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Here is some information you might find helpful on the Commercial Construction industry.

Industry Overview

• The commercial construction industry is highly fragmented, including about 80,000 firms with total annual revenues of $450 billion, including $200 billion of public construction. The industry includes about 6,000 companies with annual revenue over $10 million, several dozen with revenues over $500 million, and a handful of giants like Bechtel; Fluor; and Turner Construction.
• 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, etc. This industry group includes special trade contractors, such as asbestos removal, fence, irrigation, glass and glazing contractors, and landscape companies whose services may be a part of the actual construction contract or can be contracted by the building owner to enhance the usefulness or appearance of the property.
• Because construction is very expensive, demand depends heavily on the health of the US economy, including corporate profits and government budgets. Large companies may be involved in many types of construction. Smaller companies typically lack sufficient expertise to participate in a broad range of projects and therefore specialize in only a few, or just one, type. Of about 37,000 firms involved in constructing commercial buildings, for example, 75 percent get the majority of their business in a single specialty area. Small construction companies typically work in a limited geographical area and often function as subcontractors on larger projects.
• All construction companies need to manage equipment, labor, and construction materials. Larger companies may own much of their equipment and retain full-time construction crews, while smaller ones typically lease equipment for a particular project and hire much of their labor force on a project basis.
• Larger companies typically negotiate an overall contract with a project owner and function as general 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, elevators and similar mechanical systems).

• General contractors need special management skills to deal with the project owner, designer (architect/engineer), consultants, suppliers, accountants, the government, attorneys, insurance carriers, and unions.
• Because of the increasing complexity of construction projects, many project owners prefer to award the construction phase of a project to the same firm that produces the design (and therefore knows best how to execute it). The growing popularity of design-build contracts has encouraged many construction companies to acquire or develop a design capability.
• companies acquire new business by maintaining contacts with architects, engineers, developers, and other construction companies, and central industry information sources like FW Dodge. On private-sector projects, companies may be invited to submit a bid, based on their reputation. Public projects are usually open to all bidders. Most projects are awarded through one of three types of contracts: guaranteed maximum cost; fixed price (lump cost); or cost-plus-fee; all carry varying risks. 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 projected amount, the owner and contractor often split the savings. With fixed price contracts, the contractor keeps any cost savings. In cost-plus-fee contracts, the owner pays all costs, including the contractor's negotiated fee. Most contracts contain penalties for late completion.
• With profit margins relatively thin, there is little room for error in cost estimation or project management. The more cost risk a contractor is willing to assume, the greater the opportunity for profit, but with the equity capitalization of most construction companies fairly low, a losing contract can sharply affect a company's financial health. Construction companies must manage cash flow carefully, due to delayed and unpredictable payments. Many contracts require "retainage" - payments held until after the project is completed. Weather and changing material prices can have large effects on cash flow.
• Cash flow management can difficult for construction companies, especially on large projects, because of the large numbers of payments that must be made, while revenue is often received in periodic installments. Both payables and receivables can be high. Depending on the type of contract, the construction company may be exposed to changing materials or labor prices.

• While construction companies are not directly regulated by the government, they must comply with numerous federal, state, and local building codes, safety regulations, hiring practices, etc. Public projects often entail even more detailed regulations. companies generally have to maintain detailed records of many activities associated with a project. Computer technology is extensively used in project design and management, and for cost estimating and accounting.
• Because most construction companies work in a very limited geographical area, they are strongly affected by local economic conditions. For example, in 2002, the top markets for office building construction (excluding Manhattan) were Washington, DC; Chicago; and Boston; while there was little construction in larger markets like Los Angeles, Dallas, and Atlanta.
• Jobs in construction work often require special training or experience, and are therefore relatively well-paid. In many areas of the country, construction workers are unionized. Although much work still requires manual labor, operating machines such as cranes, backhoes, graders, and concrete pumpers has become more important. Construction methods and materials have simplified routine construction projects.
• Construction work is mildly seasonal. Many companies keep a core of full-time workers and hire extra for each project. For workers employed only on a project basis, there are no long-term fringe benefits. The average expense for fringe benefits is therefore a fairly low 24 percent addition to payroll expense.
• Greater safety concerns, in an industry that still has a relatively high number of fatal accidents, have brought annual illness and accident rates down from 14 cases per 100 workers in 1990 to 8 in 2000. (The rate for the manufacturing industry in 2000 was 9 cases.)

Industry Merger Opportunities

• High Government Spending - Government spending on infrastructure projects like highways and bridges is expected to remain at high levels during the next decade. Construction of new schools, funded at state and local levels, has also increased. Despite the likelihood of a federal deficit during the next few years, funds for construction projects are expected to remain high. From 1997 to 2002, public construction increased 40 percent.
• Improved Construction Technology - In an industry that relies heavily on correct scheduling, coordination, and technical specifications, computer technology has reduced costs and mistakes. New construction methods, such as tilt-up construction and greater use of pre-fabricated structural members, will also encourage more construction by reducing costs.
• Diversification into Homebuilding - As the commercial construction market declines, more commercial builders are diversifying into other construction markets, including the residential market. The increased land, capital, and ownership risks of homebuilding are offset by higher margins; however, homebuilding requires very different contractor skills and activities, with large land costs, intense demographic research, and heavy marketing to attract buyers.

Business Trends

• Specialization - With the scale and cost of many construction projects rising, contracts and subcontracts are much more likely to be awarded to companies with an expertise in a particular specialty such as framing, mechanical, demolition, roofing, electrical, public works, or roads. For many companies, a majority of new contracts come from existing customers who hire them to do projects similar to those completed in the past.
• Joint Ventures/Pooling Expertise - As projects get bigger, on-time completion becomes more important to owners, since costs associated with late completion rise relative to actual construction costs. The larger scale and complexity of projects is creating more joint ventures among construction companies, which can pool their expertise and financial resources in bidding for contracts.
• Construction Management, Design-Build - The technological sophistication of many projects and the increasing use of design/build contracts encourage the integration of engineering and construction companies. While large companies like Bechtel and Fluor have long combined engineering and construction expertise, the combination of skills is becoming more important for small and mid-sized companies.
• Repeat Business from Satisfied Customers - More contracts are being awarded without bidding to builders who have already done work for a project owner. While low cost is still important in awarding a contract, project owners are often more concerned about reliability and financial stability.
• Guaranteed Maximum Price Contracts - More projects are being done under guaranteed maximum price contracts, which limit the owner's exposure and put a premium on a construction company's ability to accurately estimate and manage project costs. Project management skills are becoming more important relative to the actual execution of fairly routine building activities.
• More Frequent Equipment, Staff Leasing - Many companies have their own project managers, but hire all other workers and all equipment on a project basis.
• Attention to Security in Building Design - Designs are being influenced by security concerns: high-rise designs are likely to fade in favor of massive low-level buildings. Greater emphasis on evacuation routes and stronger walls and windows is also likely, is as the protection of air-circulation systems (to prevent gas or biological attacks).

Industry Forecast

• The value of US new nonresidential construction, a major driver for commercial construction contracting, is Forecast to grow at an annual compounded rate of 8.5 percent between 2005 and 2008. Driven by the current low interest rate environment and economic recovery, industrial construction is expected to pick up in the next few years. Strong growth is also expected for office buildings and the hotel industry. Much of this record growth reverses the significant reduction in commercial building from 2001-2003.