOPs to function successfully, have a sufficient level of oversight. Oversight of an ESOP is bestowed it is important to have upon a trustee, who has a fiduciary responsibility for the plan’s assets. a wide disbursement Due to the demands and legalities in the general age of associated with this role, it has become increasingly popular to employ employees as well as in professional trustees, such as banks or trust companies, rather than choose the ages of key managers in-house trustees. and company leaders. Consequently, from a cost standpoint, it generally does not make sense for relatively small companies to establish ESOPs. While there is no universal agreement as to how profitable a company should be before considering an ESOP, a general “rule of thumb” is that ESOP candidates should consistently generate operating earnings greater than $1,000,000.

Criteria No. 4: Maturity and Cyclicality of Earnings Companies in cyclical and highly competitive industries, such as engineering and construction, are generally not good ESOP candidates for two main reasons. First, ESOPs are able to facilitate ownership transition by buying out sellers with borrowed money. This means that companies that adopt ESOPs are immediately under pressure to generate enough earnings to pay down the debt assumed to buy out previous ownership. Companies in cyclical and highly competitive industries will likely have a more difficult time paying off the debt assumed to establish the ESOP. Second, the primary purpose of an ESOP is to provide a retirement fund for employees. Since most of the investment of an ESOP is in company stock, the future success of the company is a critical factor in providing for employee retirements. Enron serves as a fateful reminder in this regard. Highly competitive and cyclical businesses are more likely to fail or create highly variable valuations of the company’s stock, which puts the comfortable retirement of each individual in the organization at risk.

Criteria No. 5: Employee Demographics and Depth The demographics of an ESOP-owned company are critical to its success. In order for an ESOP to function successfully, it is important to have a wide disbursement in the general age of employees as well as in the ages of key managers 114 ■ do leveraged esops make sense for e&c companies?

and company leaders. Such disbursement helps to ensure that the organization will function smoothly over a prolonged period of time. More specifically, disbursement in employee ages helps to spread out the company’s ESOP repurchase obligation; whereas, adequate disbursement in the ages of upper management and company leadership helps to ensure that the organization will not suffer from a loss of key employees. In order for an ESOP to be feasible from a demographic standpoint, it is generally beneficial for ESOP-owned companies to have at least 20 to 30 employees. It is also important for employees of ESOP-owned companies to transition their key relationships and operational knowledge to their successors. By consciously building depth throughout the organization, employees of ESOP-owned companies help to ensure that their successors will be able to fulfill the ESOP’s repurchase obligations. Self-interest of ESOP participants can be a powerful motivator in successor development.

Often, construction Criteria No. 6: Bonding Requirements companies do not make Establishing a leveraged ESOP may significantly reduce a company’s good ESOP candidates ability to pursue bonded work. While surety companies may look positively because their success upon some of the benefits associated is driven by a handful with ESOPs, such as organizational continuity and improved cash flow of entrepreneurs that (via tax reduction), bonding lines tend to be determined by more tangible thrive in a high-risk, and immediate measures, such as high-reward atmosphere. working capital and net worth. Generally, when an owner sells his or her company to an ESOP, the ESOP borrows money in order to purchase the selling owner’s shares. By adding debt to the capital structure of the company, the company decreases its net worth, which, in turn, may decrease the company’s ability to bond work. In case of this, selling owners may be forced to gradually implement the ESOP or consider other exit alternatives. The company may be able to implement an ESOP and avoid a significant effect on the company’s bonding capacity, if new shareholders directly inject additional capital into the company or loan funds to the company and subordinate the loan to the surety.

Criteria No. 7: Company Culture and Homogeneity Often, construction companies do not make good ESOP candidates because their success is driven by a handful of entrepreneurs that thrive in a high-risk, high-reward atmosphere. ESOPs are often recognized as a successful ownership structure because they promote widespread employee ownership, which, in theory, translates to heightened levels of efficiency and productivity. However, ESOPs also spread out risk and decision-making duties among an entire organization. 2008 issue 3 FMI QUARTERLY ■ 115

Therefore, no one in the organization has all that much to lose or gain. Consequently, you lose what FMI likes to call the “3 a.m. factor.” That is, who is going to be up worrying about the business at 3 a.m.? In our experience, a high-risk, high-reward atmosphere is a critical component to the success of construction companies. Taking that into consideration, certain companies, such as engineering firms with more homogenous work forces may be aptly suited for ESOPs. These firms are more likely to have a high number of employees with similar backgrounds and professional values. In addition, the pay scale of employees in these firms typically falls within a relatively tight range. These factors help to facilitate decision making and communication throughout an ESOP-owned organization.

So, like most “too-good-to-be-true” opportunities, “the devil is in the details.” ESOPs can be an excellent mechanism for ownership transition; however, they are clearly not appropriate in every circumstance. ■

Curt Young is a associate with FMI Corporation’s Investment Banking Group. He may be reached at 303.398.7273 or via e-mail at [email protected].

1 The IRS considers the stocks or bonds of domestic operating companies to be “qualified replacement property.” 2 Eligible pay is defined as the pay of all the participants in the plan up to $200,000 (2002 dollars; indexed for inflation) The Rise of the General Contractor in 19th Century America

Guest writer and project historian Sara Wermiel shares her research on the formation of general contracting in America. By Sara E. Wermiel, Ph.D.

riting in 1917 about the changes in architectural W practice since the beginning of his career in 1874, Boston architect Robert D. Andrews noted, “The emergence of the general contractor constitutes the most significant change in professional practice.” It may be surprising that an architect would single out the growth of general contracting as a watershed event, but the emergence of the general contractor did indeed fundamentally transform the role of the architect in building production.

