Obstacle Course

Sizing up the Top 10 Hurdles Builders Face in New York City

The New York region’s construction industry speaks up about the difficulties that developers, contractors, designers, and others face in trying to complete projects in New York City.

by Adrian MacDonald

New York City’s construction marketplace is promising record activity on the horizon.

Every corner of the city is booming with new projects, from “everyday” residential towers to signature efforts, such as the World Trade Center complex’s 10 million sq ft of office space in Manhattan; the $4 billion Atlantic Yards complex in Brooklyn; new baseball stadiums in the Bronx and Queens; and billions of dollars worth of new transportation projects to add tunnels and new subway lines.

A report from the New York Building Congress underscores the push, predicting construction spending in the city will exceed $21 billion per year in both 2007 and 2008. And the sheer size of some of the projects on the current slate suggests that the market will be strong through at least 2010.

But while the market is creating unprecedented opportunities in the building industry, it also invites headaches. Industry observers call current conditions a “perfect storm,” with national and global forces, such as the hurricane-ravaged Gulf Coast and the expansion of the Chinese economy adding further strain to an already tight market for resources – from people to financing – and exposing some of the longstanding points of conflict in the market.

“It’s such a robust market, there’s bound to be a shortage of something,” says Dick Anderson, president of the New York Building Congress. “There’s too much work out there not to have interruptions of supply.”

Some of the strains are most visible on the public sector side, where agencies are facing higher-than-expected bids and a drop in the number of bidders. It recently happened on several New York City jobs expected to cost hundreds of millions of dollars each – the New York City Department of Transportation’s reconstruction of the Willis Avenue Bridge over the Harlem River; New York City Transit’s planned rehabilitation of the 207th Street railyards for the A subway line in Manhattan; and the New York State Department of Transportation’s plans to widen and rehabilitate the Alexander Hamilton Bridge carrying Interstate 95 from Manhattan to the Bronx.

The Willis received two bids both topping the $417 million estimate by $200 million; the railyard one bid that exceeded the $200 million estimate by $179 million; and the Alexander Hamilton bridge project got no bids at all.

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No. 1: Shortage of Qualified People   

New York shares in a critical problem confronting the construction industry nationwide – the lack of strong, capable, and experienced workers and executives.

“Qualified people are a tight commodity,” says Charles Murphy, vice president and general manager of the New York office of Turner Construction. “We’re all competing for the same group of professionals.”

According to a study by McGraw-Hill Construction, U.S. colleges grant about 70,000 engineering degrees every year, compared to 600,000 in China and 300,000 in India. Murphy says companies are now sending steel detailing and design drawing tasks to firms in other countries.

But outsourcing is limited as a method to fill gaps of available workers.

“Mostly in our business we need people here where the work is,” Murphy says. “We’re competing for site people. You can export the final drawings, but we need someone to sit with the client and do the rough drawings and the actual construction.”

On the management side, the problem lies less with the number of people available than with the number of qualified people, says John Cavanagh, executive director of the Contractors’ Association of Greater New York.

“They keep hiring people, but they aren’t as knowledgeable as they should be,” he adds. “We need a lot more training of people coming up.”

Overall, the attempt by some contractors to grow in the midst of a boom market is being stymied by a lack of people to manage new projects, says Marc Newman, a partner in the construction services group at Anchin Block & Anchin, a New York accounting firm. And a lack of qualified people can make it difficult for company owners to hand off the business to a new generation when they are ready to retire, Newman adds.

“It’s hard to wind down a construction business,” he says. “It takes years with all the overhead and ongoing jobs. Otherwise you have to liquidate, which is expensive.”

Interestingly, a problem facing other regions – a shortage of skilled workers – is not as big a concern in New York, says Paul Fernandes, chief of staff for the Building and Construction Trades Council of Greater New York. But despite the ample workforce, Fernandes says the New York market faces a major challenge in the spread of nonunion crews, and he says that correlates to less safety on construction sites.

