2021and Beyond: Why Operational Excellence Matters - FMI Corporation
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2021and Beyond: Why Operational Excellence Matters
CONTENT DIRECTOR CONTRIBUTORS
Sabine Hoover
DESIGNER Chris Daum
Erda Estremera Ryan Foley
Priya Kapila
PROJECT MANAGER Emily Livorsi
Liz Hester Tyler Paré
Gregg Schoppman
Tim Tokarczyk
CONTACT US:
www.fminet.com
mediarelations@fminet.com
Copyright © 2020 FMI Corporation. All rights reserved. Published since 2003 by FMI Corporation, 223 S. West Street, Suite 1200, Raleigh,
North Carolina 27603.
FMI QUARTERLY 2020
TABLE OF CONTENTS
Introduction�����������������������������������������������������������������������������3
Chris Daum
Get Lean and Mean: Preparing for 2021 and Beyond�������������������5
By Tyler Paré
The Silver Lining of Construction Productivity and Covid-19���������11
By Gregg Schoppman
Selling Your E&C Company During Covid-19������������������������������17
By Ryan Foley
Four Ways to Optimize Talent in Uncertain Times�����������������������22
By Priya Kapila
Why Focusing on Your Company Vision Still Matters�������������������28
By Tim Tokarczyk and Emily Livorsi
Welcome to the FMI Quarterly
By Chris Daum
Welcome to the fourth edition of the 2020 FMI Quarterly
and the last month of a most unusual year.
2020 has been incredibly difficult due to the pandemic, economic recession and many
other COVID-19-related disruptions to everyday life and commerce. Unfortunately, we
expect the industry will continue to be challenged in 2021, so leaders must remain
hyperfocused on completing current projects under changing conditions while also
preparing for tougher market conditions to come.
However, as critical as performance-based strategies are to weathering difficult markets, it
is vitally important that a leader remains committed to the company’s vision and the core
purpose and values that define the organization. After all, strategies will evolve as market
conditions change, but the continuous pursuit of your envisioned future is constant.
So with both the near and long term in mind, this edition of the Quarterly includes
articles on operational excellence: getting “mean and lean” to outperform, improving
productivity and managing talent, as well as reminding you why staying true to your
company’s vision still matters. One article introduces the concept of a COVID-19
productivity factor that captures both positive and negative effects of pandemic-driven
changes to crew size, job site conditions, project schedules and other work processes. In
another piece, members of FMI’s Performance practice describe six elements necessary to
out-execute the competition, taken from our work with dozens of the industry’s leading
companies. Lastly, in an article titled “Does Vision Still Matter?” principals from our
Leadership & Organizational Development practice contrast average leaders from
visionary leaders during times of crisis.
3
In closing, it may seem absurd to think of any silver linings resulting from the damage
wrought by COVID-19. However, in much the same way the financial crisis that caused
the Great Recession alerted the industry to a pending downturn, the pandemic is forcing
the industry to tighten operations and management practices in response to the
pandemic. After a decade of sustained growth, you are now called to lead and manage
through a period of uncertainty and potential disruption. The FMI team is here to help.
Chris Daum is the president and chief executive officer of FMI
Corporation. Chris oversees the management of all FMI
businesses and services and leads the firm’s strategic growth
efforts. He can be reached via email at cdaum@fminet.com.
4
Get Lean and Mean:
Preparing for 2021and Beyond
By Tyler Paré
What does increased competition mean for your business?
How will you become more competitive?
While the impact of the coronavirus Perception vs. Reality
pandemic will vary by geography and I recently listened to a developer
market segment, broad-based demand for bemoaning the lack of downward
construction services is expected to decline movement in construction prices in the
over the next two to four years. The wake of the pandemic. She argued that,
downcycle will increase competition; bull with expected declines in demand for
markets will attract new entrants while construction services (and increased
bear markets will offer fewer opportunities competition as a corollary), the price of
for established incumbents. these services should also decline.
What does increased competition mean for It is true that many contractors’ book-to-
your business? How will you become more burn ratios are underwater. In other words,
competitive? In this article, we explore the they are booking work at a slower rate
current market challenges that are putting than they are burning backlog. If this trend
pressure on pricing and margins. We will persists for a protracted period, annual
also offer some guidance on how to revenue will decline, and a construction
navigate these challenging times: business’s economic model will be
threatened if adjustments to fixed costs are
1. Don’t Panic not made proactively.
2. Get Lean and Mean
3. Execute However, many contractors expressed
having too much work and being stretched
beyond capacity prior to the onset of the
5
pandemic. The pullback induced by the Materials
pandemic, for some, was a welcomed Shocks to the global supply chain
reprieve and a chance to slow down, have created material shortages across
reevaluate and get the organization caught the industry, increasing the cost of
up. Translation – we have yet to see a building products and construction
broad-based trend in dramatic price materials worldwide.
reduction for construction services.
If direct costs are increasing, prices should
That may only be temporary. Eventually, also rise, not drop. The developer I spoke
declining backlogs will place pressure on with did not like this rationale. “But won’t
contractors to win more business and be contractors become hungry for work and
more aggressive. The construction industry lower their prices?” she rebutted. “I feel
lags the broader economy by 12 to 18 like they have been making money hand
months, and we have yet to see the true over fist in the last runup. Don’t they have
impacts on construction demand and room to cut their margins?”
contractor backlogs.
Pressure on Margins
Pricing If there is not expected to be much short-
Most construction companies employ a term relief in direct cost reductions, most
cost-based pricing methodology. They of the price competition will come down to
develop an estimate of the direct cost inputs margins and how aggressive contractors
(labor, equipment, material, subcontractors, are willing to be.
etc.) and then add margin to cover overhead
and sufficient net profit. For prices to While contractor margins have crept up
retreat, it would require a reduction in one year over year for the past decade, average
or more of these variables. trade contractor net margins were still in
the mid-single digits, and general
The Pandemic’s Effect on Costs contractor margins were roughly 50% of
those margins prior to the pandemic.
