Public works is a “the show must go on” proposition. Even with the economic downturn of the last three years, there are public projects that continue to be funded and completed.
“The economy doesn’t change our need for modernizations and improvements to Nevada’s roads, schools and public facilities,” said Randy Highland, president of the Las Vegas chapter of Associated General Contractors.
Some projects are matters of public safety that can’t be set aside. Other projects require preventative maintenance, such as roadway projects where ongoing maintenance means fixing potholes now rather than sinkholes later. Some projects are replacement projects – rather than building new schools, county public works departments modernize existing schools.
Every city and county organizes its public works department a little differently, but essentially, all public works departments work with publically owned infrastructure and services necessary to sustain our way of life, including water and sewer systems, courts and corrections facilities, administrative buildings and fire stations, and are responsible not only for construction and maintenance, but also for fiscal efficiency.
It seems like almost every construction project currently underway in Nevada is a public/private, public works or government project. Even so, the forecast for Nevada as a whole is for horizontal rather than vertical construction for the foreseeable future. Expect resurfaced highways and existing facility maintenance rather than new buildings. That’s not good news for a state where construction was the second largest employer and statewide unemployment rates for the industry are in the 40 to 45 percent range. Having almost half of an industry unemployed doesn’t do anything good for the sales tax revenue, which in turn doesn’t do anything particularly good for the public works projects currently on hold.
“A great deal of work in Truckee Meadows was the result of the RTC 5 and Senate Bill 201 passage,” said Fred Reeder, president, Associated General Contractors, Nevada chapter, referring to two pieces of legislation providing funds for road construction. “Unfortunately this did not help the vertical builders and they are the ones really suffering.” There’s still a lot of vertical market needs, just no funding to move ahead. “The majority of vertical building we’ll see in the next few years is going to be in remodel and rehabilitation of existing buildings and not new buildings.”
Public Works Projects
Public works encompasses more than the obvious day-to-day activities like traffic signal repair or road work. At state and county levels, public works departments are responsible for community services such as design, construction and maintenance of highways and roadways, flood control facilities, traffic and safety management. Design engineering departments create plans and specifications for construction; capital improvement divisions plan, construct, remodel or modernize public facilities; engineering divisions work with land development, code compliance, flood plain management and traffic engineering. Facilities management divisions are responsible for construction and maintenance of facilities under its jurisdiction.
The State Public Works Board oversees state buildings and state-level building construction. The Nevada Public Works Board’s active projects list is 10 pages long, even with the current economy. Even so, this economy has been challenging for public works.
“Basically, our capital spending is down considerably. We’re at best doing bare minimum capital replacement,” said Dan St. John, director, Washoe County Public Works. “However, we did see an upswing in the current fiscal year with available funds for many building system capital investment projects like replacing mechanical systems in some of our large complexes like the downtown courts and jail complex and so forth.”
Washoe County courts take up a large percentage of Washoe County public works funds, because the system is bigger than the historic courthouse at 75 Court Street in Reno. There’s also the Justice Court in Sparks, which would like to move out of the strip mall it’s located in and into its own facility (but can’t, because the money set aside for that project went away in the last legislative session). There’s also a justice court in Wadsworth, a justice court in Reno and various District Court annexes in downtown Reno, not to mention the county corrections units. And while there may have been some funding coming in for courts and corrections projects, Washoe County lost a cash flow stream of “somewhere north of $7 million” according to St. John, when the Legislature pulled the capital improvement funding to the counties.
The 2009 Legislature rolled some $500 million statewide out of capital improvement projects and put the monies back into the general fund, affecting projects at state, county and city levels, according to Kevin Burke, chairman, Nevada State Contractor’s Board.
“At the county level, our days of large capital projects are three or four years behind us,” said St. John. “But I do see a need for some large scale projects in the five to 10 year time frame ahead of us.”
Competing for Funds
Because public works is more than just roads and infrastructure, and includes utilities, segments of the industry are performing more strongly than others.
“Water and sewer utilities have a dedicated customer base and a reasonable rate for service,” said St. John. “They have a dedicated source of funding and are not in competition for funds with public safety initiatives. Public sentiment is always stronger toward public safety departments like fire and sheriff and police and judiciary and that area of government function. Areas such as parks and recreation, cultural activities, libraries, tend to be on the other end of the spectrum and are things the public is willing to sacrifice.”
