In preparing its bid for Greater Victoria’s controversial sewage treatment plant at McLoughlin Point in Esquimalt, home-grown construction firm Knappett Projects spent close to $1 million. Knappett’s partner in the bid, the Canadian subsidiary of Spanish multinational Dragados, contributed a few million dollars more to their Capital Clear team bid, one of three that the Capital Regional District selected to respond to a request for proposals for the project.
With an estimated $782.7 million price tag, and one-in-three odds, the project was worth a gamble. Except now that political infighting in the Capital Region has put the brakes on the project, Knappett and Dragados have next to nothing to show for all that work. According to the terms of the RFP, the losing bidders will receive just $250,000 in partial compensation.
“It’s just sitting in limbo as far as I can tell,” says John Knappett, who founded his company 32 years ago after cutting his construction management teeth with the now defunct Dura Construction. “They have not awarded a contract and they have not terminated the process.”
A High-Stakes Industry
The boondoggle illustrates just a few of the challenges, pitfalls and frustrations that Island construction firms face as they compete among each other and with national and multinational enterprises, for major projects. Sometimes big projects are simply beyond the capabilities of local companies. However, according to Island-based contractors, the projects that are too big for them are far fewer than one might think.
“Typically, it’s the size and complexity and the scope of jobs that attract international competitors,” says Greg Baynton, CEO of the Vancouver Island Construction Association (VICA), a 500-member organization representing the non-residential construction sector on the Island. VICA members concentrate on commercial buildings, like shopping centres, institutional buildings like schools, multi-family residences like condominium blocks, and infrastructure projects like highway overpasses.
When large firms from off-Island began winning a large share of those jobs in 2011 and 2012, “the local market didn’t react very positively,” Baynton says. Those outside companies have tremendous resources — such as their own architects, in-house engineering staffs and separate marketing departments — that small firms just can’t bring to bear.
Knappett, however, disagrees. The outsiders might have an edge on certain types of design-build projects, although even that’s not always the case. As he points out, Victoria’s Farmer Construction recently won the design-build contract for the new Oak Bay high school.
“There are few projects on Vancouver Island that our company couldn’t take on for size,” Knappett says. For instance, his firm recently completed the $104.8 million 443 Squadron maritime helicopter facility for Defence Construction Canada next to Victoria International Airport in North Saanich.
Other home-grown firms — like Farmer Construction, Campbell Construction and Kinetic Construction — are equally capable, Knappett says. While he would prefer that local firms get all the local work, he doesn’t sound too worried about competition from outsiders. He’s seen this movie many times before: a big firm from elsewhere comes to Victoria to take on a big project.
“But when those jobs are done, they aren’t competitive in the local market for the run-of-the-mill construction work and they generally pack up and leave,” Knappett says.
The Home Advantage
Not every local firm is as ready as Knappett to square off with the big guns. Chris Erb, president of Nanaimo-based SupErb Construction, says he avoids such confrontations by keeping to projects under $10 million. “I don’t care what they say, it’s hard to compete with those guys,” says Erb.
SupErb has a core office staff of about five but can swell to as many as 75 workers and subtrades on a project. Recent projects include BMW/Mini, Mercedes-Benz/Smartcar and Subaru dealerships in Nanaimo, and the Mercedes dealership renovation and new Porche and Volkswagen dealerships in Victoria. SupErb has also been contracted to build the Vancouver Island Motorsport Resort in the Cowichan. Competition is fierce for projects like these, even among the local contractors. “There’s too many in my opinion,” Erb says.
But on smaller projects, of up to $50 million, locals have the competitive edge because of their local knowledge, says Baynton. Another advantage is they have rosters of carpenters, labourers and other trades that outside companies have to bring in. Being on an island also tends to keep the outsiders at bay.
“It’s difficult to relocate personnel here,” says Knappett, whose company at any given moment employs 125 to 150 people, working on 10 to 15 projects, ranging from $100,000 to $100 million. “We love it here but you find that many people don’t want to relocate here, particularly in the middle of their career.”
He recently received a call from a national company asking if he knew of anyone available to do a project in Victoria for a national client which was having difficulty staffing the job.
Another way national companies solve that problem is to call local union halls, says Phil Venoit, president of the Vancouver Island Building and Construction Trades Council, which represents about 7,500 unionized tradespeople on the Island.
For example, shortly after Montreal-based global construction behemoth SNC-Lavalin won the contract for the $1.1 billion upgrade of the John Hart Generating Station near Campbell River, it signed a deal with the Allied Hydro Council, which represents various building trades, “because they know that we have the qualified people who know how to do the work,” Venoit says.
When Size Matters
Venoit says projects don’t really grow beyond the scope of Island construction firms until they reach the half-billion-dollar mark. At that point, smaller companies don’t have the bonding capacity or a history of performing such mega-projects.
“Those jobs don’t happen every month or every year on a place like Vancouver Island,” Venoit says. “They come along maybe every decade or two.”
A global player that specializes in, say, building concrete dams will scout the world for those kinds of jobs and do one after another. Nevertheless, the Island’s two largest projects — John Hart dam and the $606.2 million North Island hospitals project in Campbell River and Courtenay — have a lot of Island participation.
Farmer Construction is part of the consortium building the hospitals. Of the 217 people working on them in December, two-thirds were from the Island, according to the project’s January 2015 newsletter.
