Canada’s top construction firms evolve, adapt to change
By JIM BARNESConstruction Financing Infrastructure LEED P3s Risk Management Roads Skills Development
PCL, EllisDon, Ledcor finish top 3 in annual On-Site Top Contractor survey
It is interesting to compare the Top Contractors list of 25 years ago with the one in this issue. There have been changes, but a surprising number of the companies that were on the list then, still dominate it. It is not as if the industry has not changed – the companies that have survived and thrived at the top have had to adapt to very challenging circumstances.
Consider: the changes over the years in corporate structure; geographic and sectoral diversification; skilled labour needs; alternative procurement models; equipment and information technology; regulation in health, safety and the environment; programs like LEED and BIM; the prevalence of partnerships; new requirements in finance and surety; and many others.
However, the important things have not changed. This industry is still run by hard-working, entrepreneurial, practical thinkers. That is what keeps it healthy and profitable in good times and bad.
We approached representatives of a few of our long-term Top Contractors for comments on how their firms have weathered the changes over the years.
For a general comment, we started out with Michael Atkinson, president of the Canadian Construction Association in Ottawa. “The firms back then (30 years ago) were the master builders; they did everything. Today, that approach is almost extinct,” he says.
Growing project size, especially in resource and infrastructure, is partly driving the change. He says that 15 or 20 years ago, he could have counted the billion-dollar projects on the fingers of one hand, “without using all five digits.” Today, one listing of Canada’s largest infrastructure projects shows 52 listed at $1 billion or more, says Atkinson.
One reason for this growth is capacity issues among owners. “Our clients are facing the same capacity challenges in terms of the aging demographic and holding onto experienced people that contractors and the supply chain do,” notes Atkinson.
They do not have the experienced people or the big engineering departments they used to. “At the same time, they have more demand, because a lot of Canada’s public infrastructure is in need of [rehabilitation]… That’s one of the reasons why we are seeing projects go out in larger scope than they might have in the past.”
When the projects get bigger, the big contractors have to, as well. “If you’re not a contractor that can play in that bigger sandbox, you’re going to find yourself left behind,” says Atkinson
Another factor is a growing preference for the one-stop shop. Clients no longer want to have to hire a design team, a contractor, a facility manager and the other skill sets. They want to go to one source. “A company that can’t readily supply those services may find its market disappearing,” says Atkinson.
Competitive forces are increasing. “Someone said to me recently, ‘In the old days, we had to prequalify for a half billion-dollar contract. We pretty well knew that three or four of us would be shortlisted. We didn’t have to do a lot of work in the pre-qual.’
“That’s no longer the case,” notes Atkinson. “There will be two or three or four additional names there who have the capacity to do the work. You’re in a situation now where you have to do a lot of work just to prequalify, because the competition is stiffer even at the prequalification stage.”
As well, he notes, “We have larger European companies in our sandbox now. That, in itself, drives a certain need to grow to compete… They have experience in P3 delivery and they have had a lot of experience with larger transportation projects.”
At one time, says Adam Borgatti, director, Corporate Development & Investor Relations, Aecon Group was mainly an Ontario-focused road builder. “Now, we’re a full, turnkey, self-perform contractor country-wide, with half our business in the west and half in the east. We’re an integrated service provider across three main areas – energy, infrastructure and mining. That’s a very different company than where we started from.
“The emphasis now is on turnkey projects, executed through partnerships — not only with our bid partners but with our clients, unions, First Nations and others,” he adds.
“Many of these projects are being procured through P3s, which require expertise across development, finance, construction, operations and maintenance – the full gamut,” says Borgatti. “You’re performing all those services in partnerships with global players and local organizations.”
P3 bids can take over a year to complete, once you prequalify, he notes. “They cost millions of dollars to pursue. Generally, they are performed with partners that are very sophisticated and have expertise from overseas. We act as a strong local partner for some of the foreign players… It’s nice to have large, international partners with different experience that we can leverage.”