No. 2: Tight Subcontractor Market    

Both the private and public sectors are facing a squeeze to attract enough bids from subcontractors to get a competitive price.

“It’s like you’re negotiating with yourself right now,” says James Abadie, principal-in-charge of the New York region for Bovis Lend Lease. “There’s only one or two qualified bidders.”

With the region’s robust residential market, cast-in-place concrete, curtain-wall installation, and plumbing subcontractors have been the most difficult to secure, while electricians have workers on the shelf, says Turner’s Murphy.  He adds that the mix is changing as the market shifts from residential into transportation and commercial space as the lead sectors.

For specialties in high demand, some owners are settling for higher prices and second-choice contractors, says Thomas Scarangello, managing principal for Thornton-Tomasetti, a New York-based structural engineer.  

“From an engineering standpoint, it is affecting the quality of the work,” he adds. “You have the next tier of quality kicking in on certain projects, which I won’t name.”

No. 3: Bonding and Financing Issues    

 Even as demand for the industry’s services heats up, surety companies are leaving the market and construction loans are harder to secure, say Abadie, Murphy, and others.

“We’re doing double the volume we were two years ago, so the subs are exceeding their bonding limit,” Abadie says. “They might be bonded for $30 million, and they’re getting $60 million worth of work. But it’s a Catch 22. You have to be doing $60 million for three years to  get your bonding capacity raised.”

The problem is most severe when bidding public work because government regulations are inflexible about bonding, says CAGNY’s Cavanagh.

“The surety industry has to change, because it’s really inhibiting growth,” Cavanagh says.

No. 4: Contractors Getting Paid     

While contractors are notorious for griping about not getting paid enough, they are complaining more loudly that the payments are too slow in coming, says Lou Coletti, president of the Building Trades Employers’ Association of New York.

“It’s on public and private jobs, and it’s all over,” Coletti says. “It’s becoming extremely serious.”

Coletti adds that slow payments contribute to a shortage of contractors in the market because when companies can’t cover their cash outlay for labor and change orders on finished work, it prevents them from bidding new jobs.

“Owners are slow, and banks are slow,” says Anchin’s Newman. “You may not make that much on a particular job, so a dispute like that can really affect profitability.”

A busy market in an industry facing staff shortages may compound the payment problem, Turner’s Murphy says.

“Because there are fewer professionals in the management process, change orders are taking longer to process,” he adds. “In some cases, subs are short of management levels to get the paperwork in.”

But Murphy says he is not sure owners in general are paying more slowly, but rather that with more work available, there is simply more potential for hang-ups.

No. 5: Construction Costs on the Rise      

Urban companies face rent, tolls, parking, congestion, and many other factors that make it expensive to do business. Such expenses are magnified for New York contractors, Newman says.

“They’re always driving around in cars and trucks,” he adds. “There are tolls, transportation costs, and just time in traffic.”

At the same time, New York builders contend with volatility in the global commodities market, which in recent years caused rapid, unpredictable escalations in the price of materials such as steel and concrete.

Labor costs and land values are also major contributing factors to an expensive New York construction market, says the Building Congress’s Anderson, who adds that construction costs in New York can be as much as 50% higher than other cities. 

And the escalation continues. Residential towers built last year for $325 per square foot are now priced at $400, Bovis’s Abadie says.

“In the past, if the numbers were bad, you’d go back and rebid,” says Thornton-Tomasetti’s Scarangello. “Now, owners are just accepting those bids as the reality, which will only be higher tomorrow.”

No. 6: Bureaucracy and Red Tape      

“Every time something happens on a construction job, there’s another approval or permit or safety check,” Anderson says. “Generally, there’s no sunset provision on these, so they just keep getting added.”

And the bureaucratic hurdles generally are worst on public jobs, especially in the area of procurement regulations, the BTEA’s Coletti says.

“The rules for bidding a public job are too onerous,” he adds. “In a strong market, a lot of contractors don’t even look at public work.”

The rules can include strict bonding requirements and “no damage for delay” clauses that force contractors to accept all or most risk from project delays, including slowdowns caused by bureaucratic inefficiencies.

