John Anderson, Senior VP for Business Development, for Diede Construction, spoke to us about the state of his industry and some of the projects in which Diede is involved.
“A lot of people think construction development has been down the last 24 months but public works has never stopped,” Mr. Anderson said. “But, losing 400,000 construction jobs across the country has caused competitive bid problems. Example, there were 12 bidders in a Vacaville public works project. Estimated cost for the project was $18 million but the bids came in from $12 million to $16 million.”
Many of the low bidders were from very reputable firms but their margins most likely were below costs on the bid. The idea in the construction business is to keep cash flow going. Bids under cost may not pencil out but because they bring cash flow the jobs can provide an operating floor for profitable jobs. Without some cash flow the company may be in jeopardy of failure.
“Typically, bidders are bidding on every bid list,” Mr. Anderson said. “When you have a company reducing profit to negative just for cash flow it’s very disruptive. The end game can be pretty disastrous.”
Mr. Anderson indicated that over the next two weeks $100 million in public works bids will be processed. Most likely the low bid will be a “cash flow” bid.
“The overly aggressive low bidders are having trouble paying their subs,” Mr. Anderson said. “If you don’t finish the job, the bond company will finish it for cost.”
The vicious cycle of defaulting on subcontractor pay or a shut down during the job is very disruptive for the client.
General contractors, because of the scarcity of work for all the idled companies, are taking work too cheap and right on the financial edge.
“If you have seven HVAC prices and they are at $4 million and one is at $2.3 million, you know there is probably a problem there.”
“We have too much respect for our bond company to do that to them,” Mr. Anderson said. “We called one subcontractor and told them their bid was too low. Many aren’t used to all the regulations on the public sector side. We wouldn’t use this sub because of his unrealistic bid, but somebody else did.”
“Some of the municipalities have had it with the bad bidding. Stanislaus County, for example, ask for design-build and use best value. Their animal control project is a good example. We were not the low bid, but we brought the best team. So we got that job and finished under budget.. We make a decent margin and they have a great product.”
This was example of a project having long-term institutional value.
Diede is also currently the select design build firm for an animal control facility in Manteca.
“The state’s position is to dissolve the redevelopment agencies,” Mr. Anderson said. “This is a huge mistake. The benefits it brings to a community are huge. This is the deal. A private developer isn’t going into an area where there is blight. They’re going where there is improving area. Unless the cities have a way to clean up their problem neighborhoods there just won’t be private investment and development. It’s a downward spiral.”
Sacramento’s downtown redevelopment is a great example of a success. People are going out to dinner now in an area through which they once drove fearfully and quickly.
“We have redevelopment jobs from Los Banos to Sacramento,” Mr. Anderson said.
Millions of dollars are being moved out of accounts and placed for projects in cities throughout the state in order to sequester funds before a state recall. The state has already taken big chunks of redevelopment money and cities are wary. Ironically, Governor Brown when mayor of Oakland used redevelopment money often.
Redevelopment agencies have already bought blocks of land. The land can be used for equity side of development to get a project going. It is unclear what other use besides redevelopment the lands could be used for. Opinions are that this bodes well for at least some projects continuing.
“This year should be a mending year,” Mr. Anderson said. “Private work has been flat but with interest rates as low as they are we are looking to get going. Qualified borrowers are getting loans left and right.”
Retail and other states
“We haven’t done retail in the past,” Mr. Anderson said. “Now we have multiple states’ licenses. Hawaii, Idaho, and Nevada are some of the locations. We are a select contractor for Wal-Mart, and a local grocery company who bought a chain in Hawaii. It’s exciting. We are also doing a lot of work for a Fortune 500 company. They have locations in Hawaii. We are doing rehabs and expansion on 24 sites in California and Hawaii. Tax incentives expiring this year are a strong motivator for a lot of construction projects. We are bidding on a Wal-Mart store in the Bay Area for the same reason. Tax incentives. That store has ten years on it and usually they don’t rehab or remodel or update until after fifteen years, but the 100 percent capital purchase deduction is a strong motivator.”
Fast Turnaround gets clients
Diede gets clients because they are fast. A potential client in need of major repairs calls into Diede and other construction companies. Within 48 hours we have a line drawing and respond with a quote. Other companies come in a week later and take two weeks to get a proposal out.
“During the boom it wasn’t that way because everyone was so busy,” Mr. Anderson said. “We had a pipeline in the private sector. Now you have to earn those clients.”
Projects coming up for Diede include fleet services for cities and counties.
“We’ve done a lot of fleet service work, including design and build. We have added a lot of green elements. Lots of solar,” Mr. Anderson said. “We are in the middle of proposals for many of those projects.”
Diede does substantial medical work. Trinity Plaza Medical Center in the Park West Center is an example. They do TI packages there. They have ongoing projects with Mark Twain Hospital in San Andreas.
Hospitals, and entertainment are the biggest push for them this year. They have momentum on multiple sites in San Joaquin, Yolo, and in Stanislaus counties. The work includes hotels, bowling alleys and cinemas.
The cinema in Lodi was huge success. They have designed a platform for cinema and bowling alley combos that are attractive to municipalities. They generate tax revenue and value to a community. It’s good for kids.
Mr. Anderson is going to China March 15th. He is going to Zambia later in the year. Emerging markets are becoming more and more important for Diede.