Labor
Labor wages are not expected to
Net margins for construction businesses
decline dramatically—rarely do these
have always been misaligned with the
figures move backwards, particularly
inherent risks in the industry. Growing
in an industry that is perpetually
margins for the construction industry are
lacking talent.
not a bad thing. Even if margins have
Productivity is likely to decrease increased (in some cases doubled) as FMI’s
because of increased COVID-related financial benchmarking data would
regulation (social distancing, point of suggest, it would be difficult to argue that
entry control, sanitization, etc.). contractors were taking advantage of the
bull market, let alone price gouging.
Equipment
With decreased utilization, the per-hour
cost of ownership is likely to go up.
6
Additionally, falling revenue means that FMI’s guidance for navigating a
overhead as a percentage of revenue will
market downcycle:
increase. If significant adjustments to fixed
costs are not made, contractors will
1. Don’t Panic
actually need to increase gross margins to
Knowing that we are facing a multiyear
sustain normal levels of net profitability.
downcycle, temper your work acquisition
Mathematically, the argument for
urgency accordingly. Panicking too early
contractors being able to drastically slash
and loading up on cheap work (i.e., poorly,
their margins begins to break down.
aggressively or emotionally estimated) is a
bad strategy that can result in years of
Theoretically, contractors have room to cut
headaches.
their margins, but not by much.
Downward pressure on contractor margins
Every construction market has irrational
spells risk for all project stakeholders. At a
players—those that will torpedo the market
basic level, would you rather partner with
and come in screaming low on bid day—
a highly successful, profitable construction
taking work and forsaking margins, sending
company or a desperate contractor
reverberations through the market and
operating on razor-thin margins, one
causing the competition’s estimators to
hiccup away from default?
scratch their heads. Don’t be that contractor.
If contractors are willing to slash their bid
margins to zero, they are going to have to 2. Get Lean and Mean
make it up somewhere else – cutting a) Be selective.
resources in an attempt to reduce direct Increase your project selectivity (go/
costs can lead to potential production and no-go process) discipline. Get
schedule issues; cutting overhead costs can competitive on the work that you
decrease overall project support relative to know you want, know you can win
quality, safety and schedule; and trying to and you know can deliver on. Don’t
make it all up on change orders can lead to swing at every pitch, especially those
strained relationships and potential delays. in the dirt. Chasing too many low
probability opportunities can burn
out your estimating department,
leading to low-quality estimates
fraught with mistakes and award of
troubled jobs that can could haunt
you and hamstring your organization
for years.
7
b) Know your true costs on bid day.
Oftentimes, there is hidden margin Avoid the Compounding Effect
in the direct cost line items of
of “Sharpening Your Pencil”
construction estimates. Estimators
will call this contingency or waste
factors; others might call it
Example
sandbagging. In good times, you can
An estimator knows that he/she must get
still win work with overly
more competitive to win work. He/she
conservative estimates. When job
removes all the “fluff” from the estimate
costs underrun budgets, these
and may even factor in overly aggressive
savings directly translate into margin.
productivity estimates. The chief estima-
Estimators and project managers
tor reviews the cost estimate, then skin-
both lay claim to these victories.
nies down the additional pricing factors
such as contingency, overhead markup
In reality there is probably room to
and margin. The president then steps in
tighten your estimates. We encourage
and says, “We really need to win this job;
contractors to base these adjustments
let’s cut the margin.” You now have
in historical data and facts, not just
aggressive pricing behavior at three dif-
intuition. By analyzing the direct cost
ferent levels. Often these measures are
variances across a large sample of
taken in isolation, without discussion or
work (the last three to four years),
consultation among all the players. This
you can identify trends and areas
can create a highly risky estimate. Ensure
where you consistently pick up
your work teams and decision-making
margin and theoretically have room to
are closely aligned when getting com-
tighten estimating practices. (Caution:
petitive on bid day.
Equal scrutiny should be given to
those line items that consistently
overrun budgeted costs).
In a bull market, overstressed your key subs and vendors—leverage
estimating departments can become those relationships to get advantages
lax in their processes and procedures. on bid day. Reevaluate contract terms
“Plug” numbers and “SF” numbers that may garner advantageous prices
may have been sufficient for small from your subs.
items in the past, but it is now critical
to have detailed costs for all budget c) Focus on operations.
items. It’s also important to carefully Tighten operational processes,
validate your subcontractor costs by controls and productivity. Get back to
increasing coverage, leveling efforts basics with respect to pre-job
and prequalifying. Stay close with planning, scheduling and look-ahead,
8
manpower coordination and project ratios of revenue, gross profit and net
closeout. If you are tightening your profit-per-head by employee
estimating practices, there is less room classification can help you make
for error, and projects need to be have prudent cost adjustments and right-
a high degree of discipline and size the organization.
adherence to proven best practices.
