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’staining green

Quarterly2008 issue 3

THIS QUARTER

A Building Green-Movement? 4BY JERRY JACKSON

OPPOSING VIEWPOINTS

Coming Clean: Green Building Brings Risk of Greenwashing 6BY JAY B. FREEDMAN

BUSINESS DEVELOPMENT

Storms Clouds on the Horizon 12BY CYNTHIA PAUL

MARKET INFORMATION

Globalizing Green, Verde, Vert, Vihreä, Grün, Grön, Groen 17BY HEATHER JONES

GENERAL CONTRACTORS

Integrity in Tough Times 21BY RALPH E. JAMES PH.D.

LEADERSHIP

Maximize Your Leadership Potential 24BY VANESSA WINZENBURG

PLANNING

Plans That Get Action 28BY JERRY JACKSON

PLANNING

Twelve Reasons (Excuses) For Poor Job Planning 31BY RALPH E. JAMES PH.D.

QUARTERLY INTERVIEW

Credit, Risk, Insurance and Surety: Zurich’s Terry Gray and Bill Cheatham 36BY TIM SZNEWAJS

Construction Materials Will Hill

Contractors Rick Reese

Engineers & Architects Tim Huckaby

Heavy Highway/Utilities Jay Bowman

International Steve Darnell

Private Equity George Reddin

Manufacturers & Distributors John Hughes

Owner Services Mark Bridgers

Surety Lanny Harer

Business Development Cynthia Paul

Leadership Vanessa Winzenburg

Mergers & Acquisitions Stuart Phoenix

Project Delivery Michael McLin

Trade Contractors Randy StutzmanKen Roper

Strategy Ken Roper

Training Ken Wilson

Residential Construction Clark Ellis

CONTACT US AT:[email protected]

Board of Directors

Hank HarrisPresident andManaging Director

Robert (Chip) AndrewsWill HillJerry JacksonJohn LambersonRon MagnusGeorge ReddinHugh RiceLee SmitherBob Wright

Copyright © 2008 FMI Corporation. All rights reserved. Published since 2003 by FMI Corporation, 5171 Glenwood Ave., Raleigh, North Carolina, 27612.

Printed in the United States of America.

Departmental EditorsPublisher & Senior EditorJerry Jackson

Editor &Project ManagerAlison Weaver

Group ManagerTom Smith

Graphic DesignerMary Humphrey

Information GraphicsDebby Dunn

FEATURES

Saving the Planet, One Building at a Time: Is LEED Accreditation Worth It? 52

Two companies experienced in green building help to answer the question: Should your company start taking on green projects if it hasn’t already?

BY KELLEY CHISHOLM

Forecast Calls for Building Green in U.S. Nonresidential Markets 62

Growth rates across the nonresidential building segments reveal construction industry stakeholders are beginning to embrace the green movement.

BY KEVIN HAYNES AND HEATHER JONES

Develop Them and They Will Stay 78

The greatest source of skilled labor and field leaders will come from within, requiring firms to cultivate their own leaders and technicians in order to meet future industry demands of the future.

BY GREGG SCHOPPMAN

What is all that Mumbo Jumbo about Vision and Mission Statements? 88

Rather than view visions and missions as a wordsmith exercise, think of them as invaluable leadership tools that provide focus, motivation and assist in building an enduring company.

BY KEN ROPER

Blowing the Whistle: The Buzz on Executive Coaching 98

Executives who have been coached have found direction, purpose and confidence in achieving their goals more quickly than they would have without their coach.

BY JENNIFER JONES AND JAKE APPELMAN

Do Leveraged ESOPs Make Sense for E&C Companies? 108

While ESOPs offer a number of benefits, they are not the right organizational structure for all companies. If you are thinking about selling to an ESOP, consider the following criteria.

BY CURT YOUNG

The Rise of the General Contractor in 19th Century America 116

Guest writer and project historian Sara Wermiel shares her research on the formation of general contracting in America.

BY SARA E. WERMIEL, PH.D.

Delegation: A Win-Win Strategy 130

Delegation is a valuable, yet often underused, leadership tool. It reduces the leader’s workload while also empowering others to take on a greater leadership role.

BY TIM TOKARCZYK AND WILLIE HEPWORTH

Dear Reader:

Green … the color of money. Or is it?

In this quarter’s publication, we provide some thought material on the Green movement. Few agendas have had as profound or as fast an impact on American business and the construction world as getting Green. Is it substantially a product of Scuppies? (Socially Conscious, Upwardly mobilePersons … coined by Chuck Failla, author of The Scuppie Handbook) Or isthe Green movement a permanent part of our futures?

According to Kermit, “It’s not easy being green.” A new writer for FMI Quarterly, Jay B. Freedman, a business and real estate lawyer fromCalifornia, explores the risks of building Green. Unusual for FMI Quarterly,this article is drawn from an earlier article published in Builder and Developer.The fit with our theme was too good to ignore. Jay also provides a brief article on “Greenwashing,” an appellation that you really would rather notacquire. Kelley Chisholm, a frequent contributor to FMI Quarterly, asks andanswers the question of the value of LEED certification. Kevin Haynes andHeather Jones from FMI’s Research Services Group forecast and commentupon the Green market in nonresidential building. Layne Newton takes two profound trends of our time and links them in “Globalizing Green” (andother unpronounceable terms).

In case Green is not part of your world (yet), we also have our usual assortmentof other good reads.

Another writer for this issue from outside the FMI ranks is Dr. Sara Wermiel. Ahistoric preservation consultant, a project historian and an independent scholar,Sara gives us a look at the evolution of the general contractor from the earlydays of Norcross Brothers and George Fuller. For those of you who wouldlike to understand the origins of the industry, find time to read Sara’s article.

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This Quarter: A Building Green-Movement?

2008 issue 3 FMI QUARTERLY ■ 5

Our Leadership and Organizational Development Group, represented by Tim Tokarczyk and Willie Hepworth, provide ways to leverage your time with“Delegation, a Win-Win Strategy.” Vanessa Winzenburg provides her departmental look at how to maximize leadership potential. Jennifer Jonesrounds out the Leadership team’s offerings with her look at executive coaching.

Long-termer Ralph James gives us “Twelve Reasons (Excuses) for Poor JobPlanning.” Strategist Ken Roper begins a series on corporate direction andstrategy with his article on “What’s all the Mumbo-Jumbo About Vision andMission Statements?” Gregg Schoppman, our editor for all things of a ProjectExecution flavor, gives us reinforcement for investing in the development ofour human talent as a retention device.

Storm Clouds in the marketplace mean getting your business developmentmachine operating at top efficiency. Cynthia Paul gives us some tips. RalphJames provides a second article in this issue, and this one illustrates howintegrity gets challenged in tough times and what you might do about it.Employee stock ownership programs are not appropriate for all companies,but they can be an excellent ownership-transfer vehicle for some companies.Curt Young from FMI’s Investment Banking Group shares specific criteria tohelp you determine if an ESOP is a good mechanism for your company’sownership transition. Terry Gray and Bill Cheatham from our publishing partner, Zurich, give us contemporary market views from the insurance andsurety perspectives of Zurich. Terry is global head of construction, GeneralInsurance for Zurich and Bill is has been head of Zurich’s surety operation.

I think that you’ll find plenty to keep you busy reading, thinking and discussingmany of these topics with your team. You may even find the reading a biteasier, now that we have made some adjustments to our type size and layout.What we lose in elegance, we hope to make up for with increased ease inreading, especially those of us with 40-year-old eyes (or more!).

Share your thoughts on the new look, our content or what you want to see inupcoming issues. Our next issue will deal with Change Management. Until then,keep developing your organization. If we can help, we’ll be glad to participate.

Sincerely,

Jerry JacksonFMI Quarterly Publisher and Senior Editor

BUSINESS DEVELOPMENT Storms Clouds on the Horizon

Walking out of the house on a beautiful spring morning, I am instantlysurrounded by sunshine, flowers just starting to bloom, grass that’s turningfrom wintery brown to green and fresh air. A quick glance to the west revealsdark charcoal-gray storm clouds on the horizon. Living in the prairie of easternColorado, there are few things between where I am and the clouds on thehorizon some 30 to 40 miles away.

The implication of approaching storm clouds starts a familiar sequence of events — get the cars under cover, gather up the animals, drag the pottedplants in and start shutting the windows. Spring storms can either be a lightsprinkle of rain or golf ball-size hail. There’s no need to rush around in panic,just a need to prepare for the potential storm.

MIXED ECONOMIC NEWSToday’s economic news points to storm clouds on the horizon. I can’t

tell you with certainty if the nonresidential markets need to prepare for aspring shower or hail; but I can tell you that the time to get ready is now.

The residential market has been struggling for months. The subprime situation has impacted the credit markets — and consumers. The U.S. economy is dependent upon consumer spending. The old adage is: When the U.S. consumer gets nervous, the economy gets a cold.

Now is the time to begin toreadying your company for thepotential of a softening market. Now is the time to get close toexisting customers, meet new customers and prepare to jazz upyour selling efforts.

Talking to contractors across thecountry, we are hearing that 2008looks to be a good economic yearfor many of them — especially forcompanies whose backlog is filled

The old adage is: Whenthe U.S. consumer gets nervous, the economy gets a cold.

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with large projects. For mid-size contractors whose backlog burn rate isfaster, the second half of 2008 looks to be challenging. Most contractors aresaying that they are eating through backlog at a rate that is faster than theyare adding to it. But the news is still mixed on the economy.

PREPARING YOUR COMPANY Getting ready for a changing market means dusting off your go-to-market

strategy, building your get-work machine and targeting the type of customersand projects you need to be successful.

Here are some tips for getting ready:

Devise additional keep-in-touch strategies. When schedules are crazybusy, keeping in touch with customers is a challenge. Keeping in close contacttells customers that you value the work they provide, you are willing to make an investment in them and gives them the reassurance that if somethinggoes wrong you will be there. Get creative about ways to stay in touch. Face-to-face meetings are wonderful, but neither you nor your contacts have thetime to meet every day or week. Periodic phone calls, a note through themail, an e-mail informing them of the status on the job, meeting them at civicor social events, etc., all give customers the confidence that you and yourorganization value their business. Expand your contact list inside a key customer organization from one or two contacts to three, five or more. Thatway, when one of your contacts leaves the organization, your relationshipwith the company stays strong and grows.

Get close to existing customers. Spend time getting candid feedback onhow your company has performed on the customer’s current and past projects. Brainstorm together about what and how lessons learned can betaken from past projects and invested into future ones, making the processsmoother and more efficient for both of your organizations. Learn moreabout their pressures — those they face in their business and what pressuresthey are feeling from their customers and competitors. Use that knowledgeto develop unique ways to continue to build value and drive customer loyalty.

Revisit your key value propositions. Why should a customer or potentialcustomer pick you over another very good contractor? The answer to thisquestion represents your value proposition. Value propositions need to keeppace with changing markets and improvements being made by competitors.Get a team of key operations, estimating, senior management and businessdevelopment together to critically revisit your value proposition and answerthe following questions:

• How truly unique is your value proposition compared to your very best competition?

• Can you objectively prove it to the customer and prospective customers?• What can you say/offer to the customer that none of your other

competitors say/offer?

Get more feet on the street. Nothing beats feet on the street for meeting and cementing new relationships. Investigate how much time your

14 ■ departments

business development people are actually on the street meeting new customers. You do not have to add people to get more feet on the street. Youjust need to free up your current staff’s time so they can call on prospectivecustomers. Have the business development staff estimate how they spendtheir time. Use the time categories shown below to get a clear picture ofwhere the staff is currently investing time, and realign this time according toyour go-to-market strategy.

a. ______% Servicing existing customersb. ______% Writing proposals, participating in presentations and following up c. ______% Putting out firesd.______% Internal meetingse. ______% Doing research and getting ready to run sales callsf. ______% Calling on new customers

Reinforce/reward customer service. Customer service is what your field,project management, accounting and administrative functions do to ensure thatcustomers are getting everything they have been promised in your proposalor contract. Today’s customers are demanding, potentially unprepared ormisinformed, sometimes short-sighted and always concerned about gettingthe most they can from the investment they’re making. Give your people newstrategies, skills and tools to discover customer hot buttons, proactively solveproblems, resolve people conflict, build lasting relationships, ask good questions and follow through on commitments. In a soft economy, customerswill have more choices of which good contractor to use. Growing the customer

satisfaction skills of your people will ensure more customers continueto build with you regardless of market changes.

