Roundtable Discussion: A Look Through the Contractors’ Eyes
Jim Rush — Jul 01, 2008
Each year at the No-Dig Show, Trenchless Technology gathers leaders from the trenchless community to explore different aspects of the industry. This year, we decided to take a look at the market through the contractor’s eyes.
We were pleased to assemble some of the leading contractors in the country to share their thoughts on the state of the industry, a changing economy and the role of trenchless technology in the future.
The roundtable discussion was held Tuesday, April 29 at the Gaylord Texan Resort and Convention Center in Grapevine, Texas. The participants were:
- Keith Alexander, President, Visu Sewer
- Alex Buehler, Vice President of Marketing and Technology, Insituform Technologies Inc.
- Mark Hallett, Vice President of Operations-Utility Division, Miller Pipeline
- Mark Harris, Vice President, Reynolds Inliner
- Dan Liotti, President, Midwest Mole
- Kelly O’Dell, Vice President, Michels Pipeline Services
Trenchless Technology – How has the trenchless market changed recently from the contractor’s perspective? What areas have been improved? What areas need improvement?
Buehler – I’ve
seen a shift in mix moving from large-diameter to a higher percentage of
small-diameter rehabilitation. Additionally, I have seen a shift in the scope
of work, meaning that we see more customers opting for bundled work as part of
a turnkey solution. Specifically, they are typically bundling mainline
rehabilitation with laterals, manholes, and other digging.
Beyond the borders of the United States, I am seeing changes in testing requirements, mostly emanating from Germany and seemingly spreading throughout Western Europe. Likewise, I see more activism from the engineering community – people educating themselves on trenchless technology and trying to drive specifications accordingly. Obviously, we see pricing pressure in our market where the barriers to entry are relatively low and the market is somewhat mature.
Technology continues to improve. Importantly, the people in this room have helped drive shifts in technology to make trenchless more viable, robust and affordable. I see tremendous improvement on the curing and composites side, which will continue to push the technical envelope associated with CIPP. Regarding improvement, I see a substantial discrepancy between the real demand in this market and the actual spending. Consequently, we as an industry must continue to educate the general public, as well as municipal leadership about what is happening underground and the costs of inaction and even catastrophic failure.
Liotti – In the new installation world, soils information is so important. We’re really just starting to see some better soils information, geotechnical data reports and geotechnical baseline reports. One of the newer technologies that has become more commonplace is guided boring or pilot tube microtunneling, which gives us the ability to install small diameter sewers cost effectively. This technology has now been applied to auger boring and we are using the pilot tube machine to guide an auger bore. It gives us the ability to do installations that were previously nearly impossible, like 350 ft manhole shots with small diameter auger bores. Disc cutter technology is not new, but it is now being applied to smaller diameters, which gives us the ability to install smaller diameter pipes through rock. Manufacturers are taking these disc cutters with button bits and carbide inserts, along with high-horsepower machines, and miniaturizing them so we have the ability to take these machines and attack some very difficult ground.
O’Dell – I’ve seen quite a bit of change in market acceptance in the cured-in-place business. And as the dollars tighten up, I think we’ll see more money spent on the trenchless industry because we are more competitive than open-cut operations. We’re actually seeing a little bit different mix from small bore to large diameter in the Midwest.
Alexander – We’re
also seeing in increase in larger diameters. There are many changes in the
marketplace as we go forward. It’s inevitable. Change is always going to
happen. It is about getting your people geared up and make changes as you are
moving forward and running your operation within the marketplace or utilizing
new products coming down the pipeline.
We also
need to keep promoting awareness and keeping trenchless technologies on the
forefront on people’s minds so that when it comes down to the board meetings,
trenchless is right there as an option. Whether it is driven by economics or just
social savings, it can be a benefit for everybody involved.
There is a big void in education when it comes to design engineers, project engineers and inspectors. We need to start developing more co-op programs at our Universities to get students in the field so they can get real, hands on experience.
Harris – We’ve seen a lot more packaging of contracts recently as customers are looking to deal with just one entity to get everything done. One of the things I find disturbing though is that we have some clients putting these packages together and trying to cover every possible scenario that you could think of on a project .What happens is that you take a $100,000 job and make a $2 million bid. That leads to bid unbalancing, which is risky and something that no one really likes to talk about. A smart contractor is going to evaluate the risk and bid it properly, but a smart contractor doesn’t necessarily get the project.