Before this, separate contracts were the norm for large projects: an owner would make a contract with each tradesman and material supplier, and the building’s architect, or a superintending architect or construction superintendent, coordinated the tradesmen and suppliers. Andrews recalled that in the bad old days, a “city house” might require 10 to 20 different contracts and, “The architect had to correlate the working of all those trades,” essentially doing the work of a general contractor. He continued, “It required much tact and firmness to settle the incessant questions of responsibility arising under these conditions.” General contracting for buildings (as distinguished from contracting for 118 ■ the rise of the general contractor in 19th century america

public works, such as roads, bridges and dams) began in the United States in the late 1860s, when builders first took single, or whole, contracts to erect all, or at least the bulk, of large and complicated buildings, which might take more than one year to complete. While single contracts were known earlier than this, these would have been for small projects, such as houses, and small churches and public buildings (market houses and small-town jails and courthouses).1 The appearance of the general contractor coincides with the growing scale and complexity of many buildings at the end of the 19th century and a simultaneous flowering of specialization in the building industry. This article presents case The appearance of studies of two early and influential the general contractor general contracting firms — Norcross Brothers and George A. Fuller coincides with the Company — which give an idea of the beginnings of general contracting growing scale and for buildings in the United States. complexity of many WHEN AND HOW DID GENERAL buildings at the end of CONTRACTING BEGIN IN THE UNITED STATES? the 19th century and a The question of exactly when simultaneous flowering general contracting for buildings began cannot be pinned down precisely. A of specialization in the way to trace the emergence of general contracting is to see when and in what building industry. context the term “general contractor” came into use. The word “contractor” was used in Great Britain in the early 18th century, at which time it applied to men who built public works, such as lighthouses, roads or bridges. Perhaps the term originated because the individuals who handled engineering projects like these were not associated with any traditional trade. In the United States, the term likewise appears to be associated in its early days with people who did business with governmental bodies. Government agencies preferred to give single contracts, and builders bidding on them became general contractors at least for those particular jobs. The reason why whole contracts for large, private buildings were uncommon was due in part to the difficulties of financing a large payroll and purchasing materials for projects that might take more than one building season to complete.2 General contractors begin to appear in the late 1860s. Nevertheless, for many years, until the end of the 19th century, various contracting systems were used; separate contracts persisted, along with day’s work and general contracting. (Under day’s work, an owner paid for labor and materials, and hired superintendents to oversee the workmen; the superintendents were paid a fee or a percentage of the costs.) General contractors still comprised a small minority of builders by the late 1880s, but had become important players in the building field, usually undertaking the more complex building projects. By that time, the idea of taking whole contracts 2008 issue 3 FMI QUARTERLY ■ 119

was well established, according to the New York architect Oliver P. Hatfield. In an 1889 paper he read to a convention of the National Association of Builders (founded 1887), Hatfield called masons and carpenters “principal contractors” and said that “in most sections of our country the whole contract is taken by these [tradesmen], all other building tradesmen coming in as subcontractors, engaging to furnish their work directly to the principal contractors.” He may have been overstating the dominance of general contracting, but at least the business was known. General contracting came about because of the increased scale and complexity of construction projects at the end of the 19th century. Where once governmental bodies undertook the largest buildings, in the latter half of the century, private owners were erecting major buildings filled with modern amenities. City centers sprouted soaring (for their day) office buildings, expansive department stores and lavish hotels. But while growing complexity in building was a necessary precondition, it was not sufficient to call general contractors into being. First, aspiring contractors had to solve the problem of how to get sufficient working capital. Builders traditionally were paid when they completed a job or phases of a job. Thus, as projects became larger and the time between start and completion longer, contractors had to carry more costs (payrolls, supplies and so on) until they were paid by the owners. Early contractors solved this problem in a variety of ways. One solution was to own real estate, which could be used as collateral to obtain a business loan. Another was to have affluent family members willing to make loans. Contractors could also break down or shift their costs. They could negotiate terms that committed owners to more frequent payments, which reduced the amount of capital they needed. Or they could shift the financing burden on to the materials suppliers by getting supplies on long credit, or use subcontractors rather than their own workforce and make them wait for payment. The ways early general contractors solved this and other problems are illustrated in the histories of two important early firms: the Norcross Brothers and the George A. Fuller Company. Norcross Brothers, Contractors and Builders (Worcester, Mass.), was one of the first general contractors for buildings in the United States, perhaps the first to work nationwide, and also, at the turn of the

Shown from the Northeast, the Rookery Building located at 209 South LaSalle Street in Chicago was one of George Fuller’s early large projects, and the first project on which his company used a cost-plus contract. A transitional structure in the evolution of modern architecture, it employs both masonry wall-bearing and skeletal frame construction techniques. It takes its name from a temporary City Hall and water tank that stood on the site following the Fire of 1871. A favorite roost for pigeons, these structures were referred to as "the rookery." When Frank Lloyd Wright remodeled the Rookery's large skylit lobby in 1905, he introduced elements characteristic of his Prairie School designs. The photo on page 116 shows the interior of the building. (Courtesy Chicago Historical Society) 120 ■ the rise of the general contractor in 19th century america

20th century, the largest. The George A. Fuller Company, founded in Chicago, represented the second generation of general contractors; this firm became one of the most prominent builders of skyscrapers. Its contribution to the development of general contracting included its innovative building methods; emphasis on speed, which became a hallmark of American building methods; and promotion of cost-plus contracts, in contrast to lump-sum contracts.