Re-examine customer contactpoints. Whose job is it anyway?Keeping in touch with customers andbuilding lasting relationships is theresponsibility of more than just yourbusiness development staff. Meetwith estimating, project managementand field leaders to revisit their rolesin delighting customers, maintaining

relationships and exploring additional work opportunities. It is too easy forthese managers to let this responsibility fall onto your business developmentstaff, when the reality is that these managers have more contact with existingcustomers on projects than your business development people. Make sure thatthey know how critical their role is. Create incentive and feedback systemsto reward those team members that help you keep and win additional workwith existing customers.

Recharge your business development people. Whether full-time or part-time, all business development personnel represent a critical link in yourget-work chain. Giving them new skills, tools and selling messages makes their


jobs easier, increases the number of qualified leads to chase and helps youclose work. Analyze your collateral, point-of-sale and leave-behind tools.Could they use a face-lift? Do the project pictures represent your best andmost current projects? Do they include your current value propositions? Don’t discount skillsdevelopment as a way to rechargeyour staff. If you want them to callon executive-level customers, givethem the skills they need to relate toand interface with senior executives.One of the hottest training topicsfor business development people isbusiness skills. Being able to understand a customer’s economicmodel, implications of changing markets, economic forecasts, changing customer preferences, etc.,gives business developers the tools they need to have meaningful conversationswith senior executives and build value for your company.

Increase the selling effectiveness of proposals. Proposals are sellingtools. They either get you a spot in the interview schedule or get you passedover. Read two of your recent proposals — cover to cover:

• What would you think if you were the client? • Is the proposal uniquely crafted to that client? • Is your offering unique, attention-grabbing and compelling? • Does the proposal clearly show why your company is the best choice?

If you can’t utter an emphatic “yes” to each of these questions, get workingon your proposals!

Define customer contact expectations. Setting goals helps us achievewhat we have set out to accomplish. The same can be said for creating specific targets regarding the frequency of meetings with existing, past andnew customers. Create criteria to objectively evaluate which contacts warrant weekly, bi-weekly, month, quarterly, semi-annually and annual contact.Include a list for those contacts which only need contact via marketing communications. Develop a rating system to show which contacts representthe greatest opportunity for your company, and build the contact schedule.Measure staff members on how well they maintain the contacts, what opportunities are generated and how many projects are booked into backlog.Measure progress toward your goals. Give staff members feedback on whatthey are doing that works and where opportunities exist for improvement.Set realistic goals with a hint of “reach” in them, and you will keep your team focused.

Build robust go/no-go criteria. Not every opportunity is a good one.There are more opportunities in your market than you can afford to chase,

Proposals are sellingtools. They either getyou a spot in the interview schedule orget you passed over.

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even when markets are soft. Quantify what it costs you to chase a typicalopportunity. This is where the vast majority of your marketing dollars arebeing spent — chasing opportunities. Focus your efforts on opportunitiesthat you have a good chance of winning, have the potential for repeat work

and fit your sweet spot. Build arobust go/no-go process. Do notwaste time chasing customers whoonly use you as an estimating serviceto keep their favorite contractorhonest. Use your resources wisely.Create a go/no-go that helps youidentify which opportunities andcustomer groups in which to investyour time and resources.

Put more pizzazz into your presentations. Presentations aremore than beauty contests. Clientsuse them to determine who reallyunderstands their needs and who isright for the job. Presentation skillsare critical for getting selected.Invest the time to prepare for apresentation. Conduct a few dry-run

presentations and get feedback on what is working and not working. Create a unique approach that will get you out in front of the competition. Tell theclient that you are the right team for the job and that you are excited for theopportunity to work with their organization. Presentations are more than justanother step in the process; they are your best chance to sell who you areand why your team is the right one for the project.

Create capture strategies to win key customers and opportunities.Capture plans are strategic business development plans targeted to win aspecific customer or project opportunity. Think of it like a mini strategic planon a specific opportunity. The capture plan is your road map to displacecompetition, build a new relationship and cement customer loyalty. Take thetime to carefully identify and plan for winning the right key opportunities inyour marketplace.

STORM CLOUDSSeeing storm clouds on the horizon does not always guarantee that a

storm is coming. It simply means that conditions are right for a storm to form and blow into our neighborhood. The storm may be short, long or fail tomaterialize. While we cannot be 100% certain about what to expect, preparing your company for a potential storm will ensure that any potentialdamage is mitigated before it occurs.

Use the list above to reinvigorate your “get-work” efforts. Get close to yourbest customers. Start spending more time with them now, before any significantchange occurs in the marketplace. Help your people develop the skills theyneed to delight customers, build loyalty and keep them coming back for more.

Presentations are more than just anotherstep in the process; theyare your best chance to sell who you are andwhy your team is theright one for the project.


The best bet is to get ready for a potential storm before it hits. That way,if the storm does come your way, you will be able to ride it out in warmth andsafety — with a solid backlog and strong customer relationships. The time toget ready is now. ■

Cynthia Paul is a managing director with FMI Corporation. She may be reached at 303.398.7206 or

via e-mail at [email protected]

MARKET INFORMATION Globalizing Green, Verde, Vert, Vihreä, Grün, Grön, Groen

Like the variances in language, the looks and sounds of what “green”means globally are just as diverse. Although green is a key topic aroundmost of the world, each country has its own ideas of how best to make the transformation. Together, green construction and green buildings are onetopic that is generating ample discussion. Buildings capture much of theworldwide attention on the subject since they expend 40% of the world’senergy and create at least one-third of the greenhouse gases. People aroundthe world recognize that green buildings are the best target for reducingenergy consumption and pollution.Now countries are trying to indentifythe best way to make this happen.

TRENDS SHIFT FOCUS TOSUSTAINABLE DESIGN

According to the United Nations Population Fund’s State ofthe World Population Report 2007,by 2008, the world will have morethan half its population living in urbanareas. This will mark the first time in history that this has happened. By 2030, the urban population isexpected to increase to approxi-mately five billion people. Manydeveloping countries are starting torecognize that cities are a majorcause of pollution and environmentaldegradation and are taking theopportunity to build environmentallysustainable buildings.1

Developing areas like Asia and Africa will double their urban population by 2030. With the population increase, countries are demandingmore construction of building space. China is seeing 21 billion square feet ofnew space added every year. China is also the largest consumer of cement,

Like the variances in language, the looks andsounds of what “green”means globally are just asdiverse. Although greenis a key topic aroundmost of the world, eachcountry has its own ideasof how best to make thetransformation.

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steel, brick and other building materials. The global demand of constructionmaterials also lends itself to green building practices.2 Green building practicescreate a demand for local and recycled products. According to the CaliforniaIntegrated Waste Management Board, “Building and construction activitiesworldwide consume three billion tons of raw materials each year or 40% oftotal global use.3 Using green building materials and products promotes conservation of dwindling nonrenewable resources internationally. In addition,integrating green building materials into building projects can help reduce theenvironmental impacts associated with the extraction, transport, processing,fabrication, installation, reuse, recycling and disposal of these building industrysource materials.”4

Former President Clinton agrees that buildings that are more efficientare a strategic way to improve the environment through the use of alreadyavailable technologies. He established the Clinton Climate Initiative EnergyEfficiency Building Retrofit Program, which will fund building renovations at no net cost. Initially, five global banks — Citigroup, UBS, Deutsche Bank,ABN AMRO and JP Morgan Chase — have each approved assembly of $1 billion for a total of $5 billion in loans, which will be made available to citygovernment and building owners. The money borrowed will be paid backwith interest from the reduced energy costs created by the retrofit.American Standard, owner of Honeywell, Johnson Controls, Siemens andTrane, has agreed to financially guarantee energy savings from the projectswhile increasing its capacity to help with large numbers of building retrofits.

The first major cities who have volunteered their municipal buildings for energy retrofits includeNew York, London, Tokyo, Bangkok,Johannesburg, Berlin, Chicago,Houston, Karachi, Melbourne,Mexico City, Rome, Sao Paulo, Seouland Toronto.5

These major cities are working towards developing andconstructing more energy-efficient,sustainable green buildings becauseof major climate concerns acrossthe globe. According to the PewGlobal Attitudes Project, manycountries in the world perceive

climate change to be a very serious problem. Interestingly, many developingcountries view global warming as a major concern (see Exhibit 1), and whilecost concerns are usually prevalent, demand for green building is increasing.Key contributors to the major causes of the global climate change are theconstruction and past use of buildings. In response, a great deal of attentionis now focused on how to reduce the footprint from construction and futuredevelopment. Green building combines the best practices of traditionalbuilding with environmentally safe materials.

Green building combinesthe best practices of traditional building with environmentallysafe materials.


Exhibit 1

Pew Global Attitudes ProjectIn your view, is climate change a very serious problem, somewhat serious, not too serious or not a problem?

Note: Due to rounding, percentages may not total 100%. The top-line “total” columns always show 100% however, because they are based on unrounded numbers

North America

United States

Canada

Latin America

Argentina

Bolivia

Brazil

Chile

Mexico

Peru

Venezuela

West Europe

Britain

France

Germany

Italy

Spain

Sweden

East Europe

Bulgaria

Czech Republic

Poland

Russia

Slovakia

Ukraine

Middle East

Turkey

Egypt

Jordan

Kuwait

Lebanon

Morocco

Palestinian territory

Israel

Asia

Pakistan

Bangladesh

Indonesia

Malaysia

China

India

Japan

South Korea

47

58

69

68

88

75

57

66

78

45

68

60

57

70

64

66

61

40

40

65

59

70

32

32

69

41

69

59

48

41

85

43

46

42

57

78

75

20002005Very

SeriousSomewhat

SeriousNot tooSerious

Not aProblem

DK/Refused Total

28

29

21

24

8

17

24

20

17

37

27

26

35

25

25

19

29

47

33

28

30

18

37

32

19

42

13

22

37

21

12

32

32

46

28

19

22

13

8

2

4

1

2

10

4

1

10

4

8

2

2

5

5

8

8

19

5

7

3

18

25

6

15

6

5

11

5

2

9

10

7

4

2

2

9

4

1

1

2

1

2

1

2

5

1

4

1

0

2

1

3

2

6

1

1

1

8

8

6

2

3

7

2

3

0

3

2

1

1

1

0

2

2

7

3

2

5

7

9

1

3

0

2

6

3

4

8

0

4

3

1

2

8

6

3

1

1

10

7

2

30

1

12

10

4

10

1

0

100

100

100

100

100

100

100

100

100

100

100

100

100

100

100

100

100

100

100

100

100

100

100

100

100

100

100

100

100

100

100

100

100

100

100

100

100

20 ■ departments

GOVERNMENT AND BUSINESS SUPPORTMany national cities have support from local and state governments to

build more sustainable buildings. All U.S. General Services Administrationbuildings have to be Leadership in Energy and Environmental Design (LEEDcertified. Companies, individuals and even politicians, like California Gov.Arnold Schwarzenegger, Chicago Mayor Richard M. Daley and New YorkMayor Michael Bloomberg, are recognizing green is not an eccentric, passingtrend. In addition, there is a growing list of companies driving the market forgreen construction, including Seattle-based Starbucks; Austin, Texas-basedWhole Foods; Minneapolis-based Target; Charlotte, N.C.-based Bank ofAmerica; and San Jose, Calif.-based Adobe Systems. High-profile companies,individuals and politicians will drive the definition of green and create strategies that will shape a greener, cleaner future.

The construction of green buildings is growing at a rapid pace. Accordingto Architecture Week, “There are over 40,000 projects in the United Statesand beyond that are accredited through the USGBC LEED rating system,totaling 3.2 billion square feet.” The president of the USGBC warns againstbecoming apathetic, “Only about one in every nine buildings is going green;we’ve got a lot more work to do.”

As many companies are greening up their ways, many organizations are developing to help them. The most recognized organization doing this is

the United States Green BuildingCouncil (USGBC). The USGBC isdriving the green building movement.In 2007, more than 22,000 peopleattended the USGBC GreenbuildInternational Conference. The conference started in Austin, Texas,with 8,500 people attending.6

The growth and interest in green building has grown and will continueto do so.

The World Green BuildingCouncil is a union of national building councils like the USGBCand is working to reduce the globalconstruction footprint. This organization is trying to accelerate

market transformation of the global property industry towards sustainability.7

Their participating countries include: Australia, Canada, Japan, the UnitedStates, the United Kingdom, India, Mexico and Argentina. Taiwan, Brazil,Germany and China are in the development process, while 31 other countriesare interested in organizing councils.