3. Execute
Ensure you have robust project These strategies are not unique. In fact
controls that can help you and your remove the challenges of 2020, and you
management team identity troubled can argue that most of these tactics make
projects early, affording enough time good business sense no matter the
and opportunity to course-correct economic climate. The difference we are
before things spiral out of control. hearing from firms in the industry today is
the level of focus and urgency related to
Productivity is a journey, not a these strategies. Contractors understand
destination. If you have made steps to that they need newfound levels of intensity
improve productivity in the past, now and intentionality in addressing their
is the time to revisit and double down companies’ performances.
on those efforts. FMI recommends
establishing a task force of your Wayne Gretzky famously said, “I skate to
operational leaders to improve labor where the puck is going to be, not where it
productivity and equipment utilization. has been.” Now that the industry is
aligning on “where the puck is going to
Also, ensure that your field leaders be,” contractors are all skating in the same
and subcontractor partners feel direction. Who can skate there (i.e., get
appreciated and supported. Stay close lean and mean) the fastest will be the
to them and listen to what is going on competitive differentiator in the post-
in the field. They are the lifeblood of COVID era.
your business and will be the ultimate
differentiators in winning or losing in Assess your executive team’s ability to
the current environment. execute on change management initiatives
necessary to win in an increasingly
d) Rightsize. competitive market.
Interrogate your fixed-cost
infrastructure. Cutting overhead alone
is not a sound strategy for maintaining
profitability in a downturn. However,
all aspects of your G&A need to be
highly scrutinized, including your
organizational structure, roles,
compensation, real estate, owned
equipment and technology.
Understanding your key efficiency
9About the Author
Tyler Paré is a principal with FMI. Tyler leverages his construction
experience, coupled with his advanced knowledge of business
mechanics, to help clients optimize profitability and mitigate risks.
His consulting work focuses on implementing work acquisition and
project execution best practices in support of competitive strategy.
He can be reached at tpare@fminet.com.
10The Silver Lining of Construction
Productivity and COVID-19
By Gregg Schoppman
An examination of the new normal COVID-19
productivity factor.
In early 2020 most business leaders constantly changing dynamics. One area to
probably didn’t think a pandemic would watch closely is job site productivity, which
shake the foundations of the world is unlikely to remain static. However, there
economy. In fact, the continued threat of are probably several misconceptions and,
diminished skilled labor and the related, more importantly, some of the pandemic’s
detrimental impact to productivity were consequences may even benefit contractors
the common industry challenges that most in the long run.
construction executives faced at the time.
For instance, there was a collective industry
Today businesses have new sets of rules, groan at the thought of testing every
guidelines and tactics to implement in order employee and cleaning every tool prior to
to succeed in the operating environment commencing of work every day. However,
thrust upon everyone as a result of COVID- there was also a moment of reflection where
19. While the pandemic’s earliest impacts leading managers also recognized that for
on engineering and construction (E&C) every productivity detractor, there was the
remained unknown, many construction potential of increased efficiency. All of the
leaders shifted their focus to known elements in Exhibit 1 are considerations
variables such as social distancing, that affect daily productivity and, in many
technology and clients’ demands. cases, the upside is something that cannot
be discounted.
Looking ahead, business leaders will
undoubtedly find new ways to thrive, but
they’ll also make errors as they react to
11Exhibit 1. Productivity Drivers and Inhibitors
in the Wake of COVID-19
HOUR
X DAY
CREW SPACING SPACING CLEANING TOOLS
SIZE Part 1 Part 2 IMPACT
With social distancing Crew stacking will be While adjacent trades What will be the loss
in effect, crew sizes a limiting factor, may be limited, will of productivity due to
will be limited (i.e., reducing area over output be negatively cleaning equipment
five-person crew to a population. affected? and tools at the
four-person crew). beginning and end of
work shifts?
TECH LEVERAGE TECH LEVERAGE TECH LEVERAGE CLEANING MATERIALS
Part 1 Part 2 Part 3 IMPACT
With a movement With social distancing What new innovative What will the loss of
toward paperless, rules, communication tools and equipment productivity be as it
firms will see gains in will have to be targeted will aid production? relates to cleaning
operational and direct, limiting time materials that come
productivity. away from jobs on-site?
(i.e., wasted meetings).
12The Upside of New Crew Sizing and owners may not allow crew stacking,
even if they haven’t reached the capacity
and Spacing
allowed for a particular space. This may
With social distancing rules in effect, there
require longer durations for specific
may be a need to reduce crew size.
activities, and it should be reflected in
However, in many businesses, crew sizes
project estimates and budgets accordingly.
have ballooned with no explanation or
challenge to those increases. The question
Crew transportation should also be
becomes: Can we do the same (or more)
considered and evaluated in terms of cost
with less?
impacts. For example, in many markets
carpooling is common and helps
There are many studies that show the
employees save money. In a COVID-19
optimum spacing for personal
world, some organizations are limiting
productivity. Oil companies have explored
group transportation, thus increasing costs
these spatial constraints for years to
for employees or the project cost profile in
determine effective spacing requirements
the form of additional fuel expenses. Even
in areas where safety and productivity
if the cost is minimal, this can impact the
must be maximized (e.g., on offshore
overall project.
rigs). Similarly, many construction
managers assume that output increases
when you cram more employees on a job Cleaning Time: The Pros and Cons
site. The problem is that there is a law of Personal hygiene is not limited to hand-
diminishing return when it comes to washing. It takes time to clean tools and
overloading resources on a job site; work areas, both at the beginning and end
simply adding bodies within confined of work shifts. Be sure to allocate time for
spaces will only impede productivity. The preventive maintenance, as the new rules
good news is that new rules may prohibit may dictate a less than optimal use of a
placing more people in an area. Trade 40-hour workweek.
contractors will rejoice at this, knowing
they will not have to work on top of other The materials that arrive on job sites may
trades simultaneously. also need to be cleaned prior to use.
Obviously, a greenfield project may have a
final cleaning phase that will provide a
The Flip Side of Spacing
certain level of closure for customers.