NORCROSS BROTHERS COMPANY During its roughly 66-year existence (1864–1924), Norcross Brothers Company built 338 known buildings (apart from monuments and other kinds of structures), a group that included some of the most Orlando W. Norcross important and admired buildings in their day. It would be interesting to know why these two brothers, who started out as carpenters and country builders, decided to take whole contracts and exactly how they got the resources to handle their first large commissions. Unfortunately, no business records for the firm survive. James A. (1831–1903) and Orlando W. (1839–1920) Norcross, the brothers who founded the firm, were sons of a carpenter and millwright. Their family moved from Maine to Massachusetts, and around 1864, they went into business together as builders. Also around this time, they established their headquarters in the mid-sized city of Worcester, Massachusetts. James managed the office while Orlando (O.W.) was the outside man in the business — always traveling, figuring and visiting job sites. According to a contemporary and colleague, O.W. was a “genius in the building profession.” The brothers showed a venturesome spirit early in their partnership. They took whole contracts for large, masonry buildings, although their training was in carpentry and their financial resources were modest. Probably their first large project as general contractor was the Crompton’s Block in Worcester (1868), a five-story brick commercial building. Although they briefly got in over their heads, they finished the job successfully and profitably. In 1869, they won the contract to build a high school for Worcester — another large, brick building (completed 1871). In addition to raising the firm’s profile, this project introduced the brothers to its architect, Henry H. Richardson, who would become the foremost American architect of his generation. Although Norcross Brothers started with very little capital, the firm apparently operated profitably and used its profits to finance work on new projects. They won James A. Norcross contracts for ever larger buildings. A key to the firm’s ability to be competitive, yet profitable, 2008 issue 3 FMI QUARTERLY ■ 121

was O.W.’s extraordinary talent as a cost estimator. An architect who had worked with Norcross recalled that in his early days, O.W. poured over drawings, specifications, contracts and correspondence in order to work up a bid. When the firm was large and well established, it employed a corps of assistant estimators; yet O.W. could glance at drawings and state a round sum that “in eight cases out of 10 … would be fairly close to the figure arrived at by the more laborious process.” Stone construction became the firm’s specialty. Around 1872, Norcross Brothers had contracts for two stone buildings designed by Richardson as well as the stone Park Congregational Church in Norwich, Connecticut. In 1873, the brothers signed a contract for their largest commission to date: Richardson’s Trinity Church in Boston (1873–76). This enormous church was to be built of brown sandstone in the Romanesque Revival style. Two important features of the company were in place by the 1870s. The first was that the firm hired tradesmen and worked with its own employees rather than subcontracting. In the early 20th century, when subcontracting became commonplace in many cities, the Norcross Brothers’ methods seemed old-fashioned. But since the firm started up before specialized subcontractors existed, their original business model was unavoidable. Norcross Brothers employed mechanics in all the necessary crafts and appointed a foreman to oversee each department. The second was that it supplied much of the material it used in its projects, and for this purpose, operated quarries, a brickyard and workshops. Norcross Brothers first began supplying stone around 1873, when it leased a quarry to obtain stone for the Trinity Church project. In 1881, the firm built a

An impressive example of The Norcross Brothers stone work, Trinity Church is located in Boston and has appeared on the architectural community’s “top 10” lists of significant buildings for the past 100-plus years. The celebrated style, “Richardsonian Romanesque,” is named after the building’s architect, H.H. Richardson. The brother’s bid was accepted just as a depression hit the economy, and the project swept away all their financial concerns. Shown here first from its west (front) elevation, south side, and then a view from the rear of the church to the altar. (Courtesy Library of Congress) 122 ■ the rise of the general contractor in 19th century america

workshop in Worcester, which had shops for cabinetmaking, painting, blacksmithing and machining as well The Trinity Church as space for storing lumber. At the turn of the 20th century, the firm, or project was a turning O.W. individually, had interests in at least nine stone (granite, sandstone, point for the firm. The marble) companies in several states. job was full of risks; O.W. was president of Blandford Brick & Tile Co., with works in among these was the Russell, Massachusetts. Presumably, the rationale for owning the quarries fact that the architect and shops was to allow Norcross Bothers to get materials to its job sites designed the building when needed and thereby minimize while it was going up, yet costly delays. Having supplies on site when required was one of the most Norcross Brothers had critical factors in being able to complete a building on time. Norcross Brothers a lump-sum contract. was not unusual in owning sources of supplies; many New England builders at the time did likewise. The Trinity Church project was a turning point for the firm. The job was full of risks; among these was the fact that the architect designed the building while it was going up, yet Norcross Brothers had a lump-sum contract. But the firm got favorable terms in their contract: they agreed to build the church and furnish nearly all the materials (on a contract worth $435,000) while “giving no bond” and were to be paid monthly in cash, with only about 10% of the contract amount retained until completion. The firm publicized their new status as “contractors.” Formerly called “carpenters and builders,” the firm described itself in an 1872 advertisement as “Norcross Brothers, Contractors and Builders.” By the end of the 1870s, the brothers had accumulated a respectable amount of working capital as well as some financial backers. They emerged from the depression of that decade comparatively wealthy and, with their

A corporate brochure for The Norcross Brothers shows their work on Sever Hall at Harvard University in Cambridge, Mass. Another H.H. Richardson design, the building was constructed through a gift from Anne Sever in honor of her deceased husband, James Warren Sever. It is estimated that 1.3 million bricks were used in its construction. (Courtesy Philip Norcross) 2008 issue 3 FMI QUARTERLY ■ 123