The main obstacle to building green remains the perception that it is too expensive to build this way. As with most cycles, the prices for green materials are decreasing as more suppliers are providing green materials andmore people are demanding their use. However, in the developing worlds,there is an additional struggle for growing green building; beyond cost, the


notion exists that environmentalleadership needs to come from first-world countries. Until there are national and international greenstandards set, green building mayremain an option rather than a standard in construction around the world.

Green building is becoming aglobal trend that construction companies should not only be aware of, but also actively pursueand work to educate both the owners and the public about itsbenefits. Although there has beenmajor growth in building and developing green, it is still mostly

encouraged by government incentives and some independent owners. Untilthere are standards in place, green building can be and is a differentiatingcompetency for contractors around the globe. ■

For more information related to this article, please contact FMI Construction Economist Heather Jones at

919.785.9335 or via e-mail at [email protected].

1 UNFPA State of the World Population 2007: Unleashing the Potential of Urban Growth2 Fogarty, David. Inaction on Greener Buildings Puzzle Experts, Reuters. December 7, 2007.3 D.M. Roodman and N. Lenssen, A Building Revolution: How Ecology and Health Concerns are Transforming Construction,

Worldwatch Paper 124, Worldwatch Institute, Washington, D.C., March 1995, p. 5. 4 California Integrated Waste Management Board, http://www.ciwmb.ca.gov/5 Nichols, M., Gardner, T. Clinton, Cities, Unveil $5 billion building energy plan. Reuters. May 16, 2007.6 Libby, B., GreenBuild 2007 Conference. Architecture Week. December 14, 2007.7 World Green Building Council Mission

GENERAL CONTRACTORS Integrity in Tough Times

Bill leaned against his pickup, “You know, Tom, I don’t believe in integrityin construction, especially in these tough times.” A slow grin stole acrossTom’s face, “At least you’re honest about it!”

Can we believe in integrity in construction, especially in hard times?

LEADERSHIP INTEGRITYIt depends on leadership.If leaders have made promises based upon unwarranted market

assumption, they may find themselves trapped by their own words. “The reasonI promised no layoffs was my honest belief that the market would hold up.”But should leaders ever make promises based upon beliefs about future markets? Honest mistakes can still destroy trust.

Until there are nationaland international greenstandards set, greenbuilding may remain anoption rather than astandard in constructionaround the world.

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The leadership opportunity in hard times, therefore, begins with killingoff wishful thinking. This is the first step in protecting company integrity. Trustis the essential fabric of corporate culture.

PRICE/SCOPE INTEGRITYThe second essential is price/scope integrity. Price can be the source of

hope in tough times. “If we reduce our prices, maybe we can get enoughwork to hold ourselves together until the market recovers.” But how can wereduce price and maintain price/scope integrity? Let’s look at a typical hourlycharge-out rate for a subcontractor:

Standard Hourly Rates Hard-Times Hourly RatesMaterial $35 $30Labor $23 $20Equipment $20 $20Overhead $17 $15Profit $5 $1

$100 $86

In our new price, we plan to install the same work as performed previouslyfor $100. Has price/scope integrity been maintained? We have trimmed ourcost, thus enabling a price reduction to attempt to get a desperately neededjob. We submit our bid with the new prices. But our competitor bids the jobat $74, well below our cost. Our competitor has violated price/scope integrity,but we are still without a job. Our price/scope integrity has been maintainedbecause we reduced cost, not price. We will bid again with our lower cost.Our competitor must have deep pockets or it’s game over for them.

To maintain price/scope integrity and protect our reputation, we mustreduce cost in hard times. Our new lower price reflects our lower cost. Themistake is to act like a volume-sensitive industry (airlines, etc.). We cannot dothis because construction is a variable-cost industry, not a fixed-cost industry.

Price/scope integrity is essential tosurvival, especially in hard times. We can understand our variable-cost structure and price sensitivityby simply looking at the fact that variable costs are defined as thosecosts that fluctuate with sales. Nojob awarded; no job cost. Job costconstitutes 80% to 90% of our cost.

CYCLICALITY OF CONSTRUCTIONThe third reason for integrity

in hard times is cyclicality.Construction business cycles havethrown us into tough times/goodtimes fluctuations for years. This

To maintain price/scopeintegrity and protect ourreputation, we mustreduce cost in hard times.Our new lower pricereflects our lower cost.


can be seen in Exhibit 1, which shows Contractor Pre-Tax Return on Salesfrom 1985 through 2007.

Notice that recovery is always just a few years away. How we treat customers and suppliers in tough times can be remembered easily. In theIntegrity Chain, the argument is made that the key to long-term profitability istreating customers and suppliers with such trustworthy behavior that a highpercentage of repeat business can be maintained. Can we imagine profitabilitywithout repeat business? Most contractors report that 60% to 80% of theirbusiness is from repeat customers or in recurring market segments becauseof their good reputation. This philosophy obviously applies to negotiated work,but it also applies to bid environments since the integrity of our constructionprocesses, i.e., job costing, planning, etc., positions us to be low-cost providers.

GOOSE INTEGRITYThe fourth reason for integrity in hard times is protection of the golden

goose. Refusal to reduce cost when the market sags jeopardizes the companyitself. Our fiduciary responsibility requires priority of goose protection. It isbetter to save some jobs than lose all jobs by killing the goose. Brutal honestyoutranks sentiment.

Not incidentally, laid-off employees often complain more about the wayit was done than the fact that it was done. This can reflect promises thatshould not have been made or just sloppy management. Honesty withemployees is just as important as honesty with customers and suppliers. Youcannot say opportunistically, “I’m sure our layoff will be temporary,” since youcannot know the duration of hard times with certainty.

Our $86 price-reduction example protects as many jobs as possiblethrough cost reduction. Still, we cannot prevent competition panic that isexpressed in selling below cost. In a price-sensitive industry, this may hurt ourbusiness while the competition’s panic cuts its throat. We must be preparedto face the hard facts. We have enough work for X number of people. Or wedon’t. We may think we are a $100 million company when, in reality, we are a$40 million company. And this can happen almost overnight in construction.

3

2

0

1

Exhibit 1

Contractor Pre-Tax Return on Sales

7

4

5

6

Source: Risk Management Associates, Philadelphia, PA, Annual Statement Studies, 1985–2007

ElectricalCommercialHeavy Construction

PavingHVACUtilities

1985 200786 87 88 89 90 91 92 93 94 95 96 97 98 99 01 02 03 04 05 0600

Recession Period

Recession Period

24 ■ departments

You can say, “I will do everything in my power to sail through the downturn.” The integrity of this statement can be supported by my cashmanagement strategy. If you have created cash reserves because you knowthe up and down of the construction business, then you have empoweredthe goose to survive and your commitment rings true.

SELF-PERCEPTIONOne final reason for integrity in tough times is self-perception. Are you

a trustworthy person? Can you be counted on when the chips are down? Are you really fighting to save as many jobs as possible while protecting thegoose? Are you going to look back at yourself after the downturn and beable to say “good job”? What we do during tough times tells us who we are.Our actions also tell others who we are. ■

Ralph E. James, Ph.D. is a director with FMI Corporation. He may be reached at 919.785.9227 or via e-mail at

[email protected]. To order a copy of the book, Integrity Chain by Ralph James, contact FMI at 919.787.8400.

LEADERSHIP Maximize Your Leadership Potential

If you “Google” leadership, you will receive more than 124 million hits.Search Amazon.com and you’ll find more than 250,000 book titles in Englishon the subject. MBA programs talk about it. Fellowships exist to harness it.And citizens around the globe are tuned in to the news and other sources totry to determine who is best suited to lead this country for the next four years.

So why is leadership such a hottopic? In today’s volatile economicand political marketplace, leadersare the ones who will determine howour scarce resources are allocatedand set the course for our futures,both at the national level and withinour organizations.

In today’s society of uncertainty,ambiguity, globalization, informationoverload and rapidly changing social,political and economic environments,the job of a leader is becomingmore and more complex. It is nolonger possible for leaders to have

all of the information required to make the right decisions. Instead, leadershave to be able to adapt quickly to change, know when to hold fast and whento change course, and most important, command the respect and dedication oftheir followership — those who will execute the leader’s plan.

Through extensive research involving current leadership theories, interviews with current and former leaders, and analysis of existing models

It is no longer possiblefor leaders to have all of the informationrequired to make theright decisions.


of individual and organizational leadership, FMI has developed a formal, comprehensive leadership model. In its simplest form, the model categorizesthe many behaviors and skills required for leaders to perform at their peak of personal effectiveness into eight areas. To perform at their peak, leaders

must effectively set direction, alignresources, motivate and inspire,think strategically, focus on others,develop talent, execute and followthrough, and lead within (lead them-selves effectively). (See Exhibit 1.)

Our clients often ask us whichof these leadership behaviors is“most important.” After all, mostleaders are better in some areasthan in others and are far too busyto attempt to grow in all eight areassimultaneously. So we set out toanswer that question by reviewingassessment data collected through avariety of leadership programs ourclients have attended. We reviewed

personality profiles, ability batteries and 360˚ feedback instruments. (360˚assessments collect feedback on leaders from their managers, peers, directreports, customers and others whom they ask to rate their effectiveness as aleader). Based on this group of more than 2,000 leaders in the constructionindustry, the most important predictors of a leader’s overall effectiveness arethe leader’s skill in focusing on others and ability to lead within, as assessedby those who work most closely with him or her.

Initial analyses (conducted in 2004) indicated that more than 69% of the variability in a leader’s performance is directly related to his or her effectiveness at Leading Within and Focusing on Others. This was a surprising result, suggesting that only 31% of the remaining variance could be attributed to age, gender, experience, tenure, personality, natural abilitiesand all other leadership skills combined! Results from a new study of morethan 20,000 360˚ assessments of construction industry leaders are evenmore compelling. Recent analyses suggest that behaviors associated withLead Within and Focus on Othersaccount for more than three-quarters, or 77%, of the variability in overall leadership performance.(See Exhibit 2.)

This research suggests that if youwant to fundamentally enhance youreffectiveness as a leader, you shouldfocus your leader developmentefforts on how effectively you areleading within and focusing on others.These two elements, more than any

hibit 1

eak Leaders

Personal Values and Atti

tude

s

WorldView

W

ithin

T

alent Direction Strategically

Execute and Focus Motivate

Alig

n

Lead

D

evelop Set Think

Follow Through on Others and Inspire

Reso

urce

s

Exhibit 1

Peak Leaders

23%

77%Lead Within andFocus On Others

Exhibit 2

Overall Leadership Performance

Other factors

100% = >20,000 respondents

26 ■ departments

other leadership behaviors, are foundational to creating trust, respect and afollowing of those around you — the predecessors to a motivated executionof the strategies you are leading your charges toward. FMI’s research showsthat in order to reach your maximum potential as a leader, your leader development time and effort should be focused on mastering the followingseven areas, components of leading within and focusing on others:

Personal mission — Does your company have a mission statement? Doyou have a personal mission? Where are you headed in your life? What do youstand for? What are your convictions? Clarity around personal mission leadsto clarity in your actions and an increased feeling of trust from your followers.

Personal character — Leadership character is defined by honesty,integrity, authenticity, tenacity and accountability. How open and honest areyou with the people around you? Do you fulfill your commitments every time,no matter how difficult? Do you stand behind what you say? Do you trulyopen yourself up to others, admitting to both successes and failures? Do you stay in the fight when the going gets tough? Do you take personalresponsibility for making things better? Are there areas of your leadership

where you could be more open,honest, loyal or trustworthy? This isa cornerstone of effective leadershipat all levels.

Self-awareness — The bestleaders have heightened self-awareness. They know theirstrengths and weaknesses. They areaware of how they are viewed byothers through consistent collectionof feedback. Often leaders lackgood mechanisms for collectingfeedback from others and may befunctioning with blind spots in theirperformance. When is the last timesomeone gave you really difficultfeedback about your performance?If it’s been a while, it might be timeto seek some out.

Personal disciplines — Peoplerespect leaders who role modeleffective personal and professional

habits, who take care of themselves, who have disciplines and structures tosupport them. What are your personal habits? How is your health? Do youmaintain your mental, physical, emotional, financial and spiritual health on aregular basis? Do you have the physical, mental and emotional energy toeffectively manage your daily tasks and support others?

Emotional intelligence — Beyond cognitive intelligence, leaders who areable to recognize and harness the power of their own and others’ emotionsfind them to be a powerful source of connection, energy, information and

The best leaders have heightened self-awareness. They knowtheir strengths andweaknesses. They areaware of how they areviewed by others throughconsistent collection of feedback.


influence, all of which are critical to success in today’s volatile markets. Could you be more effective in your emotional responses to the people whowork around you?