“Financing issues go hand-in-hand with the size and nature of these projects. You must have a strong balance sheet and/or an ability to secure capital, bonding, insurance – there are all these packages and partnerships help. Everybody shares the risk and the costs,” says Borgatti.
The company prides itself on its vertical integration. “Vertically integrated, to us, means a full suite of services. We can provide full, turnkey capabilities,” he says. “It’s a big jump and we’ve done it pretty much across all of our services.”
“On the infrastructure side, for example, it could be developing a project, doing the utilities associated with that project, laying roadway or rail if it is an LRT, all the way through to project completion — doing the building on-site and even operating it afterwards if the client so wishes,” he says.
The firm has had a sectoral shift. “We used to have a very large building business focused on social construction. We scaled back that business four or five years ago. We are now focused on turnkey services in the infrastructure, energy and mining sectors, which can include some buildings.” says Borgatti. “That was a real shift, for Aecon to say that we were going to self-perform the majority of services in areas where we can deliver.”
The company has targeted the U.S. as a growth market. “It has the potential to be the largest P3 market in the world,” says Borgatti. “The market has some risk to it, but it is developing and we think the US demand for urban transit sol
utions, roadways, and other kinds of work is just going to be significant. Very few companies in the U.S. have P3 experience. It’s a very specialized skill set.”
EllisDon Corp. of Mississauga, Ont. has experienced tremendous growth since it started out in 1951, building schools in London, Ont., according to Jody Becker, the firm’s SVP, Emerging Markets & chief strategy officer. One constant, though, is a strong sense of entrepreneurialism that dates back to the firm’s founders.
“We’ve always been willing to go to new places and do different types of work beyond what some people might have assumed was our core business,” she says. “That really got us into the P3 business 10 years ago, which was a real game-changer for us.”
“I believe we were the first contractor to jump into the equity box on P3 projects in Canada,” says Becker. What started out as a matter of necessity became a strength. “We have the expertise to do it and we think frankly that we can even exceed what is available from some of the financial advisors in the marketplace.
Given the size of some of the megaprojects that are now out in the market, strong partners are crucial. “They have been a key part of our expanding our abilities,” says Becker. “We’ve had the opportunity to work with some really great partners who have introduced us to some types of projects that were relatively new to us, including industrial and civil projects.”
The firm puts a focus on services, according to Becker. “We call it cradle-to-grave services. That means being able to assist with the early stages of any project,” and follow through as far as the client wants. Services cover a spectrum, from equity services and design services (including Building Information Modelling and Virtual Design and Construction) to project management, managed services, facilities management and sustainability services that ensure the building meets LEED and other sustainability requirements.
The firm is looking for a special kind of staff, says Becker. They need open-minded, experienced people, “who are not only well-versed in the core business but are willing to take the kind of risks that we have been talking about – people that are willing to put the extra effort in, to understand all aspects of the project, who have new ideas about how to build things and how to finance things.”
EllisDon’s international orientation is increasing. “The next frontier is to build up business in the U.S.,” she says. “We are really focusing on our strategy for that market.” As well, the firm is doing projects in the Middle East, with some projects going on in the Caribbean and a project going on in Colombia.
Since its earliest days, Ledcor Group has set a priority on diversification, notes John Kump, chief administration officer and senior vice president, P3 Infrastructure Investment. “We consider ourselves to be one of the most diversified contractors in the country. We’re in various markets, including oil and gas, energy, commodities and building.”
Alternative procurement models have spurred growth at Ledcor, as it has with other large contractors.
“The projects have become so complex. What’s really driving a lot of the partnering is just how difficult it is to qualify for some of these projects,” says Kump. “The resume and the background you need to qualify – just to get through the first gate –is so stringent and so robust that few contractors can pursue those jobs on their own. They’re being forced to partner with other companies because it’s easier to qualify for those jobs together.”