growing experience, poised to expand operations. As a sign of their comfortable circumstances, they built handsome stone houses for themselves, side by side, at 16 and 18 Claremont Street in Worcester (1878). An unusual move by the firm was to take contracts for jobs far from Worcester. Most builders at the time operated within a community or region; Norcross Brothers developed a national business. The way the brothers got projects in distant cities was by bidding on contracts designed by architects they knew. Thus, Norcross Brothers built Stephen C. Earle’s library in Rhode Island and church in Connecticut, and Richardson’s commercial building in Connecticut. In 1873, while building Trinity Church, the firm opened a Boston office. At the end of the 1870s, Norcross Brothers broke into the New York City market, when it won a contract to build the Union League Club House there, designed by the Boston-based architectural firm of Peabody & Stearns. In the early 20th century, Norcross Brothers Co. had offices in Boston, Chicago, New York and Washington, By the end of the and in Montreal and Toronto, 1870s, the brothers Canada, in addition to Worcester. Norcross Brothers grew steadily. had accumulated a In 1886, the firm reportedly had more than 1,000 men on its payroll. At respectable amount of that time, it was working on a massive building in Pittsburgh: Richardson’s working capital as well as Allegheny County Buildings (1883–88), some financial backers. worth $2.27 million. The following year, the firm was busy in Chicago They emerged from the erecting Richardson’s celebrated Marshall Field Wholesale Store depression of that decade (1885–87). The firm also worked on comparatively wealthy structures other than buildings, such as bridges and seawalls, and it was and, with their growing the contractor for clearing ledge from the channel at the Portsmouth Navy experience, poised to Yard in Maine. expand operations After James’s retirement in 1897, O.W. carried on the business by himself for a time and then in January 1902, incorporated the firm under the name The Norcross Brothers Company. The following year, the firm reportedly had $9 million in work underway and employed thousands of men. In the early 20th century, Norcross Brothers expanded into Canada. Some of their Canadian projects were designed by American architectural firms, e.g., McKim, Mead & White (Bank of Montreal, Montreal, Quebec [1901–04] and Bank of Montreal, Winnipeg, Manitoba [1910–12]) and Carrère & Hastings (Bank of Toronto, Toronto, Ontario, 1910–12). In the United States, Norcross Brothers continued to focus on buildings for institutional clients: schools, hospitals, 124 ■ the rise of the general contractor in 19th century america

libraries, clubhouses and religious buildings, as well as government buildings. Norcross Brothers may have found it easier to win commissions in Canada than in the Unites States in the early 20th century, when they faced stiff competition from new contracting firms like the George A. Fuller Co. and Thompson-Starrett Co., a Fuller spin-off. Norcross Brothers supplied stone for projects for which it was not the general contractor, such as New York’s Pennsylvania Station and the Field Museum in Chicago. On the latter project, the firm lost $500,000. In the 1910s, O.W. spent much of his time defending his patents for flat slab concrete floor construction. In 1920, at age 80, O.W. was still working when, riding on a streetcar, he suffered a heart attack and died. The company dissolved in 1924. But the Canadian branch of the firm continued as a separate company, called Anglin-Norcross, until 1967.

GEORGE A. FULLER COMPANY Worcester, Mass., spawned another important builder, George A. Fuller (1851–1900). Unfortunately, no records of this company are publicly available, so its history, too, must be reconstructed from disparate published sources. George A. Fuller Fuller trained as an architect, at first in the office of his architect uncle James E. Fuller in Worcester. If he started sometime between 1869 and 1871, he could have learned about the Norcross firm from a project in his uncle’s office: the Worcester High School. James’s partner at the time, Stephen C. Earle, served as the superintending architect for this project. Fuller was exposed to Norcross Brothers again through his next employer, the Boston architectural firm of Peabody & Stearns. He joined this large firm in 1874 and remained until about 1881, becoming its chief designer. During this period, Norcross Brothers built several of Peabody & Stearns’ projects, including Harvard University’s Hemenway Gymnasium (1878–81) and the Union League Club House in New York City (1879–80). At Peabody & Stearns, Fuller gained experience working on tall, iron-framed, fireproof buildings. When he joined the firm, one of its projects was the New York Mutual Life Insurance Co. in Boston (1873–75). This six-story building was one of Boston’s first fireproof buildings. Fuller superintended the construction of a structurally similar fireproof building: the nine-story United Bank Building (1880–81, also called the First National Bank Building) in New York City. Around 1881, Fuller moved to Chicago and began working as a contractor. The exact reason for his relocation is uncertain. Likewise, why he left architecture and entered a new career is unknown. Perhaps like a later president of the Fuller Co., Paul Starrett, he concluded he was not cut out to be a designer but had an instinct for construction, and he expected building would prove a more lucrative occupation. It was probable, too, that Chicago at this time offered more opportunities for builders than for architects. The city in 1880 was on the verge of a boom in commercial construction. It was also a center of innovation in building 2008 issue 3 FMI QUARTERLY ■ 125

materials and construction technology, notably fireproof construction. With his experience working on fireproof buildings, Fuller was in a good position to set himself up as a contractor to meet the growing demand for fireproof structures. In 1882, Fuller established the George A. Fuller Co. with capital of $50,000. One of his first large projects was the Chicago Opera House Block. It was here, according to the Chicago builder and building official Henry Ericsson, that the “general contractor” was born. What Ericsson must have meant was that the cost-plus type of contract was born, which is implied by his calling this development a “factor that entered the industry at this pivotal stage to pad the costs of building.” Nevertheless, it seems to have been around this time, with the Opera House or perhaps the subsequent contract for the Rookery Building in Chicago (1886–88), that Fuller first used a cost-plus contract. The cost-plus contract differed from the usual contract, which was the lump-sum contract. In the latter type, the contractor agreed to erect a building for a set price. With a cost-plus type, the general contractor was paid a fee to manage the work, while the owner paid the actual construction costs (labor and materials). Typically, the fee was figured as a percentage of the construction costs, although it could be a flat fee. A cost-plus contract might or might not specify a maximum construction cost, which today is called a guaranteed maximum price. While one might assume that the cost-plus contract is a recent invention, actually something like it was used in New York City in the 1860s, in connection with day’s work construction. Fuller therefore did not invent cost-plus contracting; nevertheless, the system was uncommon when he began to sell the idea to owners. He undoubtedly helped make the cost-plus system acceptable to owners. Perhaps it was his background in architecture that inclined Fuller to think of himself as a professional and to charge a fee for service based on construction costs, which was how architects at the time often figured their fees. Fuller apparently was able to convince owners and architects that he, a contractor, was a professional, not a mere mechanic. Necessity may also have led to its invention. Cost-plus contracts entailed less risk for the contractor than lump-sum contracts, especially when the contracts did not have a guaranteed maximum price. In addition, by The Equitable Building located at 25 Pryor Street Northeast subcontracting most in Atlanta, is an early skyscraper designed by the Chicago firm of Burnham and Root, pioneers in the development of the work and having of skyscraper design, and built by Fuller. The building the owner pay the stood as the first example of the new architectural form to subcontractors, the be built in Georgia. (Courtesy Library of Congress) 126 ■ the rise of the general contractor in 19th century america