Humility — Great leaders get their ego out of the way! People often misunderstand this term. Humility is not thinking less of yourself, but thinkingof yourself less. Leadership is aboutdoing what is in the best interest ofthe organization, the shareholders,the employees, the customers andothers — without focus on potentialpersonal payoffs or costs.

Agapao — If you are looking for the single-greatest influencer ofleadership effectiveness as seen bythose who work with the leader, thisis it. Agapao is doing what’s in thebest interest of others, with or with-out their knowledge, consistentlyover time, unconditionally. Howmuch of your behavior is reallyfocused on the best interest of othersversus what is the easiest? Sometimes keeping a bad employee is easier thanletting him or her go, even though letting the employee go is in everyone’sbest interest. Is your goodwill conditional? What if employees let you down?Do you still do what is in their best interest? Or do they somehow have toearn this? Leaders who are able to consistently do what is in the best interestof others earn loyalty, trust and respect, which pays large and lasting dividendsto the leader and the organization.

It is no doubt easy (and maybe even “normal”) to boil leadership down to the ability to set strategy, make tough decisions and execute on goals.Without question, these are some of the skills of highly developed leaders.Our data, however, suggest that intentionally working to become more skillful at leading within and focusing on others gives you greater long-termresults as a leader. It is very possible that delving into these areas — LeadWithin and Focus on Others — will require help from others. Seek out rolemodels who do these well. Ask for feedback on your own leadership performance in leading within and focusing on others from those moreaccomplished in these areas and, even if you are feeling brave, from thosearound you. Consider finding a coach, someone who can work alongside youto help you develop these skills and behaviors. Diving into conversationabout such topics as self-awareness, personal disciplines, humility and thelike may very well be unfamiliar and uncomfortable territory for you. If it is,you are not alone; this is difficult work for nearly all leaders who are willing toexplore these areas. Perhaps that is why we so rarely encounter truly greatleadership in life; few people are willing do the challenging, long-term development work needed to better lead within and focus on others. Thosewho do give themselves the opportunity to reach their peak potential as

Agapao is doing what’s in the best interestof others, with or without their knowledge, consistently over time,unconditionally.

28 ■ departments

leaders. Not only will they be gladthat they did, but so will thosewhom they lead.

At the center of our Peak Leadermodel is the term “Worldview.” A leader’s worldview is the set ofassumptions he or she holds, consciously and unconsciously, abouthow the world operates and how he or she operates in the world.Fundamentally, a leader’s worldviewinfluences his or her values andbeliefs as well as how he or shebehaves. To truly develop personalcharacter, for example, a leadermust believe that it is right to beopen, honest and truthful. Leaderswho believe that people should bemanipulated by withholding

information, telling lies and working around the system will only be seen asmanipulative and phony if they attempt to engage in work to be seen as aperson with deeper character without first addressing the fundamentalbeliefs that underlie these behaviors. Therefore, it is also important to askyourself what it is that is at the core of your current behaviors. Is it a lack ofskill or experience, or is there a belief about people, yourself or the worldthat is preventing you from reaching your peak potential as a leader?

Why does this matter? While a leader can have the greatest strategy, the most innovative ideas, the best network of connections, all the knowl-edge and insight in the world, and even the best plan to make it all a reality, if the leader cannot get others to execute the ideas, it is somewhat irrelevant.

Once heard: A leader is only a leader if someone is walking behind him.Otherwise, he is just a man out for a stroll. ■

Vanessa Winzenburg is a senior consultant in FMI’s Tampa office. She may be reached at 303.809.0299 or

via e-mail at [email protected].

PLANNING Plans That Get Action

Action plans are the initial work product of many planning sessions, strategy explanations, committee meetings and informal discussions. Actionplans serve to instruct, to remind, to help create accountability, to establishcompletion schedules and to track what works and what doesn’t. Goodaction plans maintain focus and help increase organizational efficiency. Plansdon’t make changes; actions do.

Writing action plans is a bit of both art and science. Thought fragments

A leader’s worldview isthe set of assumptionshe or she holds, consciously andunconsciously, abouthow the world operatesand how he or she operates in the world.


and abstract notes may serve to remind authors as to what they were thinkingabout at an earlier point in time. However, future readers require more complete communication than hints at what authors intended. Even authors’memories become rusty over time, and it is easy to look back at fragmentaryaction plans and ask, “What the heck did we mean by this?”

A very simple action plan format has three parts: a task to be performed,an individual who is responsible for ensuring that the action is taken and aspecific completion date when the task will be concluded. You can expandupon this brief structure by including elements such as a further descriptionor commentary regarding the intended work product, resources required,budgetary impact and such.

Here are some keys to writing better action plans.

Use action words (verbs) to begin each action item. “Build, create, deliver,train, assemble, document, assign” are examples of the sort of action wordsthat should begin every task in effective action plans.

Define a work product intended by the action. Examples of work productsinclude such output as a training curriculum, a new or improved process, a specific number of new contacts to be made by business development, adocumented procedure, the intended changed condition, addition of specificresources or the achievement of a measurable outcome (such as improving a hit rate to 30% or greater).

Select a completion date. If youfind it difficult to assign a completiondate, you may have written an operating procedure or a behavioralinstruction rather than an action item.“Continuously evaluate performanceof direct reports,” is not a task foran action plan. While it may be agood idea, that instruction comescloser to being an operating procedure than a task with a specificwork product. “Complete the first-quarter evaluation of all direct reports,” comes closer to the definition of an action item. “Develop an improved employee evaluation process that linksperformance measurement factors to our corporate strategies,” is a muchbetter action item. When the process has been developed (or installed orthe first iteration is completed), then the work product for the action itemhas been delivered and the action can be marked, “Completed.”

Select a reasonable completion date. Many action plans are flawed bycramming most of the scheduled completion dates into the next 90 daysfrom the date of authorship. It is almost irresistible to action-biased peopleto set short deadlines as soon as a fix is identified. That way almost ensuresfrustration. It has taken months or even years to arrive at the current condition.We don’t have to fix everything right away. Most people have day-jobs to

30 ■ departments

perform, not just the completion of new action tasks. By putting plenty offloat or slack time into the schedule of task completions, you will establishmore reasonable deadlines. If you are building action plans to implement new strategies, try to spread the action items over a full nine- to 12-monthperiod so that both normal work and completion of action plan tasks can be accomplished. If the action plans result from crisis-driven planning efforts,then shorter completion times will be necessary.

Assign a single individual as the party responsible for ensuring theachievement of the action item. While most action items may take a taskforce, a committee or even an organizational element to perform the work,accountability is initiated by assigning a single individual the responsibility forensuring that performance and reporting on the progress of the action item.If necessary to memorialize the participation of other individuals, do it in aresources, comment or description element that will be the fourth ingredientof your action plan. The essential three, of course, are the task, the individualresponsible for its completion and the intended completion date. By makinga single individual responsible, you improve communication, enhanceaccountability and enable a sense of ownership over the task.

Maintain the language. While you could call tasks of an action plan “tactics” or “action items” and no harm would occur, calling those same tasks“strategies” mucks up the communications rather seriously. Hold the label

“strategy” for the high-level, costlyand relatively few methods by whichyou intend to accomplish your goals.The things that can be done by aprecise point in time are the thingsto call action items, tasks or tactics.Keep the language consistent. Thishelps to build a culture of clearthinking and organized planning.

Avoid the “wordiness” trap.When the action item is “Organize a committee to develop the trainingcurriculum,” why not say, “Developthe training curriculum”? The factthat you intend to use a committeeto accomplish that development can be noted in the comments ordescription element of your actionplan. Be suspicious of any action

item or task that cannot be defined in a single line of type. If the action wrapsover two lines, there is a simpler way of stating the task.

Keep the action plans lean. Highly detailed action plans should be unnecessary for most applications. Resist the temptation to provide a detailed,step-by-step recipe for the action plan. Such recipes lead to a “BettyCrocker” approach to action planning that is tedious to read and burdensometo communicate. Rather than setting up 12 steps to creating a marketing planjust say, “Produce and deliver a marketing plan for the Utility Division.” You

Highly detailed actionplans should be unnecessary for mostapplications. Resist thetemptation to provide adetailed, step-by-steprecipe for the action plan.


would likely assign that task to someone who had some knowledge and skill in the marketing arena. That person and his or her team can work outthe details. If there is a particular feature that you want included, list that inthe comments or description section. Don’t add unnecessary detail to theaction task itself.

Report with witnesses. You could maintain progress reporting throughperiodic written reports from the individuals responsible. That would be amistake. Accountability, ownership and peer pressure that improves performance occurs when responsible individuals are asked to stand anddeliver progress reports to a groupof people. The more frequently suchreports are delivered, the greaterthe likelihood of performance ofplans. Such sessions should beaimed at reporting achievements,identifying obstacles to performanceand seeking solutions and assistance.Reporting sessions are not intendedto create a public embarrassment,although fear of being embarrasseddoes drive some people’s behavior. For long-term plans, no less frequentthan monthly sessions should be held. For more urgent plans, weekly or evenshorter intervals may be appropriate.

Celebrate successes. Make a big deal about achievements. Make surethat the organization at large is aware of these achievements. Be sure toidentify events as results from action plans, operational plans and strategicplans. Tying events to plans helps reassure the organization that plans matter,that plans do produce results and that the organization is on course with itsintended directions. Make sure that failures are confronted, but keep thoseconfrontations on a private, nonemotional level. Work toward modificationsand solutions rather than humiliations. High performance, on the other hand,demands publicity. ■

Jerry Jackson is the senior editor and publisher of FMI Quarterly. He may be reached at 919.785.9222 or


PLANNING Twelve Reasons (Excuses) For Poor Job Planning

Job planning is the most critical control tool in the construction toolbox.Job selection also ranks high as a success/failure determinant, but this article focuses on cost control after job selection. Whether we plan is withinour control even if it adds more time to production upfront. Planning enables improved communication of expectations, optimal use of resources,less waste in waiting for other actions and overall reduction of projection completion time through proper attention to critical-path activities. As

Job planning is the mostcritical control tool in theconstruction toolbox.

32 ■ departments

Gen. Eisenhower famously said, “It’s not the plan, but the planning.” Planningis not an event; it’s a process. It continues throughout the job. The need forgood planning is seldom finished until the work is finished.

Our best-laid plans to plan often don’t work. We have “reasons” for notdoing an excellent plan — and these reasons (read: excuses) are a majorcause of the failure to plan.

1. “Why plan? They will change it anyway.” “They” may be other contractors, owners, inspectors and even designers.

And of course they do change our plans. But when we think of planning as an ongoing process, their changes become part of the dynamic our planningseeks to corral. Sometimes planning is like herding cats. We can never expect

perfect execution of the originalplan. Remembering this helps usadjust our attitude toward changingconditions. Indeed, if things did notchange, we would need less planning!But since change is part of our reality, we must saddle it with ourplanning process. Planning becomesan opportunity to control theimpacts of change.

2. “Planning is just more paperwork.”Dislike of paperwork runs deep in

the hearts of most foremen, super-intendents and even some project

managers. They like being outside, not inside filling out reports. This attitudesplashes over on the planning process since, to be a plan, it must be written.

One solution is to structure the paperwork side of planning to make iteasier and more systematic. Use standard forms. Set regular planning time.Schedule planners. Establish planning goals. Structure also helps preventmissing important details, especially when checklists are used. When all elsefails, provide valuable field leaders with office assistance for planning.

3. “Circumstances will change.” Recalling that planning is a process, we can address this attitude problem

by making the process work. If Superintendent Larry Jones attends the internalpre-job meeting, he will be much better prepared for the preconstructionmeeting with the customer. Larry literally sees the planning process as aprocess for dealing with changing circumstances when the customer asks for modifications with which he must cope. After the job starts, the updatingof Larry’s three-week, look-ahead schedule further demonstrates how theplanning process defeats the “circumstances will change” objection.

4. “How do they expect me to plan when most of my team is still on other jobs?” This logistical obstacle will challenge management’s commitment to

planning, but a contractor truly devoted to planning will find ways to get the

Sometimes planning is like herding cats. We can never expectperfect execution of the original plan.


planning team together. One method is to ask a needed field leader to delegate responsibilities to a lead team member. Another method is to callthe planning meeting on a forecast bad-weather day. Logistics can be solvedif commitment is real.