Labor is always a big issue. You’re not always going to have work within a 20-mile radius of your office. As a result, traveling is major part of the business and it’s hard to train, develop and retain your people when they’re on the road months at a time. Finally, improvements in equipment and processes have lowered the entry barriers into the business. That has opened up the market for some non-trenchless contractors to start dabbling around.
Hallett – We are seeing the bundling of multiple methods more and more. When there is enough money in the budget it’s quite effective. It does put a strain on a trenchless contractor because of the number of different technologies required to perform on a contract. Because of the specialized nature of each method the general contractor may be required to outsource many of the methods, this can account for 50 percent of the total contract or more.
More education is an area where there is room for improvement, from our political leaders to municipalities to engineers. The inspector training courses and installation courses that are currently being offered by NASCCO and NASTT are extremely beneficial to both the contractor and the owner. We have seen more engineering firms requesting information and training in an effort to make their staff more familiar with the various trenchless technologies and their capabilities.
TT-- There has been discussion about the use of alternative contracting practices, like design-build, in the trenchless marketplace. What are the potential benefits and drawbacks?
Buehler – A significant portion of our business derives from competitive bidding and that has proven pretty stable both in dollars and numbers over the last three years. I think all of us believe in the potential benefits of procurement outside of low bid. It helps mitigate, and in some cases remove, an adversarial relationship between the owner, engineer and contractor. It allows the contractor to get in on the front end to conduct value engineering and plan for work releases to ultimately deliver a high-value and lower-cost solution for the customer.
Alternative procurement methods such as design-build and CM at Risk are increasing slightly, although their proportion has significantly lagged the adoption rates in other industries. If you look at other sectors in the municipal arena, design-build can comprise up to 50 percent of all the dollars in that space, and we are certainly nowhere near that in the trenchless market.
Liotti – In the new installation world, design-build really allows the opportunity for the contractor to select the best method of installation, especially in terms of selecting the equipment. There are a lot of ways to put a new pipe or a new tunnel in, and, depending on what equipment the contractor owns, he can be much more competitive than having to go rent or lease something that is designed as a specific method. The teamwork approach is good. There is nothing better than everyone being on the same side of the table to complete a project.
O’Dell – I have not seen a real shift toward design-build. It’s weighted pretty heavily toward competitive bidding. The one area I would like to see changed is the way specifications are written. It’s just like a building a house. If you start out with good specifications, you get a good product. Fortunately, we are seeing some movement in the direction where the specifications are strict enough that we are getting good information prior to bidding the job and hopefully that will continue.
Alexander – The benefit of design-build should be a mutual effort between the contractor and design firms to have mutual savings on a project. I see a need for it possibly on larger more difficult projects, but we need to proceed cautiously because the marketplace is wired toward low-bid. You will get a savings through your team approach with your designer, contactor and owner working toward maximizing the end result as you are installing the project. One of the drawbacks is that contractors are wired competitively. Probably 90 percent of our work is low bid, with design-build and negotiated work making up the balance. The end results of design-build can be a very positive approach but most owners are accustomed to utilizing the low-bid mentality. The more realistic approach may be laying out specifications and pre-qualifications ahead of time and pre-qualify contractors prior to the bid process. This theory would allow the design engineer to verify the quality of all parties and products before the bid process begins.
Hallett – The use
of design-build is win-win for all parties involved. This format allows for a
thorough evaluation by the design team, the contractor and the owner. It allows
all the parties to buy in to the best solution. It also spreads the risk
amongst the group instead of putting it all on the contractor. This lets the
contractor give his very best price to perform the work, generally saving the
owner money and headaches. Unfortunately, the perception is that you’re going
to pay more with a design-build contract as opposed to a project competitively
bid. But what the owner does not see is the additional money added to cover the
risk which may or may not be necessary. With that said I expect alternative
contracting practices to be only a small part of our business.
TT – Is there an advantage to alternative contracting from a contractor’s side?
Hallett – Yes. When we can get involved on the design side of a project we can better understand the needs of our customer. Because of our experience we can then recommend the best method of repair.