general contractor needed less working capital, especially if the subcontractors were reimbursed by the general contractor on a pay-as-paid basis. Through the first half of the 20th century, the Fuller Co. did mainly (although not exclusively) cost-plus work. The cost-plus contract won acceptance because it offered advantages for owners and architects. For the owner, construction could begin before all architectural drawings and specifications were complete — which would otherwise be necessary for soliciting bids — and thus design and construction could proceed simultaneously. Some architects preferred the cost-plus contract because it allowed them to work more collaboratively with a builder than under a lump- sum arrangement. However, since the contractor’s fee rose along with Like Norcross, Fuller construction costs, cost-plus contracts became a collaborator that were loosely drawn or lacked a guaranteed maximum encouraged with architects in builders to overspend — the padding Ericsson disparaged. the design process Like Norcross, Fuller became a and helped develop collaborator with architects in the design process and helped develop new solutions to new solutions to construction problems. Fuller was the first builder to have a construction problems. tar-paper roof put over a building site so that foundation work could go forward in bad weather. He did this on the Rookery Building and this project, Paul Starrett believed, helped establish both the building’s architects and Fuller as “the leading men in the building business.” The Tacoma Building in Chicago, built by Fuller (1888–89), is a landmark in the evolution of skeleton frame construction, being the first structure with curtain walls on its two street façades. According to Raymond Daly, president of the Fuller Company in the late 1950s, when skyscraper construction was being developed, “Chicagoans brought their building problems to Mr. Fuller and those problems were solved time and again. As a builder with architectural training, working closely with architects, he was so trusted on all sides that for many years after the Tacoma Building not a single important building went up in that city [Chicago] that did not bear the imprint of George A. Fuller Company.” While Daly exaggerates Fuller’s dominance a bit, certainly his firm built many of Chicago’s pioneer skyscrapers. Like Norcross, Fuller was able to build outside of Chicago by bidding on buildings designed by architects he knew. One of his first buildings outside Chicago was the eight-story Equitable Building in Atlanta (1890–92), designed by Burnham & Root and considered Atlanta’s earliest skyscraper. Another was the D. S. Morgan Building in Buffalo, N.Y. (1895), designed by Holabird & Roche. In 1898–99, Fuller built the Massachusetts Building, later the Union Trust Building in Baltimore, which was designed by the Boston architectural firm of Winslow & Wetherell. 2008 issue 3 FMI QUARTERLY ■ 127

Fuller used his connections with architects and investors to expand his operations to the East Coast in the late 1890s and to break into the New York City building market — the center of skyscraper construction. In 1896, Fuller opened an office in New York City and worked with some Midwestern and Boston men on a project for a building at Broadway and Chambers Street (Broadway-Chambers Building). This project took several years to come together, and in the meantime, Fuller got his first New York commission: the Coe Estate Building (1896–7), a narrow, 10-story building designed by George B. Post. The Broadway-Chambers Building project came to fruition in 1899 (completed 1900). At 18 stories with a small (about 51 x 94 feet) footprint and a skeleton frame, this building qualified as a true skyscraper. Fuller’s firm put up $100,000 of the $500,000 cost, and Fuller helped arrange a loan for the principal investor. What this suggests is that at first, Fuller got work in New York City by developing projects with out-of-town architects and investors, rather than by competing with local builders. As a specialist in erecting skyscrapers, he soon became established. In 1900, the Fuller Co. had the contract to build the Broad-Exchange Building in New York — at 20 stories and 326,500 rental sq. feet, the largest office building in the United States. It was in a project like Broadway-Chambers, in which the steel frame went up in only three months, that the cost-plus contractor earned his fee. In this and other projects, construction began before all drawings were complete. Speed became an obsession at the turn of the century. Skeleton-frame construction made it practical to build structures very tall, but it also made it possible to build very quickly because once the frame was erected, work could proceed on any level. Contractors seemed to compete with each other to set records, egged on by the press. Newspaper articles celebrating this breakneck construction were good publicity for the Fuller Co., but the speed obsession put a strain on all involved. Nevertheless, American commercial construction became more efficient. Fuller remained in Chicago and did not live to see these New York projects completed. He died in December 1900, at the young age of 49 — “burned himself out with hard work” according to Paul Starrett. At this point, the A present-day view of Memorial Continental Hall firm’s headquarters moved built by George Fuller. Located at 1776 D Street, NW, in from Chicago to New Washington, D.C., the building serves as the headquarters York, where it remained of the Daughters of the American Revolution. The building until it closed nearly 100 has been recognized as one of the area’s most elegant 20 buildings with its classical revival style and has since been years later. In the th designated as a Registered National Historic Landmark. century, the George A. (Courtesy Sara Wermiel) Fuller Co. continued to 128 ■ the rise of the general contractor in 19th century america