A newcomer’s perspective provides some silver lining regarding the private sector – New York’s permitting obstacles are no worse than those of other Northeastern cities, says George Cavallo, president of Providence-based Gilbane Building, which recently opened an office in Manhattan.

“The permits are actually a little faster here due to the abundance of work,” he adds. “In Manhattan, you get the same circles of people involved, and you know who the players are. Everyone is geared up because of the hot market.”

No. 7: Tangle over Design Drawings    

A busy construction climate exacerbates the debate over design drawings, which contractors such as Abadie say are increasingly incomplete.

Turner’s Murphy says the issue of incomplete drawings has hovered since owners began pushing “fast-track” methods decades ago.

“A contractor always complains that the drawings aren’t good enough,” he adds.

But Abadie says the conflict now is more pronounced.

“It’s like pulling teeth to get anyone to complete the drawings,” he adds.

The push by owners to have contractors work without complete drawings – and the willingness of engineers and architects to create these plans-in-progress – creates more opportunities for mistakes and change orders, Abadie says.

But what one contractor calls incomplete designs can also be viewed as more cooperation among project team members, Thornton Tomasetti’s Scarangello says. Owners are pushing for more flexible delivery methods in an effort to get projects done faster, including bringing contractors into the design process earlier, he adds.

“In those cases, the contractor comes on with full knowledge that the drawings are not complete and negotiates a price knowing it will be integrated into the design team,” Scarangello says. “That can lead to very good results, but there’s a steep learning curve.”

No. 8: Staging and Logistics Issues     

Overcoming the hassles from New York’s density and congestion may be a point of pride for many contractors, but in Lower Manhattan below Canal Street, where $22 billion in work is planned for a street grid of less than a square mile, staging and logistics are raw obstructions.

“Downtown, there’s a lack of open space for lay-down,” says Bob Harvey, who directs capital planning and construction for the Lower Manhattan Construction Command Center, which the city and state established in 2004 to coordinate the rebuilding of the district, including the World Trade Center site.

Contractors downtown face considerable street congestion, resulting both from normal heavy use of the narrow streets as well as numerous closures and slowdowns from construction activity. To top it off, the area has no major commercial rail or port access.

One of the most common challenges is getting concrete to a jobsite within the 90 minutes it takes to dry after mixing, Harvey says.

“All constraints add to the complexity of the work, and that’s all added into the contractor’s price in the bid,” he adds.

No. 9: Risk Negotiation Conflicts      

New York contractors have long complained that owners are pressuring them to take on increasing amounts of risk in contract negotiations. And owners counter that contractors are healthier than they claim.

The issue surfaced widely in the 1990s when the market forced construction managers in the city to move away from roles as for-fee agents of the owner, a set-up under which the owner would hold contracts with subcontractors itself. The market instead moved toward at-risk arrangements where the construction manager both holds the contracts and agrees to deliver the project under a guaranteed maximum price.

In today’s busier construction market, contractors have been able to push back on the amount of risk they will accept,  says Barry LePatner, a New York construction attorney.

“From the owner’s standpoint, it’s difficult now to find construction managers that will take on some of the risk,” he adds.

Contractors recognize the opportunity to reduce their risk, Coletti says.

“Companies are more selective now with their terms and conditions on risk,” he adds. “I think we’re at an important point in the history of this industry.”

No. 10: Challenges of Going Green     

As sustainable design ideas flow into the mainstream of the building industry, contractors are increasingly changing traditional practices and designers are re-examining their choices of materials and building systems to comply with Leadership in Energy and Environmental Design standards. And one of the main added ingredients is time.

 “LEED is not difficult if the designer and developer pay careful attention to the requirements,” says Woody Mazur, a construction attorney with Mazur Carp & Rubin of New York. “But there’s the time factor in construction and market conditions that can make it challenging to carry out.”

The environmental question won’t go away, says Rick Bell, executive director of the New York chapter of the American Institute of Architects.