In some cases, contractors need more
However, an electrical contractor working
employees on-site to get the work done
on a renovation of an active medical clinic
(e.g., for installing a window, placing a
may need extra time to clean switchgears
lintel or tying rebar). New rules may
and light fixtures. Be sure to factor this into
require novel methods and means of
the budget development process.
getting this done. Additionally, as different
trades occupy a space, general contractors
13Additionally, contractors may have to do a digital tools to report both time and
more thorough final cleaning. In the past quantities, obtain real-time productivity
this could have meant simply vacuuming, information and quickly adapt to changing
floor waxing and restroom cleanings. work environments.
Today, owners’ expectations may include a
higher level of “cleaning commitment.” At Use of videoconferencing tools such as
first glance, many contractors would Zoom, Webex, Microsoft Teams,
concede that this is a change order as it GoToMeeting and FaceTime has also
deviates from the contract documents. accelerated due to the pandemic. In fact,
Where this is undoubtedly a change in communicating via virtual tools was often
scope, it would be foolish to think that a last-ditch effort for some in the pre-
there would be no impact to general COVID era. Now, in the absence of true
conditions (i.e., original final cleaning of face-to-face interactions, these tools have
one to two days, new final cleaning of five become essential to maintaining schedules
to seven days). In summary, these changes and good communication. They’ve become
require careful planning and forethought as ubiquitous as a hammer drill or backhoe
and open communication with owners. on job sites, enabling teams to close the
distances and utilize time more effectively.
Overall, workspace hygiene and cleanliness
will change and could have ramifications for The Formulaic Approach
contractor costs, but there’s also another Most construction organizations use
perspective that should be considered. elaborate estimating programs and baseline
Outside of extraordinary exceptions or crew rates that provide a multiplier for all
requirements, trade contractors and general work quantities. For instance, if a contractor
contractors alike have largely struggled with estimates that it will need 100 linear feet of
simply keeping sites clean. Spurred by the water piping, there is some labor multiplier
pandemic, this new focus on cleanliness that represents the appropriate crew blend
and hygiene may actually improve (i.e., one crew leader, one equipment
productivity and job site safety. operator, three laborers).
Leveraging Technology However, for many organizations, the crew
Optimizing digital technology for cost blend is one dynamic that may not
timecards, job reports, punch lists, receive the required level of scrutiny. For
submittals, schedules, purchase orders, example, simply bolstering it with a cost of
quality assurance or quality control, and living increase doesn’t work anymore. In
other documents is probably just what the fact, best-in-class firms are taking a more
construction industry needed. By going formulaic approach to dissecting the cost
paperless, crews can focus on the work drivers. Exhibit 2 illustrates a theoretical
and gain efficiencies that were previously formula that represents the new multiplier:
out of reach. For example, crews can use Many may initially question how to come
14Exhibit 2.
NEW CREW RATE = (Old Crew Rate – Θ) * COVID FACTOR
COVID FACTOR = (B + X + ∆ + E + ф + Г + H)
Θ – Crew Size Decrease
B – Crew Size Loss of Production Decrease
X – Tool and Hygiene Cleaning Cost Production Decrease
∆ – Clean Materials Cost Impact
E – “Productive Site Through Cleanliness” Enhancement
ф – “Less Distractions” Enhancement
Г – “We can’t carpool” Transportation Cost Increase
H – Spacing Enhancement
up with the values for these factors. First, There are changes happening that all
developing these productivity variables is businesses should recognize as becoming
an equal balance of art and science. Going new standard operating procedures. These
through the process of identifying and changes must permeate across all aspects
quantifying these numbers is a win for of the business, including (but not limited
any firm. to) estimating, budgeting, planning, cost
monitoring, productivity reporting and
Successful businesses delve into their cost financial benchmarking. As challenging as
structure and avoid broad generalizations the pandemic has been, COVID-19 is
on productivity. With so much emphasis simply a manifestation of an ever-present
on increased time associated with cleaning list of business challenges that require
and hygiene right now, contractors might leaders to pivot and adapt. If it wasn’t
mistakenly assume that costs should COVID-19, there would be some other
increase across the organization. This, in obstacle to overcome. Overall, it is
turn, could adversely affect the firm’s essential that construction business leaders
competitiveness. To avoid this problem, adapt, react and pivot quickly to succeed
companies should focus their planning and in today’s changing operating environment.
analysis efforts across each project.
15About the Author
Gregg Schoppman is a principal with FMI. Gregg specializes in
the areas of productivity and project management. He leads FMI’s
project management consulting practice as well as the consulting
management group in FMI’s Florida office. He can be reached at
gschoppman@fminet.com.
16Selling Your E&C Company
During Covid-19
By Ryan Foley
A look at COVID’s impact on engineering and
construction M&A and what could be around
the corner in 2021 and 2022.
With COVID-19 continuing to affect the early virus-related panic began to
engineering and construction (E&C) subside, select buyers came back to the
around the world, the industry’s mergers deal table. Concurrently, sellers began
and acquisitions (M&A) activity has also calling FMI investment bankers to discuss
felt the ramifications of the ongoing exit strategies.
pandemic. In March 2020, FMI saw about
one-third of its contractor deals get While we’re not in a full recovery, we are
paused, put on hold indefinitely or seeing sellers become more interested in
canceled as acquiring companies turned potential transactions as well as shifts in
their attention to more pressing matters. deal structures, heightened due diligence
This was done to protect the buyers’ and surprisingly stable valuations. This
balance sheets, shield those buyers from article will explore these M&A trends with
vulnerable end markets (i.e., office and an emphasis on risk mitigation and
hospitality), and address overall heightened due diligence in the age of a
trepidation about the world’s economy. pandemic.