5. “How can I do my plan on such short notice?” Cursing short notice accomplishes little. Construction is the kind of

business in which a customer may demand something happen on the jobtomorrow morning — and call at 4 p.m. today. A post-supper or pre-breakfastplanning meeting may be the only way to solve the short notice problem.This, of course, assumes the customer was stubborn about changing thedemand. Sometimes the argument that work cannot start tomorrow morningbecause “it must be planned to ensure safety and quality” must prevail.

6. “How can I plan with so little information about the job?” Construction is a creative business. Creative planning ideas can be

based on probable needs, which are typical. For example, if we know wherethe job is, we can start planning general conditions. We can organize ourplanning team. We can develop options on early, on-time and late starts, etc.

7. “Their drawing doesn’t look correct to me.” Experienced contractors have learned to check all drawings. Finding

errors and omissions is part of the due diligence of construction. Error andomissions detection is part of theconstruction planning process, notthe defeat of the process. Earlydetection can be facilitated by theuse of checklists, but nothing beats“experienced eyes,” even though 3D CAD and BIM are making stridesin that direction. Drawing errors and omissions increase the need for detailed planning.

8. “They want us to plan without a contract?”

The handling of this obstacledepends on your company’s contract policy. Some contractors’policy allows the job to start beforethe signed contract is received.Others have a “no-contract, no-work” policy. Notices to proceedare often used in the first case andmay be evaluated in terms of the nature of the relationship between contractor and customer. But even in the “no-contract, no-work” case, we can plan to plan in anticipation. Indeed, the weakest part of many planningprocesses is not planning to plan.

34 ■ departments

9. “How can I plan with so little job-site access?” Access often becomes a problem in modern construction. Traffic

congestion can spoil construction access, but it intensifies the need for job-site planning. In one materials handling experiment on a high-rise project, off-site storage/staging with timed deliveries, relative to traffic patterns,

resulted in considerable savings.Good planning attacks stale accessassumptions. “Our trucks can deliver everything we need on time.”In most cases, access difficultiesblock planning only when we fail touse imagination.

10. “If I make a schedule, somebodywill club me with it.”

This fear has been justified onmany blame-infected jobs. Althoughscheduling is only part of the planning process, it has been usedas a club too often by owners andmanagers. Scheduling is a vital part

of the planning process. Like planning, scheduling is a process, not an event.Viewed from a process perspective, with regular updates, it becomes a vitaltool, not a club. But owners and managers must remain vigilant in keepingclubbing out, so scheduling and planning proceed without fear.

11. “I like action; planning feels like inaction.” In one case, a contractor expected each foreman to update a weekly

plan at the end of the day based on the day’s accomplishments. One foreman repeatedly had incomplete updates. When asked, he said the onlyplace to work on it was in his truck. But when he sat down in his truck, crewmembers razzed him. In their view, he was not working. The crew membersidentified work with physical activity. To them, planning looked like inaction.But the foreman himself may have felt planning to be inactive/non-work.

Recognizing when others identify planning as inactive or non-work may be the first step inattacking this psychology.

12. “The only thing my boss caresabout is production, not planning.”

Managers can address this perception by asking the right questions. If the only question is“How many tons?” or its equivalent,team members naturally assume this to be management’s only care. Corrective action therefore

Scheduling is a vital part of the planning process. Like planning, scheduling is a process,not an event.


becomes safety compliance today or “rework tomorrow.” Adding safety andquality questions to productivity questions steers perceptions toward morecomprehensive behavior that can include good planning. “Did you completeyour weekly plan?” might improve results better than single-topic questions,especially those that limit feelings of comprehensive responsibility. We mustbe careful what we ask for … it might be exactly what we get!

Excuses are not acceptable reasons, even if they are frequently used.Better understanding of these 12 excuses will lead to better plans. Discoveryof the underlying reasons can also result in planning improvement. ■

Ralph E. James, Ph.D. is a director with FMI Corporation. He may be reached at 919.785.9227 or via e-mail at

[email protected].

Quarterly Interview

Credit, Risk,Insurance

and Surety

An Interview with Zurich’s Terry Gray and Bill Cheatham

“The construction industry is one that continues to evolve and innovate. Zurichis well-positioned to continue to innovate,evolve and provide meaningful supportfor this industry going forward.”

— Terry Gray

Here, Terry Gray comments specifically on the impact on the insuranceindustry and related current and future trends. Gray recently assumedresponsibility for a new position within Zurich as the global head of construction, General Insurance for Zurich. In this role, Terry is leading thecompany’s global growth efforts in the construction sector. As president of Zurich’s Surety Group, Bill Cheatham provides insights on the relatedimpact on the surety industry.

FMI Quarterly: Terry, you are in a new role with Zurich. Will you tell ourreaders about your current work?

Gray: To clarify, I was previously responsible for the construction businesswithin Zurich North American Commercial, which is essentially the UnitedStates and Canada. I’ve been in the construction business here in NorthAmerica for about 13 years and finished up the last five years as the presidentof that business unit.

At the beginning of this year, I transitioned to a new position that Zurich created as part of an overall initiative to become more customer-focused ona global basis. At the end of 2007, we announced that we were developing“industry practice groups” and creating industry practice leadership for theorganization on a global basis. As a part of this customer-centric practicegroup strategy, we decided to start by focusing on three global industries:


FMI Quarterly sponsor, Zurich NAConstruction, provides risk management services to builders,general contractors, subcontractors,constructions managers, design/build firms, owners and sponsors of pubic and private constructionprojects. Through its daily contactwith these construction industryplayers, Zurich is well-positioned to commenton how the current construction environmentand the credit market crunch are impacting the insurance and surety markets. Recently,Tim Sznewajs, a senior associate with FMI’sInvestment Banking group and FMI Quarterly’sInsurance and Surety departmental editor,spoke with Terry Gray and Bill Cheatham of Zurich about their perspectives on these market shifts and their impact on Zurich.

Terr

y G

ray

Bill

Che

atha

m

38 ■ quarterly interview: zurich’s terry gray and bill cheatham

automotive, real estate owners and construction. I was named global head ofthe construction industry practice for Zurich and started working in this newrole at the beginning of the year.

What does that mean? Zurich is keen on growing its global construction business. We are a leader here in the U.S./North American market, and wehave been for several years, both from a size and leadership perspective.Quite simply, we want to have that same position on a global basis. Equallyimportant, we want to be recognized as the thought leader around risk management and insurance issues for the global construction industry. Mywork involves strategy, resource management and other items needed tohelp us achieve these objectives.

FMI Quarterly: Are you focused on specific geographies, and where do yousee the biggest growth opportunity?

Gray: We are still in the process of identifying those areas through research,but it is truly a global job. Initially, I am focusing on the Middle East, sincethere is a tremendous amount of construction activity in that region beingdriven by the high price per barrel of oil. In general, the Middle East hasbeen doing a great deal of construction over the past few years. That trendwill continue for the near term due to the oil industry as well as projects toimprove the quality of life. Construction will create infrastructure to supporthomes, tourism and other quality-of-life items for the population. So, theMiddle East is clearly an area that we are focusing on.

Asia Pacific is also an area with tremendous construction activity and growth. An enormous percentage of the world’s population resides in India,

China and the other countries inthat region. That population is goingto be modernizing, and we believethere will be continued dramaticinvestment in infrastructure, housing and all of the things thatsupport a transition to a modernworld economy.

Another region of the world inwhich we see an increasing opportunity is Latin America. Thereare changes in the insurance andreinsurance regulations going on in

Brazil that will make the country’s marketplace more appealing and availableto insurers. Another area is Eastern Europe. It continues to modernize, and there is ongoing investment in infrastructure and facilities, which willpresent opportunities to us.

While certain areas will present more opportunities for us in the next one

Zurich is keen on growing its global construction business. —TERRY GRAY


to three years, such as China and the Middle East, we will be looking toimprove our position in all geographic areas.

FMI Quarterly: What impact does the current credit crisis and overall financialturmoil have on Zurich’s construction insurance business?

Gray: Overall, today’s market environment is challenging. The current creditcrisis highlights the importance of fundamental risk-management practices aswell as how interconnected today’s global economy really is. Financial innovationand the emergence of large, complex financial institutions havemade our world much riskier. To besuccessful in such an environmentrequires a strong balance sheet, adiverse risk portfolio and the abilityto execute on a clear strategy, coupledwith a deep commitment to financialdiscipline and risk management.Zurich has a disciplined strategy inplace that aims for profitability nomatter what the financial markets or competition present us with. Five straight years of increased profitability demonstrate the successof that strategy.

The credit crisis and, in even broader terms, the slowing down of the economy, which is arguablydirectly connected to this creditissue, have had a very conspicuousimpact on residential construction.As one of the largest insurers of single family residential construction in the United States, we provide coverageto a lot of the larger regional and national homebuilders. They have seen dramatic drops in their business. Their revenues are down, which is driven bythe number of homes that they are constructing and selling. We’ve seensome of our customers shrink by as much as 50% from where they were in2006. They are just unable to sell the number of new homes that they hadplanned. So our 2007 revenues from those customers have shrunk as well.

The outlook for U.S residential construction in 2008 continues to be slow,with volumes and sales expected to stay at 2007 levels. As we move towardsthe end of 2008, we should begin to see a recovery in the new homes salesenvironment. We hope this will continue to improve as we get into 2009.This is what we are hearing from our customers. They are not optimisticabout seeing a recovery in 2008, and I don’t think any of them expect therecovery to be as fast as the descent was in 2007.

The credit crisis and, in even broader terms,the slowing down of the economy, which isarguably directly connected to this creditissue, have had a veryconspicuous impact onresidential construction.—TERRY GRAY


So what does that mean? That section of the construction economy is hurting, and it has adirect impact on the homebuildersand subcontractors who work in thatindustry. They are feeling the pinchas well. Some of the subdivision workhas been postponed or canceled,and so the general contractors whowould have been working on thosesubdivision infrastructure projectsare not getting that business opportunity. It has had an immediateimpact on those working in andaround the residential market.That’s the bad news. For us, that’s asignificant, but not an enormous,part of our overall operation.

We have a proprietary product inthe market — our Home Builder’sProtective product — and we remain

excited about that market. We think we have a great insurance propositionfor that marketplace. We believe most of our customers are repositioningthemselves and will weather the storm and come out the other side ashealthy contractors, prepared to go forward. This will be good for Zurich, aswe expect our relationships with these customers will be stronger. We willgrow with them as they continue to build more homes in 2009 and beyond.

The impact on the macro-construction environment has not been that dramatic yet. In talking with our customers in commercial construction andgovernment-infrastructure construction and looking at their renewal volumesand projections for the rest of 2008 and into early 2009, they still have veryrobust backlogs. In general, these customers are happy with the level andquality of work in those backlogs, and they continue to be optimistic aboutthe immediate future. That’s terrific, and it’s been that way for the last two orthree years. The construction industry has benefited from a significant growthcycle and strong construction economy. I think we will see that continuethrough the rest of 2008 and probably into early 2009. We expect a little bitof a slowdown as a result of the residential marketplace and the credit crisis,but not a dramatic slowdown in the short term.

The question is how the rest of 2009 and beyond will look? Constructiontends to lag the general economy by 12 to 24 months. So if we are truly in ageneral economic slowdown right now with any real depth to it, the impactwon’t be realized fully in the construction economy until sometime later. I think there are a lot of yellow flags starting to pop up with some of the construction executives who are beginning to wonder how things will look

The construction industry has benefitedfrom a significant growthcycle and strong construction economy. I think we will see thatcontinue through the restof 2008 and probablyinto early 2009.—TERRY GRAY


later in 2009 and 2010. I feel good knowing our customers are thinking throughthese issues, developing what-if scenarios and making contingency plans.

FMI Quarterly: What trends are you seeing in the construction marketplace?

Gray: A good source of trends is a contractor with a history of being both aleader in his industry as well as a good business manager. Our discussionswith these contractors and the product and service selections they are makingare a good indicator of trends. In most cases, the construction industry willadopt what these industry-leading contractors are doing in the near term.We are discussing and selling a lot of programs that support the notion ofcontractors accepting and retaining more risk than they have historically.Specifically, we are seeing contractors who subcontract a majority of theirwork increasingly embrace contractor-controlled insurance programs, oftencalled CCIPs or contractor wrap-ups. Historically, these contractors would pushaway the insurable risks through their subcontract agreement and have theirsubcontractors continue to buy their own insurance. These contractors arenow effectively aggregating that risk, both the work the general contractordoes and that performed by the subcontractors, and managing that risk atthe general contractor level. To do that, they are buying appropriate insuranceand risk-management tools at the general-contractor level. We are seeing anincreasing number of single-project CCIPs and a significant increase in thenumber of rolling CCIPs, wherecontractors are really beginning toput increasing amounts of theirproject work into a program.