Alexander – There is potential for savings for the owner if the contractor gets involved right away with the design firm from the start. If the contractor can get involved on a difficult project on the front side, we can save a lot of time in design cost along the way and time is money. Instead of an owner spending all his money on the design side, the contractor can streamline the process and start getting work completed fixing the problems.
Harris – The biggest advantage is risk sharing and that’s what makes it work. If you can get everybody onboard and understand the risks involved, you can lay out different scenarios and allocate that risk. From a contractor’s point of view, I know I can reduce my costs if I don’t have to cover certain risks. It can be a win-win. In the end it can save a lot of time and money and you get a better product because everyone is on the same team.
TT – What effect are increasing energy and materials prices having on the marketplace? How does this affect trenchless contractors vs. open-cut? What effect might the changing economy have on municipal rehabilitation budgets?
Buehler – We are all large consumers of thermosetting resin, which manifests a strong correlation with crude oil prices and clearly the volatility of crude oil has had an effect on our business. We have tried to manage pricing through appropriately aggressive procurement along with continuous innovation in chemistry and composites.
The economy has had some effect on our marketplace. Tight credit markets might also influence the availability of capital to drive municipal spending, although the results of this phenomenon have proven elusive. Surety bonds are a large financing mechanism for capital improvements projects, and municipal bond issuance is down year over year. So far, however, that is not having much of an effect on our market, and I can count the number of accounts that have delayed, decreased or cancelled spending on one hand.
Liotti – In our
business we use a lot of steel – steel casing, steel pipe – and for years it
was 28 to 30 cents a pound and now on certain sizes it is pushing 80 cents a
pound. This is over a 250 percent increase on steel over the last four years.
As these new jobs get designed, we need to consider what other pipe products we
can use, or design them with less wall thickness if that is an option. The cost
of steel is definitely driving up prices.
O’Dell – From past experience, usually when you have a downturn like this, it takes at least two years before municipalities really start seeing a change in their revenue stream, before the money starts drying up and it starts getting real competitive looking for bonds and looking for financing. I haven’t seen it yet. I’m hoping that our downturn doesn’t last through this two-year period because I do think that we would see a drop in the amount of projects that would be put out on the street.
Alexander – Comparing trenchless and open-cut, we both have fleets to operate and we both have materials utilized whether it’s steel, concrete or polymers – all materials are going up, although at different percentages. Those increases are going to have to be passed on. The effects are pretty basic, namely you’re going to get less work for the dollar. How long is this downturn going to go for? I think it’s going to rebound probably in the next 12 to 18 months.
Harris – We are definitely starting to see the effects of increasing fuel prices. Fortunately, I think we can handle it for the moment but I do have concerns looking forward. It’s not just the cost of fuel but the overall economy. Many of us have been through these downturns before and there is always an upturn that happens afterward. It’s just a matter of how deep the valley is before you start to climb the hill. Times like this can have a cleansing effect on the business. Stronger contractors, the ones that don’t have knee-jerk reactions, will keep some sanity and realize that even though you want to keep your people and equipment busy there is only so much pipe you can put in the ground on a given day and you’re kidding yourself if you think you can make your margins by doubling your production.
Hallett – We’ve seen little change as far as work coming out due to the increase in energy prices. What we don’t know is how long this will continue and how much higher prices will get. If this goes beyond two years, the amount of funding budgeted for rehab work could diminish. In addition, contractors will have to raise their pricing to cover increased cost, resulting in less rehab work getting done.
TT – There are great infrastructure needs in the United States and worldwide. How can we promote work with owners to assure that the needs are met and trenchless is the preferred alternative?
Buehler – I think of business development and marketing, at least for Insituform, at three different levels. The first is convincing a municipal owner to do something or do more. The second level of business development is to convey the value proposition of trenchless over dig-and-replace. The third level is trying to position your company and product against others in the market. I think we spend way too much time on the second and third levels as an industry and not nearly enough time on the first. Generating demand is hard in any market, and it is especially hard in a municipal one.
I think it’s going to take active trade associations to move the needle in terms of demand generation. A good initiative that I saw recently was WEF’s “Water Is Life and Infrastructure Makes It Happen” program, where they partner with municipalities to help them raise rates through public awareness campaigns and media kits.