be one of the nation’s largest builders and put up many prominent structures, including such landmarks as the Fuller (a.k.a. Flatiron) Building (1900–03); Lincoln Memorial (1914–22); Philadelphia Savings Fund Society Building (1929–32); the United Nations Secretariat Building (1949–50); Lever House (1952); and Seagram Building (1957). After 1970, the company changed hands many times and declined. It closed finally in 1994. It is interesting that the Fuller Company did not consider Norcross a competitor, perhaps because Norcross did not bid for skyscraper projects. At the turn of the century, Norcross Brothers was doing millions of dollars worth of work in New York City, e.g., building the New York Public Library and Columbia University’s new campus. The two firms worked together on at least one building: Pennsylvania Station in New York (Fuller built it, Norcross supplied the stone). Yet in recounting the construction of Penn Station, Paul Starrett refers to Norcross simply as “the New England granite man.” Around 1900, the Around 1900, the Norcross Norcross Brothers and Brothers and Fuller companies were probably the largest general contractors Fuller companies were in the Unites States and both were renowned for the quality of their probably the largest work. Norcross Brothers pioneered general contractors in the business of general building contracting when it took whole the Unites States and contracts — lump sum — for large buildings and grew in capacity so that both were renowned for it was able to undertake projects across the United States and in Canada. the quality of their work. Its specialty was massive, masonry, bearing-wall buildings. The Fuller Co. began as a general contractor and developed a different business model using the cost-plus type contract. Fuller specialized in erecting tall commercial buildings, which owners wanted put up rapidly so they could produce income as soon as possible. Owners accepted the cost-plus system because it allowed the contractor to begin working on a building before all drawings and specifications had been completed. Fuller subcontracted for most of the labor and materials used on his projects, unlike Norcross Brothers, which worked with its own employees and produced its own materials. They were at opposite ends of the spectrum, and at the turn of the 20th century, other contracting firms fell along the spectrum — neither model dominated. The emergence of the general contractor was a manifestation of the trend toward specialization in the U.S. building industry. ■

Sara E. Wermiel is an independent scholar who received a doctorate in urban history and history of technology from the Massachusetts Institute of Technology. Her specialties are the history of 19th century American technology, industrialization and urbanization. She has written many articles and a book on the main subject 2008 issue 3 FMI QUARTERLY ■ 129

of her research: structural fire protection and the development of new materials and systems for constructing buildings in the 19th century. Her most recent book, Lighthouses (Norton/Library of Congress Visual Sourcebooks series, 2006), treats American lighthouses according to construction types. She works as a historic preservation consultant and researcher, and teaches building history at Boston Architectural College. She may be reached at 617.524.9483 or via e-mail at [email protected].

1 An exception was the contracts for large buildings erected by the federal government, such as those awarded by the U.S. Treasury Department in the 1850s. But this was an unusual case, and the Treasury Department’s venture into whole contracts in the antebellum period did not jumpstart the general contracting business in the United States. 2 Readex, America's Historical Newspapers, 1690–1922, including Early American Newspapers Series 1 – 3; accessed December 2007. Search done on the years 1823–89 for “building contractor” and 1823–1860 for “contract for building.” Whether private contracts were less likely to be reported than government contracts and this is the reason for the preponderance of government “contracts” is unknown. Examples of the few references to private contracts during this period include a contract for building an “extensive block of stores” (reprinted in Hudson River Chronicle, 17 July 1838) and three churches in Maryland (Baltimore Sun, 11 March 1843, 22 April 1847, 14 July 1857).

Sources “A Big Real Estate Deal,” New York Times (18 Dec. 1898), p. 10, ProQuest Historical newspapers, The New York Times. American Institute of Architects, 1906. Proceedings of the Fortieth Annual Convention. Andrews, Robert D., 1917. “Conditions of Architectural Practice Thirty Years and More Ago,” Architectural Review, ns 5, pp. 237-8. Architectural Record, 1977. Great American Architects Series, No.s 1-6; May 1895-July 1899, New York: Da Capo Press. “Big Builder Collapses; Staff, Projects in Limbo,” 1994. Crain’s New York Business (29 Aug. 1994), p. 1. Blackall, Clarence, 1994. Seed Time and Harvest; Memories of Life, S.l. : s.n., typescript. Dahl, Curtis, 1987. Stephen C. Earle, Architect, Worcester, Mass.: Worcester Historical Museum. Daly, Raymond C., 1957. 75 Years of Construction Pioneering, George A. Fuller Company (1882-1957), New York: Newcomen Society in North America. Ericsson, Henry, 1942. Sixty Years a Builder, Chicago: A. Kroch & Son. “Failure of Norcross Brothers,” 1903. New York Times 23 July 1903, p. 6. Gilbert, Cass, 1900. “The Financial Importance of Rapid Building,” Engineering Record, 41, pp. 623-24. Girr, Christopher, 1996. “Mastery in Masonry: Norcross Brothers, Contractors and Builders, 1864-1924,” M.S. thesis, Columbia University. Gross, Philip N., “Norcross Brothers of Worcester, Massachusetts,” website (2004) http://norcross.ca/NORCROSS%20 BROTHERS%20FOLDER/NB_1864_Norcross%20Brothers%20of%20Worcester.html. Hatfield, O. P., 1889. “The Relation of the Architect to the Builder,” Inland Architect and News Record, 13, pp. 16-17. Hobhouse, Hermione, 1971. Thomas Cubitt, Master Builder, New York: Universe Books. Horowitz, Louis J., 1937. The Towers of New York, New York: Simon & Schuster. Irish, Sharon, 1999. Cass Gilbert, Architect, Modern Traditionalist, New York: Monacelli Press. Landau, Sarah and Carl Condit, 1996. Rise of the New York Skyscraper, 1865-1913, New Haven: Yale University Press. “Memoir of Orlando Whitney Norcross,” 1921. Transactions of the American Society of Civil Engineers, 84, pp. 896-898. “New Chesebrough Building,” New York Times (14 March 1898), ProQuest Historical newspapers The New York Times, p. 3. Ochsner, Jeffrey K., 1982. H. H. Richardson, Complete Architectural Works, Cambridge: M.I.T. Press. O’Gorman, James, 1973. “O. W. Norcross, Richardson’s ‘Master Builder:’ a Preliminary Report,” Journal of the Society of Architectural Historians, 32, pp. 104-113. O’Gorman, James, ed., 2004. The Makers of Trinity Church in the City of Boston, Amherst & Boston: University of Massachusetts Press. Prideaux-Brune, Diana, 1988. “Builder as Technical Innovator: Orlando Norcross and the Beamless Flat Slab,” M.A. Thesis, Cornell University. R. G. Dun & Co. Collection, Baker Library, Harvard Business School. Schweinfurth, Julius A., 1931. “Great Builders I Have Known,” American Architect, 140, pp. 48-49, 92-96. Starrett, Paul, 1938. Changing the skyline; an autobiography. New York: Whittlesey House. U.S. Dept. of Labor, Bureau of Labor Statistics, “NAICS 23: Construction,” http://www.bls.gov/iag/construction.htm (accessed Sept. 7, 2007). Wermiel, Sara, 2000. The Fireproof Building; Technology and Public Safety in the Nineteenth-Century American City, Baltimore: Johns Hopkins University Press. Delegation: A Win-Win Strategy