This trend is getting real traction,and I see that continuing in 2008 and beyond. Contractors who have subscribed to thismethodology are reaping great benefits from it. For example, there is less contentiousness on theprojects, so that when there is anissue, there’s no need to point fingers and go through subcontractagreements for resolution. They are not trying to deal with many different insurers potentially on asingle issue. By aggregating risk andprocuring insurance for the entire project site, contractors are realizing a significant operational benefit as well as economies of scale in their insuranceprogram. General contractors are embracing this in increasing numbersbecause of the benefits experienced across the board. I expect the CCIPand the rolling CCIP to be a trend that dramatically changes construction. I think we will look back in 10 years and see that it was a major turning pointin how risks are managed in a construction environment.

A good source of trends is a contractorwith a history of beingboth a leader in his industry as well as agood business manager.—TERRY GRAY


FMI Quarterly: Specifically, what changes will we see?

Gray: The whole notion is that general contractors are accepting that theycan have a dramatic impact on the way risk is managed on a project site. Byaccepting that control, I think we will see improvements in project safety. Wewill see improvements in safety with the public. We will see better relationsbetween subcontractors and general contractors because this process eliminates some of the potential contentiousness that historically exists throughthe assignment of risk to subcontractors and the requirement to procureinsurance and manage it at those levels. There can be contentiousness whenthere is a claim in a traditional environment. You go through the process ofhaving to figure out exactly who was responsible and engaging a number ofparties and insurers in that process, which inevitably results in some strain onthe relationships. The less tangible, or less expected, impact has been the

improvement in productivity. We are seeing projects constructed in amuch better way, and the partiesare saving money on the cost of riskand insurance.

Cheatham: I think Terry’s commentsare accurate, and we are now feeling the direct impact on suretyproducts. We’ve lost two major projects, one to credit-crisis issuesand the other posted a letter ofcredit in lieu of a bond. Alternativesolutions are starting to impact ourpremiums as we move toward 2009.Insurance exposures are a big issuefor us today. I give kudos to Terry’soperation. We had a huge project,$750 million, where we needed a

professional liability policy. People were having a problem securing adequatelimits or proper coverage. Zurich Surety recommended Zurich ConstructionP&C to the contractor. A very large insurance policy was written to manage aspecific exposure under the contract, which had to be covered for ZurichSurety to participate.

FMI Quarterly: That’s a good example of how having both sides of the houseallows you to be a better provider.

Cheatham: There was another example in the Midwest where Zurich bookedapproximately $1.5 million to $2 million. This represents combined surety andinsurance premium. The ultimate impact was very positive for Zurich.

Gray: Tim, you brought up a good point, which was my next trend. I think ourcustomer base is increasingly seeing the value in a broader value proposition

We are seeing projectsconstructed in a muchbetter way, and the parties are saving money on the cost ofrisk and insurance.—TERRY GRAY


from a company like Zurich, acknowledging that we have great surety capabilities and property casualty products. Again, I think we lead the marketplace in unique and propriety products for the construction industry.We really have the ability to address, if not all, certainly all of the major exposures that a contractor or project would have for a particular phase ofconstruction. That value proposition has become much more recognized inthe marketplace. It is less about playing in a commodity environment wherethe cheapest price wins. I’m not suggesting that we aren’t competitive in themarketplace, because we are; but we also bring a lot more product coverage,industry understanding and unique combinations of capabilities to the market. It’s my sense that these offerings are being valued by our customersin this environment. Clearly, the insurance market has softened in the lastfew years, and we’ve had to deal with that. I think we are in a much betterposition because of the broader value we bring, which helps our customerssucceed in a softening insurance marketplace.

Cheatham: Let me expand on Terry’s comments a little further. Years back,surety people were always extremely concerned about a relationshipbetween insurance and surety products. Some of that was to protect theirown product line rather than adopting an approach that asks: What’s betterfor the customer? I hold a different view from this historical perception. Minesays: The company who can identify what the customer needs and deliverthe solution will win in the market. We try to offer multiple products,Subguard® being one. I’ve never been an opponent of Subguard® since it’sanother option for owners when considering their best protection. What Isimply say is: It’s the responsibility of the insurance company to come up with alternative products and options. Customers should be allowed to make decisions that are best for them. What Terry is advocating as far as the relationship with surety and construction P&C is really nothing more complicated than providing what the customer wants.

FMI Quarterly: In terms of broader value proposition, do you see a difference between the large contractor market versus the midsize contractor market?

Gray: I would say that the more sophisticated the buyer, which generally correlates to size but not always, the more likely he is to recognize andappreciate the value proposition. The smaller end of the market — a guy witha pickup truck and a tool belt — is not really looking for a value propositionto be provided by his insurer or his surety. He has different issues and is buying a more standard offer in the market. As you move up the spectrumand get more sophisticated buyers, you increasingly find customers who wanta relationship with their surety and insurer that’s more than a commodityrelationship. They want an alliance that results in the full benefit of what aninsurer, like Zurich, can provide. We get to know each other more deeply andare able to provide solutions in a more effective way. I really believe that’strue; and if you talk to our customer base, you will hear different articulationsof that same message of appreciation and recognition of the value.


FMI Quarterly: You’ve mentioned two trends — one, contractors are generallyaccepting more risk, and two, contractors are seeking a broader value propositionfrom their insurance provider. What other trends do you see?

Gray: We also see an increasing frequency in public/private partnerships.Often referred to as P3, or private finance initiatives (PFIs), it focuses onwhat have historically been government or quasi-government assets — roads,bridges and other types of infrastructure that typically either federal, state or local government has provided and paid for though its tax base. P3s movethose assets to a quasi-public state in which the private sector provides thesolution. This is a trend of privatizing public assets and providing a consortiumwith the opportunity to charge a user fee for them. It provides a huge opportunity for contractors as well as a lot of challenges. It also provides anopportunity for Zurich both on the insurance and surety side to design andaggregate products in new and different ways to respond to those issues. The arrangement presents a unique combination of construction risk — fromthe design and construction risks to the operational risks involved once theproject is completed to the financial risk.

Cheatham: With the credit crisis today, the pressures are going to build onmany parts of the financial industry to find other revenue streams. It is going toactually encourage the Wall Street spectrum of companies to engage thesetypes of quasi-public ventures so that they can manage the financing and

become bigger players generating asolid return on investment. The daysof the subprime are gone. The credit crisis is going to add moreand more pressure to generate revenue streams. That’s positive forthe construction industry, but it canalso be negative. If you analyzeEuropean projects, some of thosequasi-public projects have failed.Every new project is going torequire evaluation since the cash-flow projections are critical to theproject's completion and financialpackage. This is an opportunity for asignificant source of business forZurich, but at the same time, it maybe a high risk for the constructionindustry and surety. This involvesmore than toll roads. In Europe, it’s

moving all the way down through school systems, through health care buildings,through retirement villages — you name it. It’s truly generating a revenuestream all the way through the infrastructure system.

Gray: Europe is a great model for us to learn from. It also showcases Zurich’s

Every new project isgoing to require evaluation since the cash flow projectionsare critical to the project's completion and financial package. —BILL CHEATHAM


leadership in the market. We were early in the United Kingdom in providing a proposition to respond to projects. Many of these projects were insured by Zurich.

Cheatham: Zurich already writes a significant number of internationalaccounts either for insurance and/or surety.

Gray: Absolutely. We are hoping that we can migrate some of the learningachieved through our leadership position in the United Kingdom to this typeof work in the North American marketplace as we move forward. The furthercomplication, of course, is that in the United States, with all the differentstate regulations, you end up with potentially 50 or more different types ofsolutions for essentially the same set of issues.

In the U.K., it tended to centralize around more of a single type of a solutionas it has in other parts of the world where this has really taken off. We hopea few models will emerge here in the United States that the various publicentities will coalesce around.

FMI Quarterly: Does Zurich expectto see the construction insurancemarket harden or soften in the nearto medium future?

Gray: I’ll choose a completely different term. I think we are goingto see it stabilize. By that, I mean weare already seeing the marketplacerespond to the individual customer.We are seeing contractors who havehad good performance, managedtheir risks well and had a reductionin their losses get the benefit of that commitment and result. So these contractors will see rate decreases, and that’s appropriate. They have workedhard and demonstrated their ability to manage loss. On the other hand, contractors who haven’t made improvements are seeing flat to modest rateincreases. The rate increase comes from inflation, which pushes some additional price. We have some customers who have poor loss experience,and those customers are receiving rate increases. So if you were to lookacross our entire book of business, there are a lot of ups and downs in there.We have customers receiving decreases, customers receiving increases andsome renewing at a flat or modest rate increase or decrease. There is a great spread in our book of business. The key to it really goes back to thecustomer’s experience.

Even though the insurance marketplace has softened, in broad terms, the lastfew years, there is still tremendous value for our contractors to be activelyand aggressively managing their risk and losses.

Europe is a great modelfor us to learn from. Italso showcases Zurich’sleadership in the market.—TERRY GRAY


FMI Quarterly: Then there is always reward in the marketplace for contractors doing that?

Gray: Always. The reward may not be as much today as it was five years ago,but it is absolutely important and essential for contractors to continue tomanage those losses down. If you extend that out into the future and look atan insurance market that may be in a hardening trend, those contractors who have managed their losses aggressively down through all parts of theinsurance cycle will receive even more benefit. Their rates will not be as dramatically affected as those contractors who have not done as good a jobin managing their risk.

FMI Quarterly: What trends or innovative products can you highlight for our readers?

Gray: Though Subguard® has been in the market since 1996, it is still oftenreferred to as a new product in the insurance marketplace. It is a well-established, accepted and clearly credible product. Subguard® has performedvery well for us, as we hoped and expected it would. We have seen a significant increase in the product’s customer base in every year since itsintroduction. Our customers are very satisfied with the results that they areachieving — both directly, in their ability to manage their contractors and tofollow up exposures more effectively and efficiently and indirectly, in theiroperations. These customers typically have fine-tuned their processesaround the selection and management of subcontractors that have giventhem a broader operational improvement (a direct benefit they receive fromthe product). So the direct and indirect benefits to our customers have metor exceeded their expectations in almost all cases.

Another thing we sometimes hear in the market is that there have beenclaims in Subguard®. We actually expected there would be claims, and thefact that we have had claims and successfully paid those claims helps to build the product’s credibility because it does what we said it would do. It isnot surety, and there should be no confusion about that. Our customers, likeall customers, can vote with their feet. Our retention in Subguard® is veryhigh. We almost never lose a Subguard® customer. The only cases where wehave are ones in which the customer has been acquired by somebody whodidn’t have the product and we haven’t been able to sell to the acquiringcompany yet.

Overall, the product is performing as we expected it would, and our customers’satisfaction levels and benefits realized exceed expectations. We continue tobe very bullish on the future of Subguard® as an alternative tool for generalcontractors to manage the risk of subcontractor nonperformance.

The construction industry is one that continues to evolve and innovate. Zurichis well-positioned to continue to innovate, evolve and provide meaningfulsupport for this industry going forward. We are committed to continuing to


be an insurer and a surety to the construction industry. The creation of theindustry practice group at the beginning of this year is just one more clearexample of our commitment to construction — Zurich’s commitment to construction not only on a North American basis, but also on a worldwide basis.

FMI Quarterly: What is Zurich’s view of the current market direction of suretyof large and midsize contractors?

Cheatham: Overall, the industry’s results are very favorable. I think it shows the efforts of two or three years of the industry trying to correct acycle mentality. Zurich Surety has merely experienced an extension of the

consistency and stability that it provides customers. It is because ofa very focused approach in trying tomanage the business and listeningto our customers. Our customerstold us: “Don’t take losses becausewe need your capacity.” We tried tolisten to our customers and developa program that complements theconstruction trade industry overall.

As far as direction for the large tomidsize market, we’re not changing.We are a consistent player in themarket. We want broad-based customer segmentation. Wedesigned our entire infrastructureand field operations around the customer. Our senior managementteam is focused around customersegments. Everything is built aroundidentifying customer needs, taking a product to the market that meetsthose needs and then executing it.

As a result, we are still growing. We grew last year by approximately 5%. Ouraverage growth over the last eight years is approaching 16%. The profitabilityis very strong.

FMI Quarterly: What impact is the credit crisis having on the constructionmarketplace as it relates to surety?