During the late summer and early fall, FMI Buyers Are Still Buying
witnessed a marked uptick in transaction The first notable shift in the market
activity and interest on the part of buyers environment was, not surprisingly, created
and sellers in the E&C space. As some of by buyers. In March there was a distinct
17subset of acquisitive contractors that put FMI Capital Advisors was inundated with
their ongoing or planned transactions on calls from prospective sellers seeking
indefinite hold. This was particularly true information on the marketplace, valuations
for end markets like office, retail, and M&A processes. We attribute this to
amusement and hospitality, all of which are several factors. First, many business
now in the throes of combatting a owners are nearing retirement age and
substantial decline in project backlogs. aren’t interested in managing through
another downturn after the Great
In early spring, FMI received several calls Recession.
from large, well-capitalized general and
industrial contractors expressing an Second, we see business owners looking to
eagerness to deploy resources on exit their companies after back-to-back
acquisitions. While none of these firms record-breaking years. We do, however,
expected a global pandemic to be the caution these prospective owners to avoid
catalyst, those buyers who were waiting for trying to time the market as it can be
a market correction in early 2020 were exceptionally challenging. Put simply,
keen to communicate their desires to find sophisticated acquirers won’t be fooled by
good acquisition opportunities. the notion of continued record years and
will be paying particular attention to work
Concurrently, those acquirers who hit the in progress (WIPs) and project pipelines.
pause button on M&A as a growth
strategy—and particularly specialty trade Third, as construction cycles tend to lag
contractors—were suddenly back in the gross domestic product, we still see a
market. We are now also witnessing degree of optimism from both buyers and
increasing interest from market segments sellers. However, the great overhang of
such as heavy civil, which remains bullish uncertainty could dampen these ambitions
on the prospects of a permanent next year and even into 2022. Lastly, the
infrastructure package sometime in 2021. change in U.S. presidency could spur
concerns about a higher tax environment,
In addition, companies and people driving some sellers to the deal table.
migrating away from dense urban areas
and natural disaster-prone regions are Changing Deal Structures
creating demand for housing and, to some While there is great uncertainty heading
extent, commercial development in select into 2021, buyers are seeking ways to
locations such as Texas, Utah and the mitigate the risk of a precipitous drop in
southeastern U.S. the financial performance of target
companies. As a result, changing deal
Curious Sellers Are Coming Out of structures have become a sign of the times.
the Woodwork We’re seeing earnouts (i.e., portions of the
As the country settled into a pattern of purchase price contingent on future
addressing and dealing with COVID-19’s earnings) as well as sellers’ notes increase
impacts, sellers began to take an interest in in offer structures from 10%-20% of
potential exits. In August and September, purchase price to 20%-30%. This is not
18surprising, as construction is notoriously So Where Are the Bargains?
unpredictable. Also, these mechanisms Both buyers and sellers are now wondering
help buyers and sellers bridge the gap on just what the current market and economic
valuations and get to the closing table. volatility means for valuations. Surprisingly,
the answer is not much. With companies
Heightened Diligence working through robust backlogs, both
The environment during COVID-19 is buyers and sellers are still experiencing
creating increased due diligence streams. In attractive financial performance on existing
the second quarter, there was tremendous jobs. At the other end of the spectrum,
uncertainty surrounding Paycheck opportunistic buyers anticipating a
Protection Program (PPP) loans; their downturn in valuation multiples have been
impact on M&A transactions was a large disappointed as sellers have not yet
unknown. Would the loan be forgivable? conceded a willingness to trade for less. Of
And if not, should the acquirer assume the course, this may change as project backlogs
loan? The Small Business Administration are expected to soften in the coming
and other government institutions had no months, possibly all the way into 2022.
answers to these questions, yet the lessons
learned in the Great Recession taught In December 2019, for example,
Congress that the first priority is to get the mechanical, electrical and plumbing (MEP)
money out as quickly as possible and figure public comparable companies were trading
out the regulatory environment and fraud at 7.3x enterprise value forward EBITDA.
risks later. This multiple dipped to 5.6x enterprise
value in March 2020, but as of October
We now know that the most common 2020, these multiples were largely
treatment for PPP loans places the onus of unchanged at 7.5x. In fact, for E&C as a
forgiveness on the seller. Other trends we whole (both domestic and international
have seen are increased
7.3x
scrutiny of public companies),
7.5x this multiple increased
7.1x 7.1x
6.5x 6.4x
unfunded pension liabilities,
6.4x WIP profit
5.6x from 6.4x
5.6x 5.3x in December
6.0x 2019 to 7.1x in
4.8x
fade/gain trends and other financial October 2020 (Exhibit 1).
instruments that could be negatively
impacted by an economic downturn.
ExhibitDecember
1. Enterprise Value
2019
March/ 1-Yr Forecast
2020
EBITDA
October
2020
M/E/P Avg. Heavy Civil Avg.
General Contractor Avg. M/E/P Avg.
7.3x 7.5x 7.1x 7.1x
6.4x 6.5x 6.4x
5.6x 5.6x 5.3x 6.0x
4.8x
December March October
2019 2020 2020
Source: CapitalIQ M/E/P Avg. Heavy Civil Avg.
General Contractor Avg. 19 M/E/P Avg.Our Crystal Ball On the bear side, we expect M&A
As we close out 2020 and move into the activity among commercial
new year, FMI expects these M&A trends contractors with exposure to retail,
to either continue or begin to take shape: office, hospitality, transportation,
amusement and multifamily to be
Based on conversations with dormant.
contractor management teams, we In addition, while we expect there
expect an increase in deal activity in will be interest from large general
2021 versus 2020, particularly due to contractors to acquire attractive
the lost quarter that happened in early targets, we expect valuation to remain
2020, when M&A transactions were a hurdle for closings. For example,
on hold. we’re seeing a number of buyers that
We also expect to see deal want to acquire contractors that
announcements in mechanical and service data centers, pharmaceuticals,
electrical trades, where there warehousing and distribution. The
continues to exist robust interest from question is, why will sellers be willing
large private and publicly held to trade when they are amid record-
companies. setting demand.