Delegation is a valuable, yet often underused, leadership tool. It reduces the leader’s workload while also empowering others to take on a greater leadership role. By Tim Tokarczyk and Willie Hepworth

eaders today face the challenge of having to do more L and more with less and less time: Achieve better results. Take on additional responsibility. Develop people. Stay on top of the constantly changing environment. Leaders are asked to do all this and more while remaining upbeat and positive.

It comes as no surprise, then, that many leaders, on occasion, feel a bit overworked or overwhelmed. In fact, the sheer volume of their daily tasks can be enough to frustrate some leaders into not knowing where to begin. Leaders in the construction industry have many tools at their disposal to aid them with even the most challenging circumstances. One of the most useful, but underutilized, tools is delegation. Delegation involves one person handing over specific tasks or assignments to another person as well as the accountability and responsibility for completing the task. Delegation is such a valuable tool for leaders since, when used effectively, it serves the dual purpose of reducing the leader’s workload while also empowering others to take on a greater leadership role. In a similar way, effective delegation offers individuals stretch assignments that challenge and motivate them while at the same time freeing up the leader to pursue more challenging and motivating assignments. This allows leaders to do less managing, and more leading. In the process, delegating builds trust between leaders and followers, increases 132 ■ delegation: a win-win strategy

organizational productivity and provides an additional means of examining a subordinate’s capabilities. Why, then, is delegation so underutilized as a leadership device? The reasons can vary, but most center around a mistaken understanding of delegation. Some leaders worry about losing their place in the organization if they delegate major tasks, since credit for completing the task would go to others, instead of themselves. Others feel that the process is far too inefficient, and the task could be completed much quicker if they just did it themselves. Both of these reasons take a limited view of delegation. Consider the view that delegation is inefficient because it requires an investment of upfront time. For example, a leader may not When done correctly, want to delegate a task because it delegation can greatly requires only two hours a week to complete, and it would take eight transform organizations hours to train someone else to do it. Although the investment of time is and individuals and larger upfront, delegation of repetitive serve as one of the most duties would pay off greatly in the future. By investing eight hours to valuable tools leaders train someone else, the leader would save two hours per week, eight hours have at their disposal. per month and 96 hours per year. When delegation is used properly, the organization and individuals involved will reap these benefits. However, taking the wrong approach to delegation could result in the opposite effect — less efficiency in the organization, less trust between leaders and followers and even disempowerment when things go badly. Leaders need to understand when to use delegation and with whom to use it, what types of tasks and assignments to delegate and how to monitor the process to ensure it is working properly. When done correctly, delegation can greatly transform organizations and individuals and can serve as one of the most valuable tools leaders have at their disposal.

DELEGATION AS A WIN-WIN Increase Productivity Research from the productivity team at FMI suggests that construction executives have approximately 400 hours of work on their desk at any one time. Even after 400 hours, these executives won’t likely reach the bottom of their inbox since as tasks, functions and projects are completed, the inbox continues to fill up. Most construction executives will never completely “catch up” with their work simply by plowing through it with their head down. To make any real progress on a task list far too extensive for any one person to complete, construction leaders will need to delegate. Data obtained from 360º feedback assessments of construction leaders at FMI’s Leadership Institute suggests that delegation is an area in which most leaders need to improve. 2008 issue 3 FMI QUARTERLY ■ 133

Improve Retention In addition to productivity gains, delegation is a sound strategy for improving retention. Research conducted by Career Systems International illustrates the top two retention drivers:

1. Exciting and challenging work 2. Career growth, learning and development

The construction industry faces one of the highest turnover rates in all business segments, and this rate is currently increasing. Organizations desiring to do a better job of retaining their key employees will do well to explore the use of delegation. When employees are given challenging, stretch assignments that allow them to learn new skills and gain new experiences, they are much more likely to stay with their current organization. When employees are relegated to the same old routines, they often no longer experience the same level of excitement or challenge in their daily work and are much more likely to leave the organization and seek those experiences elsewhere. Delegation can greatly reduce the desire to leave the organization for key employees.