Cheatham: I’ll break it into segments. Let’s start with the contractor customersthemselves. Very simply, the terms and conditions in their loan agreementsare much harsher than they were a few years ago. Lending institutions aretightening their covenants, placing more restrictions on the contractor. Thatforces us to manage our relationship a bit closer. Actually, that’s how we buildour base, through close relationships with our customers. We are literally

Our customers told us:“Don’t take lossesbecause we need yourcapacity.” We tried to listen to our customersand develop a programthat complements theconstruction tradeindustry overall.—BILL CHEATHAM


drilling into and reviewing the loans and security documents with the customer so that we understand what the risk is to the customer and us.Then we advise them appropriately.

Next, we look at it from the owner’s perspective and think through theirinterest in building projects. I will tell you that, from the public side, 2008 isan ongoing strong market at the local, state and federal levels. But there are 25 states that have already projected deficit budgets in 2009. They willhave to make adjustments. So we are monitoring closely, because we have tounderstand that risk. We are already seeing geographical segments of the

market with increases in the numberof bidders on projects because ofthe tightening homebuilding residential-market segments andslowing economy. The competitionis driving down the margins in themid-market segment. We think thatplaces more risk on the surety.

Large projects continue to be available. Most of our large accountsare saying there remain strongdemands. They are in a better position to manage the opportunitiesand focus on individual projects.Actually, I see this as an opportunityfor contractors in a slowing economic cycle to evaluate theirorganization and strengthen themselves by analyzing theirstrengths and weaknesses, be itpeople, infrastructure or whatever.It’s a chance to regroup and look forthe next cycle opportunity. Properly

managed, the better contractors weather good or bad times. I am not as concerned about our surety position or results as much as our process andselectivity in identifying the right customers.

FMI Quarterly: So the impact is being felt in the area of the financial marketthat provides the liquidity that enables the financing of these projects?

Cheatham: Absolutely.

FMI Quarterly: Have you seen an increase in losses yet?

Cheatham: I think Zurich Surety is an anomaly. We are proactively managingour risk exposures. Obviously, we didn’t anticipate what subprime and CDOscontributed, but at the same time, we recognized that there were financial

Properly managed, thebetter contractors weathergood or bad times. I am not as concernedabout our surety position or results asmuch as our process andselectivity in identifyingthe right customers.—BILL CHEATHAM


issues out there. We honestly arenot experiencing the frequencyincrease that we hear about. We are still managing our portfolio profitably. It is primarily because ofcareful selection and wanting tobring a product to a select group ofpeople. We are trying to be cautiousabout how we manage it becausewe see this as credit not insurance.Zurich is not experiencing the influxof problems. We are monitoring thehomebuilders segment extremelyclosely. We still don’t have a goodread on the impact that this is goingto have on the surety industry. I do have some concerns about it

because of the aggregation of exposures by re-insurers on some accounts.All the regulatory bodies have different statutes and ordinances that have tobe interpreted as to each individual bond. Right now we are managing that,and that line is still profitable for us.

FMI Quarterly: Are there specific sectors or geographic areas with significantdeviation from the overall market or more than what you expected?

Cheatham: Not really. We anticipated geographical impact. We have a solid group of senior people, and we analyzed our accounts very early onrecognizing what the risks were, and we managed them appropriately. Thereare regions that are obviously being more adversely impacted by residentialbecause of the aggressiveness of the owners and developers in those markets. News media covers all of this for you openly. We approached itunderstanding very clearly what we had in front of us. However, our marketingposition started with a defined strategy, and we did not waiver.

One area that helps differentiate Zurich from our competitors is our claimdepartment. We have the best claim people in the industry. Jointly, throughunderwriting and claim working closely, we provide a risk managementapproach to the business.

FMI Quarterly: How do you see the next six to 12 months in the constructionmarket? What is Zurich’s approach?

Cheatham: I don’t see our underwriting posture changing, as we are veryconsistent. We are still growing. I do see the surety industry itself potentiallyat risk. As the product is identified for its strong results over the last two years,there will be added pressure to grow that line of business. We are alreadyseeing some adjustments in terms, conditions and rates on an individual-casebasis. It does not appear to be an underwriting policy change by any one

One area that helps differentiate Zurichfrom our competitors isour claim department.We have the best claimpeople in the industry.—BILL CHEATHAM


company. It has been a very favorable market over the last seven or eightyears for Zurich Surety. We are still picking up the best accounts in the construction industry as customers.

Will the industry have problems? I’m expecting it will. I see the problems forthose who play more in the small- to mid-market and for those who don’t have a balanced book of business. One of the reasons reinsurers like us isbecause we have a very diversified book of business. As a result, we weatherunderwriting cycles better. That’s a management philosophy based on leadership that has been with Zurich Surety over many decades.

FMI Quarterly: You mentioned a specific project where letter of credit wasused instead of surety. Talk about the impact of competitive products and inwhat niches they are more competitive than your product.

Cheatham: I must admit I am probably naive and biased on this subject. Firstof all, I don’t think alternative products like personal surety can compete withcorporate surety. I don’t see the protection to the owner or the contractor. I think it is high-risk, but it is an alternative product and an option for the customer. In regards to other alternative products out there, LOCs havealways been there. The problem you have managing businesses to LOCs isthat they really don’t provide the same protection. They don’t have claimdepartments. They don’t protect subcontractors. A bond provides muchbroader protection than most of these other alternative products. It’s a matter

of sitting down and really analyzingwhat a bond does compared withalternative products. That’s why I am not in fear of competing with alternative products.

FMI Quarterly: Will the trend oflarge contractors using permanentarrangements continue? If so, whatis the impact to Zurich?

Cheatham: I don’t see it as a trend.I think it is used more commonlytoday because the projects are solarge that contractors want to spread the risk, just like Zurich uses reinsurance to de-leverage riskexposure. It’s just a common-senseapproach to protecting your business.

We are seeing more joint ventures because projects are jumbo. We are seeingmore co-surety because projects are requiring larger capacity. An account can require up to $5 billion or $6 billion of surety capacity. So the sureties are managing risk exposure just like the contractors. They are spreading therisk by having co-surety and then layering it off through reinsurance. The

We are seeing morejoint ventures becauseprojects are jumbo. Weare seeing more co-suretybecause projects arerequiring larger capacity.—BILL CHEATHAM


contractors simply are applying the same principles by de-leveraging the risk in the projects. Honestly, it gives more protection to the owner becausehe has multiple large contractors or sureties participating. It is a joint andseveral-type position, so all partiesare participating at a high risk if there is a failure by any joint venture or co-surety participant.

FMI Quarterly: How does Zurich participate in that end of the market?

Cheatham: We are a significantplayer. We are very selective onwho we will chose for a co-suretypartner. It goes through several different levels of scrutiny withinZurich. You have to be extremelycareful because of the joint and several aspects. We are just as careful inreviewing joint ventures because we want the joint-venture partners to complement one another. There are few surety companies that have thetechnical skills to manage joint venture and co-surety risk. You don’t seemany surety companies competing for joint venture/co-surety because, fromtheir perspective, you have to have a tremendous amount of capital. A losswith a large-contract customer could have material impact on a company’sfinancial results.

FMI Quarterly: Bill, any closing comments?

Cheatham: Zurich Surety is trying to provide a very professional, high-levelservice to all sureties that require surety credit. We are expanding our cadreof high-end experienced people who provide the absolute best service forthe customers and help them grow their business. Our whole concept is we make more money when our customers grow and make more money.What we try to do is build a relationship so there is total confidence and thecustomers want to communicate with us. We are very upfront with the customers in trying to manage the risk exposure with them to de-leverage therisk for both them and Zurich Surety. At the same time, we balance it againstthe owner’s needs. I just wish more of the surety industry felt the same way.

FMI Quarterly: Terry and Bill, we thank you both for sharing your insightswith our readers regarding market shifts and Zurich’s response to thosechanging needs. ■

Our whole concept iswe make more moneywhen our customers growand make more money.—BILL CHEATHAM

S ustainable building. Going green. LEED. Eco-advantage.

All of these are hot buzzwords in today’s construction

industry. As green building becomes more socially and

economically popular, and, in many cases, required by some cities

and municipalities, chances are your company is providing training

to some of your employees to become LEED (Leadership in Energy

and Environmental Design) certified. But what sort of return on

investment will your company realize, if any? Can your company be

a good custodian of the earth while still building its bottom line?

The U.S. Green Building Council (USGBC) developed LEED in 2000

through a consensus-based process. The program is a green building rating systemfor buildings of all types and size. LEED certification offers third-party validationof a project’s green features and verifies that the building is operating the way inwhich it was designed. According to the USGBC, “LEED is a point-based systemwhere projects earn LEED points for satisfying specific green building criteria.Within each of the six LEED credit categories, projects must satisfy particular

By Kelley Chisholm

Saving the Planet, OneBuilding at a Time: Is LEEDAccreditation Worth It?Two companies experienced in green building help to answer thequestion: Should your company start taking on green projects if it hasn’t already?

54 ■ saving the planet, one building at a time: is leed accreditation worth it?

prerequisites and earn points. The six categories include Sustainable Sites, WaterEfficiency, Energy & Atmosphere, Materials and Resources, Indoor EnvironmentalQuality and Innovation in Design. (Projects can earn ID points for green buildinginnovations.)The number of points the project earns determines the level of LEEDcertification the project receives. LEED certification is available in four progressivelevels: Certified, Silver, Gold and Platinum.1 There are 69 possible points.

• Certified — 26–32 points • Silver — 33–38 points • Gold — 39–51 points • Platinum — 52–69 points

GREEN DRIVERSWhat are the key drivers for going green on certain projects? There are a

number of them — some of which have very tangible paybacks and others withintangible benefits that are significant just the same:

Cities require it. In the past few years, many cities such as Atlanta, Boston,Las Vegas, Dallas, Portland, etc., now require builders to adhere to LEED greenbuilding standards if they are financed or funded by the city. For example, inDecember 2003, the city of Atlanta passed Ordinance No.03-0-1693, requiring allcity-funded projects greater than 5,000 square feet or costing $2 million to meet aLEED Silver rating level.2

The permitting process is fast-tracked. Some cities and municipalities fasttrack the permitting process for green buildings. For example, San Diego; LosAngeles; Arlington Co., Va.; and Gainesville, Fla., all expedite permitting, just toname a few.3

Some states offer tax incentives. The development of LEED provides stateslike Connecticut, Maryland, New York and Oregon with a way to define greenbuilding and promote it through their tax codes. For instance, in 2004, Honolulupassed an ordinance that provides an exemption from real property taxes for oneyear on all new commercial, resort, hotel and industrial construction that achievesLEED certification.4

Tenants demand it. People want to live and work in buildings that have proper ventilation, temperature and noise control, and good light levels. Greenbuilders take these features into account, address the fact that different people have

different needs and guarantee thatbuildings are designed, constructedand commissioned to ensure they are healthy and energy-efficient fortheir occupants.

There is increased social and environmental pressure. As water and energy continue to become constrained resources, people areincreasingly selecting builders that areenvironmentally sensitive. Greenbuildings generally have less negative


impact on the environment than standard building. According to an article in The Harvard Business Review, the construction of green buildings, “minimizes on-site grading, saves natural resources by using alternative building materials andrecycles construction waste rather than sending truck after truck to landfills. Amajority of a green building’s interior spaces have natural lighting and outdoorviews, while highly efficient HVAC (heating, ventilating and air-conditioning) systems and low-VOC (volatile organic compound) materials likepaint, flooring and furniture create asuperior indoor air quality.”5

Going green lowers operating costs.Although green buildings may bemore expensive to build, they cost lessto run, in terms of maintenance, waterusage and energy consumption.According to the Autodesk/AIA 2007

Green Index (a survey of members ofthe American Institute of Architectson the practices and processes architects use that support the designof sustainable buildings), “70% ofarchitects say client demand is theleading driver of green building asowners and developers seek to reduceoperating costs. Architects are responding by significantly increasing their use ofhigh-efficiency HVAC systems and recycled building materials and turning tosoftware to model energy usage.”6 The Genzyme Center in Cambridge, Mass., is a good example of how green buildings have lower operating costs. In its first yearof operation, the 12-story LEED-Platinum building used 42% less energy and had34% less water consumption than standard buildings of comparable size.7

Green outperforms non-green in key areas such as occupancy, sale price andrental rates. According to a recent study by the CoStar Group, a commercial realestate information company in the United States and United Kingdom, LEEDbuildings command rent premiums of $11.24 per square foot over their non-LEEDpeers and have 3.8% higher occupancy. The study also indicates that Energy Starbuildings are selling for an average of $61 per square foot more than their peers,while LEED buildings command a remarkable $171 more per square foot.8

Green is a recruiting magnet. Some of the best young talent is going to thegreenest companies. According to an online survey of 1,800 young people conductedby two Boston-based companies, Cone Inc. and AMP Insights, 69% consider acompany’s social and environmental commitment when deciding where to shop,and 83% will trust a company more if it is socially/environmentally responsible.9

INDIVIDUAL EXPERIENCESFMI interviewed two construction firms dedicating themselves to

sustainable building to learn what ROI these companies are experiencing. GregCosko, president and CEO of Hathaway Dinwiddie, based in California, and

Although green buildings may be moreexpensive to build, they cost less to run, interms of maintenance,water usage and energy consumption.