In addition, we anticipate a few All in all, the M&A market for construction
announcements from industrial is faring better than we anticipated at the
contractors with heavy exposure to oil outset of the pandemic. We hope that
and gas seeking to diversify into other vaccines and treatments continue to show
end markets such as food and positive progress through clinical trials and
beverage and pharmaceutical. that at least one outcome of the election
will be less uncertainty, which always
We expect continued bullishness on bodes well for both the economy and
the proposed infrastructure and demand for new construction.
pandemic rescue package to spur
deal activity in the heavy civil and
highway segments (although this will
be offset by diminished state and
municipal budgets).
20About the Author
Ryan Foley is a managing director with FMI Capital Advisors,
FMI Corporation’s investment banking subsidiary. Ryan co-heads
the Contractor & Construction Services industry practice of FMI
Capital Advisors, FMI Corporation’s Investment Banking subsidiary.
In this capacity, Ryan provides strategic M&A and capital raising
services to the construction and engineering industry. He can be
reached at rfoley@fminet.com.
21Four Ways to Optimize Talent
in Uncertain Times
By Priya Kapila
Tips for effectively assessing your current labor
pool, making the necessary adjustments and
preparing for future success.
As the end of one of the most unusual the first half of 2020, one in three
years in recent history draws to a close, it contractors acted quickly to reduce costs
is naturally a time for reflection and, even by decreasing headcount.
more importantly, a time of planning for
the days ahead. Engineering and However, there was no pause in the
construction (E&C) companies are demand for skilled talent. According to the
undoubtedly considering their 2021 U.S. Bureau of Labor Statistics (BLS), the
forecasts, including examining backlogs construction industry saw monthly net
and reviewing business development gains in job creation, and the number has
opportunities and bid prospects. Many are been rising through the most recent data
also considering discounts for for October. While total industry
subcontractor and supplier challenges as employment is below pre-COVID levels,
well as potential project delays and the unemployment rate remains relatively
cancellations. Key among these projections conservative at 6.8%, which is slightly less
for next year should be an assessment of than the U.S. average across all industries.
workforce needs. In other words, many workers have
employment options.
Four Labor Optimization Moves
In many markets, competition has This does not mean contractors cannot still
remained high and margins have take steps to improve efficiencies and, in
continued to be squeezed amid mounting doing so, streamline their organizational
health and economic concerns. During structures. It simply means they must
22proceed with care and caution. Here are four breakers, it is best to flag them as soon as
steps companies can take now to ensure their possible. If there are unique people and
labor forces are optimized for 2021. processes that are believed to be integral to
the company, it might be preferrable to
Step 1: Determine Current and Future place these outside any restructuring
efforts or ensure that the changes are
Staffing Needs
gradual and clearly communicated. Not
Before an executive team can create the
surprisingly, executives who have worked
preferred organizational structure, it must
to create and promote a positive view of
examine the company’s financial position,
leadership are often able to oversee
business development plan, and
changes best.
operational capabilities and prospects.
Nonfinancial factors must be considered
Industry benchmarks should not be the sole
too; a comprehensive overhaul of the
consideration for leaders in developing an
company’s strategic direction and activities
optimal structure, but they can yield helpful
may be ideal, but if employees perceive the
insights on how similar companies are
changes as a cultural conflict, the possible
organizing their employee populations. For
gains may not outweigh the potential for
example, FMI’s 2020 Construction
turnover and disengagement.
Professional Compensation Survey reveals
that among general contractors, most hire
The risk of reluctance or resistance to
one project manager, superintendent and
change is one reason that most companies
project engineer for approximately every $18
would be well-served by creating a
million in revenue, on average (Exhibit 1).
restructuring plan now. If there are deal
Exhibit 1. Project/Field Employees by Company Revenue
60
Total Project/Field Engineers Per Company
Total Project Management Professionals Per Company
50
Total Project Superintendents Per Company
Number of Employees
40
30
20
10
0
$0 $250 $500 $750 $1,000
E&C Company Revenue (Millions)
Source: FMI’s 2020 Construction Professional Compensation Survey
23The broad review of the corporate outlook Performance reviews primarily focused on
should be narrowed to determine the talent behaviors versus results can cause problems.
characteristics that are most important to Often, executives and HR leaders are
the firm. For example, a general contractor concerned that it causes undue stress and
that sees an opportunity to further break overfocus on tangible results rather than
into the self-perform arena may focus its long-term contributions and employee
attention on establishing qualifications and development. What’s more, in times like
expectations for field leadership and trade these, when companies are considering
staff. Another contractor in a highly reining in salary increases and incentive
competitive environment may highlight the awards, linked performance reviews lose
need for a best-in-class estimating nearly all value in the eyes of employees.
department. The identification of critical
areas does not negate the need to evaluate In the absence of a more robust training
job roles throughout the organization, but and development program, performance
leaders should prioritize those positions or reviews can still be a good starting point. If
teams that are most likely to support the used, they should offer clear, objective
company now and in the future commentary of employees’ current job
(recognizing they may be different). performances and their reflections of
company values. If employees are in the
Step 2: Evaluate Employees’ Skills, habit of developing customized goals with
their managers, this feedback can also offer
Interests and Potential
insights on what is important to each
Employees are continuously assessed for
employee (i.e., where they want to excel or
competencies, asked for insights on their
improve). In addition, the difficulty of the
aptitudes, and questioned about their
performance goals established can be an
potential and desire for advancement. For
indicator of his or her manager’s general
many contractors, this is a utopian
views of capabilities. More detailed
concept. While annual performance
assessments can be conducted and, in
reviews have become common across the
some instances, should be. However,
E&C industry, they are still fraught with
starting with available resources will lead
inconsistency and incompleteness. And,
to less disruption to the employee base
unfortunately, one approach to improve
while leaders contemplate new structures.