Develop Talent Moving beyond retention, delegation gives a leader's direct reports developmental opportunities to increase their skill levels and experience. In this way, delegation is a win-win proposition. One specific approach to delegation for construction leaders is to shift to an “ask, don’t tell” method. For example, ask your people: “How do you think this situation can be handled?” or “What do you think may have led to this problem?” This will spur solution-based thinking, providing an opportunity for you to assess your direct reports’ capabilities as well as conveying to your people that you value their input. This is far more beneficial than simply telling people how you think a situation should be handled or what you believe is the cause of a problem. By allowing employees to think through the issue and come up with their own solutions, you will empower them to solve their own problems, and they may come up with answers that you might have missed. This will also work to build ownership with your people. Since they have come up with the solution themselves, they will be more likely to buy into the process than if they were simply following an order. Ask your staff to tell you about work projects or interests that they are passionate about. People who are passionate about what they are doing need little supervision as they will generate innovative solutions to problems on their own. 134 ■ delegation: a win-win strategy

DELEGATION CHALLENGES While delegation has a number of benefits, one caveat to consider is that in offering people new challenges, mistakes will be made. When people try new things, take on more responsibility or do something unfamiliar to them, the chances a mistake will be made increase. Leaders need to treat mistakes as learning and growth opportunities and not land too hard on employees when the inevitable happens. Leaders should be less focused on their people making a mistake and more focused on ensuring that the same mistakes do not occur repeatedly. Environments in which perfection is the standard are environments where very little risk is Here are some guidelines to help taken, and people will constantly increase the effectiveness of your play it safe. Leaders need to delegate, delegation efforts: but they also need to be aware of the possibility of more mistakes. • Be specific about what you want done and the timeline for it. The less ambiguity around your expectations THE DELEGATION PROCESS and the final product, the easier it Identify Goals will be for your employees. When preparing to delegate to an • Do not delegate only uninspiring, individual, a leader needs to think boring tasks that you would like to get off your desk. Be open to through the process to ensure the act delegating jobs that you enjoy and of delegating will result in a win for that offer real developmental both parties. On the front end, the opportunities to your staff. leader should establish clear goals, • Offer opportunities on projects that including expectations for completing will increase the visibility of your the task and the desired learning direct reports within the company. • Get to know your people and their outcome. This is an ideal time to strengths and challenges well, and discuss career development and how delegate to those individuals whose this task relates to the employee’s ingenuity, experience and abilities path. This will orient both parties and you trust. ensure no misunderstandings remain • Do not pile work on staff members who are barely treading water, even if about the assignment. they are your most conscientious. • Take into consideration how much Clarify Expectations of your time will need to be invested Leaders then need to give their in your direct report in order to direct report the opportunity to ask accomplish the task. • Make sure your staff has all of questions, clarify their role and express the resources necessary to reach how they feel about the assignment. the goal. Here, leaders need to encourage their • Keep the communication lines open, reports to think through the assignment provide feedback and coach your and how it will affect them personally people to success. and the organization. This is a valuable opportunity for the leader to gather feedback. Is the assignment challenging, or is it overwhelming? Does the individual feel he or she has the capabilities to successfully complete the delegated task? Is the individual excited about the stretch assignment or anxious about it? This information is invaluable for leaders as they continue to refine their ability to delegate. 2008 issue 3 FMI QUARTERLY ■ 135

Action Planning Next, leaders need to fully plan the action with their direct report. This is a good time to establish timelines and key interim points during which the leader will receive an update on the status of the project (without giving the impression of micromanaging the process). The leader can also clarify the scope of authority the individual has to complete the assignment. These questions are essential to ensuring both parties clearly understand the structure of the As the individual begins assignment so the individual being delegated to does not do too much, work on the delegated not enough or constantly seek permission for what it takes to complete assignment, the leader the assignment. Leaders need to have will need to be conscious a discussion around the level of autonomy the employee can expect as of any roadblocks that he or she works to complete the task. arise. The leader’s task is Remove Obstacles and Monitor the Process to remove these obstacles. As the individual begins work on the delegated assignment, the leader will need to be conscious of any roadblocks that arise. The leader’s task is to remove these obstacles. This may involve communicating with others about the individual’s new role and increased authority during the assignment as well as gathering any resources needed to successfully complete the task. During the assignment, the leader should frequently communicate with the employee, making sure the employee is supported. This is perhaps the most challenging part of delegating for the leader — working to make sure the direct report is successful. Close monitoring of the assignment will help by alerting leaders to early signs of difficulties. It also provides leaders with an opportunity to coach and give feedback, which should be used to provide encouragement, without interfering. Leaders should remember that accomplishing the goal carries more significance than their opinion on how exactly it should be accomplished.

After-Action Review Finally, once the assignment is completed, the leader should perform a recap. During this meeting, the leader gives feedback to the employee about his or her performance and 136 ■ delegation: a win-win strategy

solicits feedback about his or her own performance in delegating. Both leader and follower can use this review of lessons learned to improve future performance and review how the task fits into the employee’s career development.

BUILDING THE LEADERSHIP PIPELINE To maximize their leadership efficacy, leaders must learn to delegate effectively. Delegation is a far more complicated process than simply shoving the least exciting assignments onto any individual who happens to enter your office. To truly benefit the individuals involved, delegation needs to be an intentional, purposeful activity Delegation is a far more designed to develop those in your organization. Leaders need to spend complicated process time selecting the right assignment for the right person, taking into than simply shoving consideration the individual’s strengths, weaknesses and areas for the least exciting development. Leaders must provide assignments onto any necessary coaching and mentoring when the situation calls for it and individual who happens openly communicate throughout the entire process. to enter your office. Performed in this way, delegation empowers individuals throughout an organization, strengthens levels of trust and frees up leaders to perform higher-level tasks. Delegation is a tool that allows organizations to build up their leadership pipelines and increase the overall effectiveness of the work force. Delegation is an essential skill that is an important one for individuals to learn and master as they proceed on their leadership journey. ■

Tim Tokarczyk is a consultant with FMI. He may be reached at 303.398.7260 or via e-mail at [email protected]. Willie Hepworth is a staff consultant with FMI. He may be reached at 303.398.7262 or via e-mail at [email protected].