European contractors have become a factor in the Canadian infrastructure marketplace. “Basically, every European contractor is here now – all the Spanish, all the French, all the
British and they have capabilities in that space. It’s forcing Canadian contractors to get together to compete – either with the Europeans or with our Canadian counterparts.”
“They have to partner with local companies like us. Right from the get-go, as they arrived, we have partnered with several of them,” says Kump. “Over time, we’ve been watching their strategy. We haven’t seen a lot of acquisition activity,” he says. “It looks like they want to take the partnering approach with local Canadian contractors, not just buy them up and compete against the bigger ones.”
P3s have also changed attitudes toward surety. “In the P3s, they require more letters of credit. It’s a different type of security for Canadian contractors, so the Canadian community has had to adjust their capital structure to be able to have the letter of credit capacity.” Kump says the situation is well understood. “It’s a matter of getting comfortable with the difference. The mechanism is different and the risks associated with that security are different.”
Ledcor’s international focus has been growing, often driven by competition and multinational client requests. “That world is more complicated, contracts are more complex and there are more variables and more risks to consider. This is especially true in the U.S., where it is much more litigious,” says Kump.
Kump says building the Ledcor brand is a key strategy in finding talented staff. “In the past, contractors tended to stay more in the background,” he says. “Today, contractors have to be much more forward with their brand and their top employer awards,” to attract recruits. “You have to raise your profile to attract that scarce, top talent.”
“Today we are more diversified, but we’re still one hundred per cent employee owned. That’s not going to change,” he says. “Over the past ten years, the company has worked to integrate its businesses to offer turnkey solutions to our clients. Our businesses are not silos and they work together. That’s a more recent evolution.”
A turning point for 109-year-old PCL came in 1977, with the introduction of employee ownership, says David Filipchuk, president and COO, Canadian and Australian operations. “We went from 25 shareholders then to more than 4,500 today. That’s a great success story.”
Before that change, “We had not yet branched out into the industrial business, but we were in buildings and roadbuilding,” he says. Today, “we have the three pillars of buildings, civil infrastructure and industrial,” and that diversification offers protection from market cycles.
The firm’s geographic reach has expanded as well and contributed to growth. “We’ve gone beyond our strict focus on Western Canada to being coast-to-coast in Canada and the U.S., and now into Australia as well.”
P3s have been a game-changer.
“We have great depth, but we use partnerships in P3s. We have adopted a best-in-class model,” explains Filipchuk. The firm partners with “the best mechanical trade, the best electrical trade and the best facility maintenance provider and form a team that works together,” while self-performed work is still valued for smaller jobs.
The company maintains strong relationships in the surety and insurance world. “They are critical to our success and always have been. They are particularly important with these alternative procurement projects,” he notes.
“DBFMO type operations require a strong balance sheet just to play. You have to put out security, you need formal letters of credit and often your parent company has to
guarantee that they have some cash behind them. That financial strength is the price of entry,” says Filipchuk.
Legal affairs have become more complex, too. “It is only in the last 10 to 12 years that we have had internal counsel. We once relied on external legal counsel, but that no longer seems possible in today’s environment, with the complexity of the agreements,” says Filipchuk. “The majority of our legal spend is on proactive legal – it’s not about disputes and litigation. It’s about knowing the contracts and managing our risk on the way in.”
PCL has worked to thrive in the current regulatory environment, with special attention to health and safety regulations. “It is not acceptable for anyone to get hurt on our projects. That goal is more important than anything else we do – that’s to send our people home safely at the end of every day,” he explains.
The company has made substantial investments in technologies like BIM and in LEED support. “That’s something that adds value, but it’s also a client expectation,” notes Filipchuk.
Obtaining the best management tools is also an objective. In some cases, they are brought in from outside the company. In others, “we do in-house development on certain strategic pieces of software that we need to do our business. That sometimes comes with significant expense, but we find value in our own in-house apps,” he says.
Jim Barnes is a contributing editor to On-Site. Contact email@example.com with comments.