Liotti – Again, it’s education. If the owners and the engineering community are not aware of what technologies exist then how can they solve their problems through trenchless methods? Everybody knows open-cut, and a lot of owners and engineers have had trenchless projects go bad, so we need to educate them and let them understand why the project went bad so that they don’t shy away from it in the future. NASTT has done a great job educating the industry with the training modules it has developed.
O’Dell – The key is education. The Discovery Channel recently did a program on sewer rehab and I am amazed at how many times the people out in the community come up to us on our jobs and say “Is that the same thing I’ve seen on TV?” And it is. And we have got to get the word out to the general public because they don’t see it. They see a backhoe working, but with us sometimes we’re there after they leave for work and gone by the time they get home. They can’t see where their money has gone.
Alexander – We all have sales forces out there working and taking care of media needs and education. On the front line there are educational seminars on trenchless at multiple levels. It comes down to educating the young engineers whether it’s directional drilling, microtunneling, cured-in-place, grouting, manhole rehab – you open up that avenue for these young people when they are getting out of school and they’re going to carry that torch throughout their career and look at trenchless as an option as they are going through the next 30 years. Those will be the people who are going to do your marketing and education for you along the way. My approach would be going to the ground level and putting an emphasis there and educating young engineer when they are first entering the workforce and it will continue to flourish as we all move forward.
Harris – We all
know the needs, you hear it every day. The question is who is going to pay for
it? A lot has to be done through lobbying efforts on Capitol Hill to increase
funding for Clean Water, Drinking Water, etc... On the other side, municipal
governments and mayors need to understand that they’re going to have to raise
rates because there is a problem that needs fixed. There are also a lot of
industry organizations that we’re all members of. These organizations need to
start working together and work with municipalities and governments for the
benefit of all. Sometimes I feel the organizations are more competitive than
the contractors. We need to establish a combined face for education and efforts
on Capitol Hill.
Hallett –Owners and engineering firms need to take advantage of all the information available through the various organizations that promote trenchless technologies today. In addition, contractors, vendors and manufacturers need to play a big role in getting to those who are not yet familiar with the various technologies available. The good news is that we’ve really become a mature industry in terms of trenchless technologies. We’ve gotten to the point where municipalities have many sound trenchless methods available to choose from.
TT – How do you view the market in the coming years?
Hallett – I think we’re going to see a dip over the next year or two due to higher costs and potential budget cuts. But with consent decrees in place, the awareness of CSOs, the demand for less pollution and tighter water controls, I expect it to be a strong market long term.
Buehler – As I look at the U.S. economy, candidly, I am somewhat pessimistic, at least in the short-term. If you look at any of the macroeconomic indicators like GDP, consumer confidence and employment data, you do not see a very bright picture. At the end of the day, we are a cyclical business that is inextricably tied to the strength of municipal coffers, particularly as it relates to spending for sewer rehabilitation, which is likely on the bleeding edge of discretionary spending. Now having said, that there are some other industry trends that I think are at play beyond the U.S. market. We are a global company, so we have a revenue base that is increasingly diversified geographically. The European market is growing and the Asian market is growing even more. So while the United States is down, there are other markets comprising an increasingly larger percentage of our revenue mix.
O’Dell – I do
think that the trenchless market has gotten a lot more competitive. I think we
have a bright future. I am concerned here in the United States on how far and how in
depth this downturn is going to be, but the potential for our growth in this
industry is tremendous.
Alexander – In the short term you have to be cautious, obviously with the economic indicators. But in the long term, I am very optimistic. There is a huge need to maintain and repair the underground investment. If it is not maintained and repaired, we all know about the repercussions of that. The biggest problem is keeping projects funded so they can repair these pipes, because at some point you are going to lose your window to use trenchless technologies and you will have to go to replacement..
Harris – I am guardedly optimistic for the rest of this year. I’m actually more concerned about 2009. There is so much happening that affects the general economy; the dollar and world confidence in the United States, the presidential election, the war in Iraq and what Congress is going to look like in 2009 – all these things have an effect on where this economy is going to go.
Hallett – Going into next year we’ll probably see some budget cut backs in the work that comes out, but I think we’ll see an upswing after that. The reality is that at some point the funding is going to have to be there to do this work whether it goes trenchless or open-cut. Quite frankly I don’t see how we can not address our aging infrastructure going forward.
