Commercial & Heavy Construction Contractors
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Industry Overview
The US commercial and heavy construction contractors industry includes about 80,000 firms with combined annual revenue around $525 billion. Large companies include Bechtel, Fluor, Jacobs Engineering, Peter Kiewit Sons', and the US divisions of Swedish firm Skansa. The industry is highly fragmented.
The global construction industry has annual revenues of over $7 trillion, according to Oxford Economics. Top global construction companies include HOCHTIEF (Germany), STRABAG (Austria), Skanska AB (Sweden), and Bovis Lend Lease (Australia).
Commercial construction includes apartments, office and retail buildings, hotels, schools, public buildings, industrial and manufacturing buildings, highways and bridges, sewers, pipelines, power lines, power plants, and other civil engineering projects.
Competitive Landscape
Demand depends heavily on the health of the US economy, including corporate profits and local government budgets. The commercial construction industry is intensely competitive, with companies ranging from small private firms to multi-billion dollar companies. Barriers to entry are low, since large upfront capital expenditures are not necessary.
Most companies work locally, but large firms work nationally and some, internationally. The largest firms can have up to 75 percent of their projects outside the US, and must therefore establish offices in countries where demand or regulations require a business presence. The profitability of individual companies depends on accurate project bids and efficient operations. Large companies have advantages in their ability to engage in multiple projects simultaneously and in many types of construction. Small companies can compete effectively by specializing, working in a limited geography, or serving as subcontractors on larger projects. Average annual revenue per industry worker is $350,000.
Products, Operations & Technology
Major industry services are constructing nonresidential buildings, including for industrial, commercial, and institutional use, and heavy and civil engineering projects. Commercial and institutional building construction accounts for 50 percent of industry revenue; heavy and civil engineering construction, for 45 percent; and industrial building construction, less than 5 percent.
Operations focus on bidding for projects and managing project plans, labor, equipment, and construction materials. Larger companies may own much of their equipment and retain full-time construction crews, while smaller firms typically lease equipment for a particular project and hire much of their labor on a project basis. Industry metrics include proposal accuracy and project performance-to-plan, including planned labor, time, and budget.
Larger companies typically negotiate an overall contract with a project owner and function as the prime contractor, acquiring equipment and materials, managing the construction schedule, and hiring specialist subcontractors for much of the actual construction work. Any one project can have from a dozen to hundreds of subcontractors who specialize in "ground up" work (foundation, floors, walls, roof) or in more profitable "finish out" work (interior walls, electrical, painting, plumbing, HVAC). Prime contractors and many subcontractors have general contractor licenses. General contractors need special managerial skills or staff to interact with project owners, architects, engineers, consultants, suppliers, accountants, the government, attorneys, insurance carriers, and unions.
Contractors typically obtain work by submitting bids in response to requests for proposals (RFPs). For private-sector projects, bidding is generally by invitation; for government projects, RFPs generally are publicized so that any qualified contractor may bid. Three types of contracts are common: guaranteed maximum cost, fixed-price, and cost-plus-fee. Guaranteed maximum price contracts require the project owner to pay for costs, materials, and other incidentals up to a maximum amount, after which the contractor is responsible for additional costs. If the total project cost is less than the estimate, the owner and contractor often split the savings. With fixed-price contracts, the contractor keeps any cost savings and is responsible for cost overruns. In cost-plus-fee contracts, the owner pays all costs, including the contractor's negotiated fee. Most contracts contain penalties for late completion.
Because construction projects are increasingly complex, many project owners prefer to use the same firm to design and build the project, so that accountability lies with one company. The growing popularity of design-build contracts has encouraged many construction companies to develop a design capability or acquire a design firm. In addition to exterior facade and interior layout, the design plan specifies materials, which contractors buy from building supply distributors. Building material prices and availability can fluctuate greatly, making supply contracts an important way to manage costs. Steel prices can be volatile and copper is particularly costly, leading to increased job-site theft.
Commercial construction contractors use technology throughout operations. Industry-specific software supports proposal development, project plans, labor and material allocation, and project performance monitoring. Computerized management reports enable firms, especially large ones, to monitor performance-to-plan daily. Construction machinery and equipment have computerized controls that enable precise functions, such as where to dig or lift and place material. Large firms have extensive, interconnected computer systems that enable employees to collaborate and communicate on projects; in-field handheld devices also communicate with in-office systems. Small firms generally have a PC-based or small, multi-user system.
