Since its inception in 1989, Satterfield & Pontikes Construction, Inc. has been well known for its hard-bid public-sector work, which in the past 25 years has included everything from K–12 schools and police stations to correctional facilities, university buildings, and military dormitories. Then the great recession arrived in the fall of 2008, hitting the construction industry with a sucker punch to the gut. In that moment, the Houston-based general contractor had to make a critical decision: double down on its past, or invest in its future?
It chose the latter, according to vice president and general counsel Denis Ducran. In the wake of the economic downturn, he says, Satterfield & Pontikes expanded its focus to include not only public-sector projects but also private-sector commercial work—including large retail stores, industrial warehouses, and office buildings—which, in recent years, has dominated the Texas construction market.
“At the beginning of 2009, when the market conditions really started to affect Texas, work was starting to dry up, and the contractors that survived were scrambling to find jobs to bid on,” says Ducran, a Houston native who began his career as an architect before becoming a construction attorney in 2006. “The market shrunk quite a bit, but as everything started to pick up again in mid- to late 2012, there was an explosion, particularly in Texas, in the private commercial markets, where we were not as active.”
Ducran joined Satterfield & Pontikes in 2011, not long before the market began to shift. For the company, it was an opportunity to not only survive a difficult economy but also thrive in the subsequent recovery. “We were watching market conditions and understood that in order for the company to survive, grow, and succeed, we had to be willing to change with the times,” Ducran says.
Expanding its focus also presented the firm with significant new risks, but Ducran argues that Satterfield & Pontikes has succeeded in new markets by both expanding its scope and adapting its risk-management capabilities. “Now that we are in the private market a lot more than we ever have been, it requires a different risk analysis,” he says, adding that approaching risk for both public and private construction with careful analysis can help construction companies maximize their growth and minimize their growing pains.
Public Project Pitfalls
Perhaps the biggest difference between public and private work is the funding. “One of the things that you don’t have to worry about with public work is the source of funds,” Ducran says. “Funding usually comes from a bond program or some other authorized source of government funds. So, getting paid for your work is typically not a concern.” Still, public projects can have their fair share of snags, and among those that pose the biggest risks to general contractors, according to Ducran, are competition, subcontractor claims, and change orders.
By law, most public work is competitively bid, and Ducran says the process makes it challenging to acquire work and doubly so to profit from it. “Because it’s being competitively bid, you understand that margins are going to be very competitive,” he explains, noting that public-sector clients are often required by law to select the lowest bid. “And when margins are competitive—in some cases, contractors and subcontractors are bidding the work at very little to no fee—it makes it very difficult to win jobs to begin with.”
As a result of submitting exceptionally low bids in order to get public-sector work, subcontractors typically try to make their profit elsewhere, Ducran says. Subcontractors’ claims for damages due to schedule delays and other factors pose a significant risk to the general contractors in charge of managing them. “Because subcontractors have to bid the project with little to no margins, you anticipate that claims will be filed … in order to compensate for their initial bid,” Ducran says.
Another profit maker for many subcontractors is change orders. “[When you’re a general contractor], one of your risk-management priorities is trying to avoid unnecessary or inflated change orders from subcontractors,” Ducran says, explaining that such claims and change orders can easily cripple a general contractor’s already low profit margin on a public project. “Part of our job as a general contractor is to manage change orders to ensure the best value to the owner, and obviously, if you become liable to pay for something that the owner does not pay for, that comes out of your pocket and affects your bottom line.”
Private Project Perils
Private projects don’t require competitive bidding. As a result, they can be more lucrative than their public counterparts. The tradeoff for increased profit margins, however, is often increased risk, and according to Ducran, the biggest exposures on private commercial projects can include financing and customer satisfaction.
Unlike public projects, which are typically paid for with secure funding sources such as construction bonds, private projects may have a variety of funding sources, including insurance companies, investment trusts, and commercial banks, just to name a few. The result, according to Ducran, is increased financial risk. “You have to be very selective about the private projects that you pursue because of potential funding problems,” he says. “You have to ask, ‘Who is the owner? What is their reputation? What kind of business are they in? And are they funding the project themselves, or is there another source of financing?’ You have to satisfy yourself that the owner can pay for the project that they are asking for.”
And while public projects are typically driven by price, private projects are typically relationship-driven, which means hedging against detrimental emotional exposure, too. “With a private project, you have to keep the owner satisfied,” Ducran says. “You have to provide good customer service and make sure the project is successful so [that] the owner is happy and is willing to hire you for future projects.”
To improve its relationship management and mitigate risk on private projects, Satterfield & Pontikes developed an advanced building information modeling process. The approach proved hugely successful for the company in the public market, as well, including its work on the Delta Airlines Terminal redevelopment at John F. Kennedy International Airport in New York.
“Regardless of what kinds of projects we’re working on, relationships are very important,” Ducran says. “You cannot be a successful general contractor if you don’t have good subcontractors; we value our subcontractors, and we work hard to manage and foster those relationships before disputes arise—as well as after.”