Heavy Civil Markets are Changing…Are You?

FMI’s forecast for 2022 suggests that we are at the end of a long run of year-over-year growth for the engineering and construction industry. We will see slight declines in total put in place construction in 2023 through 2025.

While total construction will be down, there are bright spots as some segments will grow. Additionally, we are witnessing a shift among some owners towards alternative procurement as they seek better outcomes than they get from traditional design-bid-build projects. In our third quarter 2022 Heavy Civil Construction Index, more than half of respondents indicated that their company strategies include increased efforts to pursue alternative procurement projects.

Concerns over weaknesses in some private heavy civil markets and challenges managing high-profile, fixed-price projects for public owners along with an increased use of qualifications-based selection (QBS) are leading more contractors to reassess their approach to project selection. As the economy continues to change, more companies are rethinking their strategies and diversifying away from traditional low-bid markets, which often include higher risk at lower margins.

Traditional procurement methods, including design-bid-build and design-build, are determined based on lowest bid prices. Alternative procurement, including construction manager/general contractor (CMGC), construction manager at risk (CMAR), progressive design-build and integrated project delivery (IPD), focus primarily or solely on qualifications. QBS and other collaborative contracting models place top priority on company and project team qualifications.

“That’s the real differentiating factor,” says Rich Rantala, president of R2 Client-Centric. “The owner establishes the selection criteria with focus on various layers of qualifications. Then it is up to the responding contractors to create the differentiation necessary to win excluding price. Keep in mind, all the work is still going to be competitively bid per the preconstruction period.”

“You are doing what's best for the customer in a very open, transparent way during the preconstruction period,” says Rantala. “That requires a very different mindset from your typical lump sum bidding way of thinking.”

Key Success Strategies

Before you set out to pursue alternative procurement, you’ll want to establish a strategy based on a clear understanding of your firm’s capabilities and constraints. Questions to consider include:

• Which geographies, segments and owners have the types of opportunities you’re targeting?
• How have these owners historically procured construction services? Do they have a track record of successful projects or are they novices at alternative procurement?
• What is the competitive landscape in the markets you’re considering? Are incumbents deeply entrenched? Is the market dominated by local firms that are politically connected, etc.?
• What capabilities does our organization possess and which are lacking? Do you have experienced business development resources? Do project managers understand the importance of building and managing relationships with customers?
• What are realistic investments in time, resources and talent to effectively compete in this marketplace?

Objectively answering these questions and determining strategy is just the first step. You must make the transition to successfully winning qualifications-based awards, and this requires real change, a dedicated effort and a long-term approach focused on continuous improvement.

How to Win with Alternative Procurement

Many contractors struggle with these requirements, but the good news is that there are some established strategies that can be implemented to be successful using alternative procurement.

Rantala says a good place to start is to understand that the interactions you have with clients will be more involved and deeper than those short specification-focused conversations that take place with more conventional approaches. For example, it may take months to establish those relationships, determine owners’ key challenges and pain points, and then come up with ways to create value through innovation as well as reduce the risk of the project if you’re leveraging alternative procurement.

“If you’re going to pivot strategy to pursue alternative procured projects, make sure you have someone on your team who understands that mindset and that cultural difference,” Rantala advises. “You’ll need that at the beginning during strategy development and throughout the business development stage to successfully drive the pursuit in the capture process. It can take months to shepherd these projects through compared to just putting together a number on the design-bid-build side.”

When assembling the right team to pursue an opportunity, you’ll need someone who can provide executive support to ensure resources can be committed. You also need a pursuit leader who understands the customer relationship and the tactical steps that must be taken to effectively pursue and win the work.

Then the affected business development manager should work closely with the pursuit leader to determine both the pursuit and capture strategies, including final proposal submission.

No Surprises

The key to winning this type of work consistently is effectively matching required business development resources to your target markets, geographies, clients and opportunities. Start by assessing your competitors to determine what you will need to compete and win.

Many contractors feel all they need to do is repurpose hard bid resources into business development players where the focus is on client relationship development versus price. That is unlikely to be successful and could backfire when you find yourself competing against firms with proven business development leaders with extensive alternative procurement portfolios.

Where the focus of design-bid-build is on low price only, the focus of CMGC, CMAR and progressive design build is on creating trusted client relationships and maximum value in a transparent way during preconstruction leading to a guaranteed maximum price.

Since the preconstruction period is also used to de-risk the project in multiple ways including all schedule, quality, safety, environmental and budget concerns, that leads to comprehensive project predictability as you make the transition from preconstruction into construction.

As more project owners shift approaches, the opportunities will continue to expand for contractors who adopt the cultural changes and resources necessary to succeed and put the time and effort into learning how to operate successfully in this marketplace.