the process—requiring a completed
review for raises and bonuses—has few
benefits other than ensuring most Step 3: Align Jobs With People
employees and managers speak at least Discussing the future potential of team
once a year about performance. members – and how it aligns with the
future goals of the firm – is a sensitive topic;
therefore, it is ideal that functional needs are
24determined independent of the assessment The more sensitive side of the alignment
of people at first. The act of reconciling equation includes the methods required to
necessary and desired staffing with the effectively transition employees who will no
current workforce is likely to result in some longer have a clear role within the company.
conflicts. In other words, there will be First, the approach for identifying those
vacancies for key positions as well as likely to be terminated must be reviewed to
employees who do not necessarily fit in the ensure fairness and compliance:
ideal organizational structure.
Employees must be evaluated
Companies should also focus on managing according to consistent criteria that
job gaps. Even contractors seeking cost reflect the company’s values and
savings and an overall reduction in the strategies.
workforce may find that there are new or
The best practice is to assess all
modified jobs needed for future business
employees, even those in jobs that
improvements. Therefore, once these
will be eliminated.
unfilled jobs are identified, leaders must
make an action plan to place the right The process should represent a
individuals in them. top-down hierarchical structure, but
not neglect critical input from team
Finally, there should be a clear members across the organization.
understanding of the characteristics and
skill sets desired after analyzing staffing Employee evaluations must be
needs. Filling the gaps might be achieved undertaken quickly and quietly.
through retraining current employees or Rumors will begin circulating rapidly,
recruiting new, experienced team members. and the sooner they can be quelled
with guidance from leadership, the
In both instances, the time and cost of better.
getting workers up to speed must be
Leadership must determine what type
evaluated carefully. Cultural and compliance
of consideration is required and if the
factors may have an impact also; in
company will offer additional
particular, when a significant reduction in
severance benefits (e.g., salary
force occurs, who is left standing takes on
continuation, paid leave payouts,
great significance. Companies may also
ongoing health care premium
consider engaging independent contractors
coverage, outplacement services, etc.).
or consultants, but, generally, this should be
done to satisfy interim needs or accomplish
short-term initiatives.
25Step 4: Develop the Restructuring Plan Not surprisingly, the views of employees
A contractor’s communication plan has who remain have much more influence on
momentous impact on the success of the the long-term performance of the company
restructuring process. While there are than those let go. One survey from the
schedules to put in place, training and Great Recession era showed that nearly all
onboarding programs to develop, and employees are less likely to recommend
overall strategic alignment to confirm, the their company as a great place to work,
way changes are managed and conveyed and 3 of 5 employees think their
will have lasting effects. organizations’ prospects have worsened
after a layoff. There is further evidence
Leaders may exercise discretion in how suggesting that employees are more likely
transparent they are when communicating to voluntarily leave a company when
workforce adjustments. If reorganization is future job satisfaction and security are
seen as necessary to take on significant increasingly uncertain and are usually the
new opportunities, then a reasonable level top performers leave first.
of optimism should be messaged. On the
other hand, if the talent shifts are needed Navigating Uncharted Territory
for dramatic course correction, it may be Given the difficulty of 2020 and the
best that leadership communicates a new outlook for 2021, contractors should
future to prepare for a turnaround. consider the caliber of current talent and
future wants and needs to bolster potential.
In any scenario, the suggestion that a This is even more important after a decade
reduction in force is simply a cost-cutting of continued growth, where there was a
endeavor will not be met well. Feedback common perception that anybody would
following a restructure is nearly always be a good fit for an open position.
challenging, but a forward-looking
perspective will be the best mitigator of The need to rein in spending and create an
anger, sadness and frustration. organization that is structured for success
means it is now time to take a hard look at
Employees in roles that are eliminated optimal job roles and current employee
should be informed promptly and be given characteristics. Using the strategies
all appropriate details related to their outlined in this article, companies can
departures. Shortly thereafter, as the effectively assess their current labor pools,
message gets out, further explanation make the necessary adjustments and build
should be shared internally and among key for future success.
external stakeholders.
26About the Author
Priya Kapila is the compensation and rewards consulting leader
with FMI. Priya is responsible for leading the compensation
consulting practice of FMI Compensation. Services provided to
clients are primarily focused on the areas of executive compensa-
tion, organizationwide salary structure development, and short-
term and long-term incentive plan design. She can be reached at
pkapila@fminet.com.
27Why Focusing on Your Company
Vision Still Matters
By Tim Tokarczyk and Emily Livorsi
Watching, waiting and ignoring changes until the
COVID-19 pandemic is over isn’t going to work.
Here’s why.
It’s been 26 years since Jim Collins and The answer is: Yes, vision still matters. And
Jerry Porras published their landmark as we see when returning to the insights in
study in “Built to Last,” and the world has “Built to Last,” leaders still need to set the
changed significantly since October 26, foundation and goals that will guide their
1994. We’ve seen dot-com bubbles burst, organizations for the coming years despite
terrorism emerge as a global threat and the continuous uncertainty. To do that, we
pace of technological change skyrocket. need to remind ourselves of what vision is
We’ve navigated through the Great and how it can be a transformative tool for
Recession of 2008, and we’ve seen the our organizations.
proliferation of disinformation propelled
by social media. Holding Steady Amid Uncertainty
“Built to Last” introduced the world to the
Today we’re in the midst of a global concept of “preserve the core and stimulate
pandemic and economic downturn, the progress.” This is the foundational principle
likes of which we’ve never experienced in that makes vision such a powerful tool. The
our lifetimes. Industry leaders would be first part of vision, defined by a core
forgiven for asking this question: Does purpose and core values, is meant to
vision still matter when we cannot even identify the aspects of an organization that
predict what will happen tomorrow, let should never change. Having a clear
alone months or years from now? purpose and core values provides stability
and a reference for everyone to use when
making business decisions.