In Southern Nevada the stronger public works’ sectors include roads, highways and transportation projects, in part because Senate Bill 5 in the last Legislative session removed the sunset clause from a voter-approved sales tax program that was set to expire in 2028.
The Associated General Contractors helped remove the sunset clause, said Highland; now the revenue source will continue and can be bonded against to raise funds for highway construction. Waste water projects in the state are also a relatively strong sector, as treatment plants become outdated and new systems hit the market to update the plants.
For state public works projects, both design and construction firms are hired. Engineering bids are taken with request for application calls and construction services bid. Funds for public works projects come from the state general fund, from bonding initiatives, gasoline taxes and profit tax revenue set asides, and in some cases from grants.
There are some ARRA funds in play (American Recovery and Reinvestment Act of 2009), but not many.
“The ARRA stimulus certainly hasn’t done anything for the construction industry,” said Highland. “If you look at the total funds that were dedicated to go to Nevada, I think it was $2.3 billion, my numbers show about $2.1 has been allocated through the second quarter of 2010 for the state and about 97 percent of it has been spent, but one out of every three dollars of that money in the state of Nevada has gone for unemployment benefits. You look at the construction industry, that’s minuscule as far as the impact the stimulus package has had. We’re talking less than 200 jobs.”
A sign of the economic times in Nevada’s hard hit construction industry is the number of bids for every public works project. Some 70 to 90 cents on every dollar goes to the private sector through public works’ projects, which from the outset hire consulting engineers and architects, construction managers and crews.
Today, it’s not uncommon to see anywhere from 10 to a dozen bids for a single project where it used to be only one or two. Prices have come down significantly and from a business standpoint, said St. John, it’s a very good time for the public sector to spend money in the private sector to deliver projects. Public sector agencies with the ability to do so, are taking advantage of the situation in Northern Nevada and getting projects built, while maintaining due diligence. Public works departments are mandated to take the lowest bidder while still making certain the contractor is qualified and experienced.
There are plenty of contractors to choose from. “There just isn’t the volume of private work there once was in the Valley,” said Burke. “Demand is just not there. Quite frankly the migration of contractors into the public sector and federal sector work for what little work is out there has created a very competitive environment where you find contractors, whether general or sub-contractors, bidding at very reduced margins and sometimes for cash flow, hoping for the best.”
“It’s not uncommon for some public projects to see 15 or 20 bidders on a single project,” said Highland. “Which certainly isn’t what we had two to three years ago when we had anywhere from three to five. It’s tripled, quadrupled, as far as the number of bidders bidding for public projects.”
In Northern Nevada it’s not unusual to see bids 10 to 15 percent below the engineer’s estimate, according to Reeder. “To say the least, construction in Truckee Meadows is currently on sale.”
Contractors must find ways to be more competitive and lower their costs, said Highland. While every firm handles this differently, most are working with smaller staffs and operating with profit margins way down.
“People are finding ways to lower costs and be more competitive and putting lower fees on projects than a few years back. Just shrinking a little bit and waiting out the economy. So when it turns around we’ll still have the infrastructure and personnel in place when recovery happens. And it will happen.”
But in the interim, it’s not just general contractors bidding; sub-contractors are bidding also and it’s not uncommon to see 15 or 20 sub-contractors bidding a specific trade on a project. “If a general contractor looking at a general project with 50 trades,” said Highland. “Fifty trades multiplied by 10 to 15 bids in each category, you can see that a good day could be spent dealing with 600 to 700 bids. It’s a lot more competitive than a couple years ago and that’s across the board.”
With so many bids coming in on every job, the award process can be slowed considerably, which means the project gets out later than initially planned, which doesn’t help in getting the project started and getting people back to work.
At the state level, Gus Nunez, manager, State Public Works Board, said the numbers of construction bids rose from two to four bids per project before the economic downturn to anywhere from nine to 18 or 19 bidders on each after the recession hit.
“Recently we’re back to only receiving around four bids per project and part of the reason I believe is that a lot of folks basically have shut their doors,” said Nunez. “We went from receiving from two to four to 10 to 20 and now getting around four, maybe five bids per construction project and I think the reason is a lot of people have gone out of business or hunkered down and are waiting for better times before opening their doors again.”
“Timing has become critical for most contractors in our area,” said Reeder. “While there are a lot of strategies being devised for next year’s Legislature, with the potential to create a great deal of construction-related jobs in Nevada, it will be interesting to see if we are able to create both short-term and long-term fixes for our industry. Without short-term fixes many of our contractors will not be able to hang on much longer.”