Carla Smith, president of CMF Construction in Nanaimo, says her company can take on projects of up to $100 million because it is part of the Carlson Group of Companies, which has bonding capacity of well over $100 million. While the hospitals project is beyond CMF’s capabilities, Smith would be interested in partnering on a job of that scale, as other Carlson Group subsidiaries have done. “But it has to be the right partnership and the right project,” she says.
For example, the group’s Vancouver Island Piling Driving was a subcontractor to SNC-Lavalin on the William R. Bennett Bridge in Kelowna, completed in 2008. The piling driving company subbed out the bridge deck to CMF, which has also done $65 million in bridge work in the Yukon in recent years. Which goes to show that Island firms can also compete on the mainland. Victoria’s Kinetic Construction even has a branch office in Vancouver.
“I spend a good deal of my time working with the Vancouver branch,” say Katy Fairley, Kinetic’s business development manager, recently named a director of the company. “It’s very different because here people know the Kinetic name. Over there, they haven’t heard of us and we are constantly educating people about … what we can bring to the job.”
View from the Outside
Among major off-Island construction firms that have a Victoria office is Vancouver-based Ledcor Group. It recently completed the shiny new Jim Pattison Toyota, Scion and Lexus Victoria dealership buildings on Douglas Street.
Steve Blair, Ledcor’s regional manager in Victoria, notes the Pattison Motor Group and Ledcor are each part owners of the Shaw Tower in Vancouver and have offices on adjacent floors of the building. Yet until the 75,000 square-foot Victoria job came along, Ledcor had only done one other project for Pattison. “For some reason, we never came together,” Blair says.
Until now that is.
“Now we’re looking at all kinds of stuff with them,” adds Blair.
Some might say the adage is: if you can’t beat ’em, join ’em. Kinetic, for example, has collaborated with Ontario-based EllisDon on various projects around the Capital Region, including expansion of the Hillside Shopping Centre and the $173 million renovation and redevelopment of the Fleet Maintenance Facility at Canadian Forces Base Esquimalt.
“One of the reasons why EllisDon looked at partnering with a local company is because they realized that there is a unique marketplace on Vancouver Island and that it’s very hard for off-Island firms to come on and be successful,” Fairley points out.
Kinetic is far from alone in partnering with larger off-Island companies, something Fairley says “speaks to the sophistication” and “progressiveness” of local firms “to notice the shift in the industry and what they need to do to stay competitive.”
At any given time, Kinetic employs 100 to 125 people, including management and work crews. About 60 to 75 are tradespeople. In comparison, EllisDon employs 2,500 people and has annual revenues of $3.2 billion.
Joint ventures aren’t for every contractor, Baynton says. “It’s in their genes (that) they like to march to their own drummer.”
Local firms have a better chance than outside firms of winning contracts from government entities because the bidding process is more transparent, Knappett says. “Basically if you have the financing and the bonding and the ability to do the work you’re not limited by the fact you’re not a national company.” He notes that local firms have won the majority of the DND building contracts in the region.
Bidding on jobs is the bane of a construction contractor’s existence. Kinetic prefers jobs with a pre-qualification process that restricts bidding to five firms, rather than an open-tender process where a dozen firms might compete. But even with five firms bidding, the chance of success averages out to 20 per cent.
“In a low-bid situation you’ve got cost certainty [from] Day 1,” Blair says. “And on Day 2 you’ve got conflict certainty, because the low bid is trying to make up what he left on the table.”
When Ledcor first came to the Island 12 years ago, the company had trouble getting reasonable pricing, Blair says. So it often brought in tradespeople from Vancouver.
“But when you look around the Island, there’s a lot of beautiful buildings that have been built by plenty of people that know how to build over here,” says Blair, who came to Victoria three years ago after eight years in Vancouver. “So there’s no reason to go to the mainland.”
Also, should a problem arise with a building that needs immediate attention, it’s impossible to get a contractor from the mainland to the Island site in a hurry. Ledcor’s advantage in competing with other off-Island firms is that “we’re here and we’re staying,” Blair says. “The advantage we have over people on the Island is that with 18 offices across North America and $3 billion a year in revenue for our Ledcor Group, we have a lot of friends out there that can help us if we need it.”
Ready to roll
The total value of building permits on the Island topped $1.3 billion in 2014, an 18.6 per cent increase over 2013, according to a recent VICA news release. The boom was centred around the Nanaimo regional district, where building permits increased by 72 per cent in the non-residential sector. But non-residential construction declined in Greater Victoria last year by 10.4 per cent.
For the last quarter, however, the trends were reversed, with Victoria’s non-residential permits up 37 per cent over the fourth quarter of 2013, and Nanaimo’s dropping by 55.7.
“There’s still a lack of work generally,” Baynton says, expressing a common sentiment. “So it’s an acutely competitive marketplace …”
But optimism prevails in the industry, ranging from the “cautious” type expressed by Kinetic’s Fairley to Venoit’s more exuberant variety.
“Holy smokes, if there’s anyone who is not optimistic about the balance of this year, next year and 2017, they’re not keeping their eyes open,” Venoit says. He anticipates a boom in multi-family housing — driven by millennials seeking to enter the housing market for the first time, and aging baby boomers looking to downsize or move into assisted living facilities.
Those retirees will come from across Canada and the U.S., the latter enticed by the weak loonie. All those people will need pharmacies, doctors, and other services — all of which will require new drug stores, clinics, hospitals, and other buildings and infrastructure. Perhaps even a sewage treatment plant.