28In our current climate, employees need to 5. How do you handle it when workers
know that your company’s defining perform well in their jobs, but do so in
characteristics won’t change. This is ways that don’t align with your purpose
important because your core purpose (why and values? Do you ignore it because
the company exists beyond making they’re high performers, or do you
money) and your core values (the enduring address it directly?
tenants of behavior) provide guidance for The answers to these questions will help
your people. The problem is that the words you determine how well you’re preserving
themselves do not accomplish anything. the core, which is critical to building an
enduring organization. In times of
To transform your company and build it uncertainty, this foundation will center
into an enduring organization requires your employees and help them stay
more than nice-sounding words. Many focused.
organizations have a written vision, but
few have taken the steps to become truly In 2019 FMI interviewed industry
visionary companies. executives who led through the Great
Recession and asked leaders what factors
To overcome this issue, core values and and leadership moves helped them
purposes must be communicated frequently weather the storm. Many leaders identified
across the organization. Employees need to having a clear core ideology—and not
receive feedback on how they are straying from it—as critical to the health of
performing relative to the purpose and the business.
values, and they need to understand what
they should be doing and changing. Stimulating Progress
Next, Collins and Porras stated that
Putting it to the Test companies need to stimulate progress to
To test how well you have embedded your accomplish their goals. This often takes the
core purpose and core values into your form of a big, hairy, audacious goal
organization, ask yourself the following (BHAG), with a clear description and
questions: understanding of what the organization is
trying to accomplish with this goal.
1. Do you have a clearly defined core
purpose and core values? The BHAG unifies the organization around
2. When was the last time you celebrated a single goal—a long-term strategic
someone for aligning with your objective that requires change. The core
purpose and values? purpose and core values provide stability,
3. What training does your organization but for an organization to survive, it must
conduct to align people with your also change and adapt. In times of
purpose and values? uncertainty, your people need to know
where the organization is going.
4. Do you ask interview questions of
potential hires to evaluate whether they
align with your culture?
29A long-term strategic goal gives your Do you have clear metrics that allow
employees direction and guides day-to-day you to measure progress and a plan to
work toward accomplishing that vision. refocus if you get off track?
Whether this direction concerns
These are just a few of the key questions
organizational growth, expanding into new
that leaders must consider when building a
markets or segments, redesigning the
long-lasting culture and organization.
organization from the inside out,
transforming your talent to be best in class,
or revolutionizing the industry, your Visionary Versus Average Leaders
people need to know where the company To help illustrate the differences between
is heading and how their contributions visionary leaders and average leaders,
support those efforts. consider the thinking of two different
leaders in the following scenarios:
To test how well you’ve clarified your
long-term strategic direction, ask yourself Scenario A: Average Leader
the following questions: I have no idea what the future looks like.
Our backlog is strong going into 2021, so I
Can your employees clearly define the feel good about that; but I’m not sure what
organization’s long-term (10- to 2022 will bring. We weathered the first
20-year) goals and direction? wave of COVID-19 well, but I’m not sure
what will happen in the next few months.
Do your employees understand what
It’s better for us to focus on the day to day
they need to do today to help the
and just get through this. Eventually,
organization achieve its long-term
things will quiet down, and we’ll be able to
goals?
get back on track then. At this point, I’ll
Have you made considerable, remind my people to focus on what they
measurable strategic progress over the can control, do their jobs and we’ll be ok.
past year?
Scenario B: Visionary Leader
Have you celebrated and
I have no idea what the future looks like,
communicated this progress to the
but I’m confident that we’re heading in the
whole organization?
right direction. We have an exceptional
Do you have a clear picture of what culture, and we need to remind people that
needs to happen over the next year to true success involves performing well day to
drive the organization forward? How day, but also aligning with our purpose and
about over the next five years? values. If we stay true to who we are, we’ll
be able to thrive in any environment. We
30also need to keep our eye on the long-term Working Toward a Brighter Future
goals of the organization. While we’re 2020 has been a challenging year for all of
dealing with uncertainty, we can’t let up on us. Even businesses that are thriving have
the gas. We have big expectations of the endured an uncommon level of stress and
organization and all employees, and there’s new obstacles. The industry has faced many
much we need to accomplish in 2021 if we challenges this year, including navigating
hope to achieve our BHAG by 2035. We new work-from-home policies, dealing with
need to leverage the collective experience COVID outbreaks at the office or on job
and wisdom of our people for innovative sites, and shifting focus as project work was
ideas to overcome our current challenges. paused or stopped, to name a few.
The key difference between these two Without intentional focus, leaders will shift
scenarios is that in times of crisis, average to the short-term tactics, pausing vision
leaders hunker down. They focus on the work in order to endure. Other leaders will
tactical, the short term. They pause their take the visionary path and increase
long-term thinking until there is more communication and refocus their people
certainty. Visionary leaders recognize that in on the company’s core purpose and core
challenging times, they must think values. They’ll think strategically about
strategically and refocus their people on what what the future of the organization looks
matters—the core purpose and core values. like in a post-COVID world, collaborate
more, leverage their people and chart a
path forward to ensure continued business
success. “Built to Last” was right all those
years ago—vision really does matter.
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