Craig Datema, AIA, president ofTriangle Associates Inc., headquarteredin Grand Rapids, Mich., offered theirinsights on how building green hasimpacted their business.

FMI Quarterly: How long haveyou been involved in sustainablebuilding?

Cosko: Hathaway Dinwiddiestarted implementing formal recyclingprograms in the 1980s. Specifically, we implemented a sophisticated waste management process when constructing The Getty Center in Los Angeles, which started in 1989. In 1991, we started work on our first

major project with a formal sustainable emphasis. It was a prototype for energy-efficient buildings constructed for California State Automobile Association andPG&E, called ACT2.

Datema: We completed our first sustainable project in 2000, which was the LEED certified Herman Miller Marketplace office building. Since that time,Triangle has grown to become a leader in sustainable building practices. Our list of completed LEED certified projects has grown to become the largest in west Michigan and one of the largest in the country. We are proud of our accomplishments with notable projects including Michigan’s first LEED certifiedapartment complex, educational facility and hospital along with the nation’s firstLEED certified Hope Lodge for the American Cancer Society.

FMI Quarterly: Overall, what percent of your projects are green? Cosko: Almost all of our projects now involve green and sustainable practices

and approximately 30% to 50% of our annual revenue is from LEED Certified,Silver, Gold or Platinum projects.

Datema: On the majority of ourprojects, we discuss and include sustainable building practices. This hasbecome part of our normal course ofoperation. However, in 2007 projectsseeking LEED certification accountedfor 25% of our construction work.This percentage has been steadilyincreasing over the last several years.

FMI Quarterly: What are themain drivers to go green with some ofyour projects?

Cosko: Hathaway Dinwiddie has

Hathaway Dinwiddie is one ofCalifornia’s oldest and most respectedbuilders: Hathaway (established in 1923)and Dinwiddie (established in 1911). Aleader in the construction of advancedtechnology facilities, its expertise lies in sophisticated commercial office buildings, higher education andbio/pharmaceutical facilities as well ascontinuing the tradition of quality construction of office buildings, interiorimprovements, restorations and specialpurpose facilities. With approximately500 employees and $835 million in salesin 2007, Hathaway Dinwiddie has longcommitted itself to sustainable and efficient building practices.

Triangle Associates Inc. is headquarteredin Grand Rapids, Mich., and is a leadingprovider of construction in Michiganwith more than $100 million in annualsales. Triangle provides constructionservices to meet the unique needs ofeach client specializing in health care, K-12, higher education, commercial,industrial, water plants and governmentfacilities. More than 180 employees,including 40 professionals, 8 LEEDCertified Professionals and more than100 field associates serve Triangle’s customers throughout Michigan.


gravitated toward green projects as part of a corporate culture grounded in integrity and social responsibility. We help our clients to build “sustainably” byemphasizing that green development offers owners and tenants reduced operatingcosts, improved sales and leasing rates, higher property values, reduced liabilityrisks, better health and productivity of workers, smoother permitting processesand improved environmental conditions.

Datema: Along with many of our clients, Triangle is dedicated to the protectionof the environment and conservation of natural resources. The primary objectivein adhering to green principles is that it is simply the right thing to do for ourenvironment. As part of our normal project planning process on all Triangle projects, we review green strategies and choices with our clients even if aclient is not specifically interested in pursuing LEED certification. We willuse and implement green buildingpractices to the extent that is beneficialto each individual project and client.As a normal course of operation, weimplement many basic green strategiessuch as building material recycling onall of our construction sites.

FMI Quarterly: Do you find that you have to convince your clientsto go green, or are they choosing towork with you based on your previousexperience?

Cosko: Most decisions to incorporate green elements are initiated by the customer, their tenants, the designprofessionals and us. Clients interested in sustainable features choose HathawayDinwiddie based on our past experience, our qualified teams, our ability to deliverprojects at outstanding value and our demonstrable knowledge of sustainable(green) practices.

Datema: Many of our clients who are interested in LEED certification fortheir projects choose Triangle for our vast experience and team expertise in thisarea. They rely on our expertise to ensure that the project not only meets but surpasses the requirements of certification while maintaining control of theirbudget constraints. However, often following the selection process and during pre-construction discussions, we learn that while our clients may not be interestedin gaining LEED certification, they are interested in using green or sustainabledesign and construction practices where it is appropriate for their project. This hasled us to implement a pre-construction process that always includes discussion onsustainable building practices.

FMI Quarterly: How many of your employees are LEED certified? Do youplan to have any others certified in the near future? Please expound on the trainingthey receive and the certification process.


Cosko: We have 51 LEED accredited professionals on staff, which amounts to nearly 20% of our total staff. We have an ongoing education process and incentive program to encourage continued growth and participation. Our accredited“Green Team” includes corporate officers, project managers, project engineers and superintendents. Our training program starts with provision of an extensive

information package, which hasUSGBC guides and internal HathawayDinwiddie training material. We oftenset up study groups that work togetherover about four to six weeks. Since2003, we have had ongoing trainingsessions with employees that discussgreen construction and review all ofthe LEED credits so that even non-accredited employees are familiar withthe concepts and understand theimpact of green building.

Datema: Eight of our team members are accredited, and we also

currently have another group of team members studying for upcoming testing. Asthe green building movement continues to spread, LEED certification for buildingswill become more commonplace in our industry. In the future, this demand willdrive LEED accreditation to become more of a professional expectation than adifferentiator for staff members.

It has always been our ultimate plan to have all project-related associatesbecome LEED accredited. The certification process is a rigorous one, so to meetthis goal, we have been working with our key project staff to assist them in theirpursuit of accreditation. Our approach has been focused on internal group training and providing the time and tools to assist our team members in thisprocess. We have a LEED committee led by our LEED manager. In addition toother duties, the committee is responsible for staff LEED training. Workingtogether, the committee monitors staff progress in the testing and accreditationprocess. The committee develops training manuals for use by team members, conducts internal training sessions and coordinates group study efforts. We alsohave sample USGBC tests that employees can use in preparation for testing.

FMI Quarterly: What is the ROI for having LEED certified staff? Cosko: The ROI is difficult to quantify as our training/accreditation costs are

direct expenses, yet the benefits are indirect. We believe green and sustainablebuilding practices are an integral part of excelling in the industry in the future,and we are incurring these costs regardless of immediate ROI.

Datema: The ROI is fourfold:

1. Having greater depth of expertise in this area gives us more credibility whenwe discuss our capabilities to our current and potential clients.

2. We are better equipped to handle the growing number of projects embracingsustainable practices or LEED certification.


3. Identifying and working towards 100% team member accreditation allowsus to maintain our leadership role in the industry.

4. Our LEED manager and each accredited team member are able to properlycommunicate and document all aspects of the project certification processto ensure consistency and implementation of all LEED requirements.

This gives our clients the confidence that they have the most experienced andknowledgeable team to ensure their project gains LEED certification.

FMI Quarterly: What have been your biggest challenges? Cosko: Although many clients are eager to build green, many do not start

the process early enough to maximize effectiveness. To avoid redesign or just toconsider all alternatives, the goal of building green should be included on DayNo. 1 of design and contracting. Costs are minimized the earlier green methodsare implemented.

Datema: The Lacks Cancer Center at St. Mary’s Health Hospital in GrandRapids posed unique challenges. As Michigan’s first hospital seeking LEED certification, the project was being designed and constructed at a time when theLEED certification process was still being developed and refined. Early on it wasclear to the project team that the criteria and documentation requirements from the USGBC hadnot been structured to accommodate a health care setting. The specializednature of the health care setting createdrestrictions for the project team as it attempted to implement many of the green strategies. Extensive productresearch as well as development ofunique building systems had to beaccomplished to meet the sometimesconflicting needs of the hospital andrequirements of the USGBC.

One of the most challenging types of projects on which to gain certification is historic renovations/restoration projects. The existing conditions andestablished building design inherent with this type of project, as well as the amountof work performed, type of existing and new products used and strict requirementsof meeting historical tax credit goals, are key factors affecting certification on historic renovations.

FMI Quarterly: What are your biggest success stories in terms of sustainablebuilding?

Cosko: Specifically, Stanford’s Y2E2 Building, the first of four buildings inStanford’s SEQ2, has been so successful that Stanford said, “This building broughta mandate from senior university management to design the three remainingbuildings in this new quad to the same level of sustainability.” The project has been

Although many clientsare eager to build green,many do not start theprocess early enough tomaximize effectiveness.—GREG COSKO


awarded the San Francisco Business Times’ “Best Green Building of the YearAward,” announced on Thursday, March 27, 2008, and written about nationally.

Datema: We consider our “biggest success” to be our first LEED project. At the time of the Herman Miller Marketplace office building project, we werenew to the process and did not have a full understanding of the details surroundinggreen construction, sustainable building practices, the LEED process and whatwas required to meet the requirements of certification. There was a huge learningcurve and investment of time and resources to guarantee success and ensure our

client’s satisfaction. We are proud tosay that our efforts achieved thesegoals, and the project was awarded agold-level certification. We have since implemented many company strategies to make both certificationand implementation easier and morecost-effective.

FMI Quarterly: Is there anythingelse you would like to share with FMI Quarterly readers?

Cosko: Based on proposals andtalking with others in the business,sustainable construction has become a significant part of the design and construction industries. Almost everyprospective customer is requestinginformation on our experience withsustainable building and soliciting our ideas and help in evaluating itsoptions.

Datema: Triangle has embraced asustainable building approach withinour corporate culture. Our success

stems from our culture and our client-centered approach to green building. Wework closely with our clients and their design professionals on every aspect of creating an environmentally friendly facility. We believe that green building is anopportunity to use resources efficiently while creating and constructing healthierbuildings. The process provides cost savings for our clients through improvedhuman health and productivity, lower-cost building operations and resource efficiency as it moves us closer to a sustainable future.

We are proud of our green building accomplishments, our long list of LEEDcertified projects and our role as a leader in the green building movement in westMichigan and across the country.

DECISIONS, DECISIONSShould your company start taking on green projects if it hasn’t already? Here

are some things to consider. The direct costs of becoming LEED certified are easy

Our success stems from our culture and ourclient-centered approachto green building. We work closely with our clients and their design professionals on every aspect of creating an environmentallyfriendly facility.—CRAIG DATEMA


enough to quantify. To determine how much it will cost to become LEED certifiedper employee, calculate training expenses, which include, but are not limited to,items such as instructor fees, training facilities, the employee’s salary while intraining, any materials needed and exam costs. After that, the ROI becomes harder to quantify since the benefits are less tangible and harder to measure. It isnot easy to put an exact figure on client confidence or a company’s credibility orleadership role due to LEED accreditation alone.

Green buildings initially cost more upfront to design and to build. Ultimately,the building owner may look strictly at the bottom-line financials in decidingwhether to go green.

Green is here to stay, and it’s quickly becoming the norm. Smart companiesrealize this and are taking the necessary steps to become competitive in this arena.Those companies that totally embrace sustainable building within their culturewill not only help their bottom lines, but also the environment. ■

Kelley Chisholm is a talent development consultant with FMI Corporation. She may be reached at

919.785.9215 or via e-mail at [email protected]

1 USGBC FAQ (http://www.usgbc.org/DisplayPage.aspx?CMSPageID=201)2 AIA. (2006). List of Cities Requiring LEED. Retrieved on April 14, 2008, from:

http://www.aia.org/static/state_local_resources/adv_sustainability/Green%20Rating%20Systems/Cities%20using%20LEED.pdf3 USGBC. (2008.) Summary of Government LEED® Incentives, February 2008. Retrieved on April 7, 2008 from:

https://www.usgbc.org/ShowFile.aspx?DocumentID=20214 USBG. (2008)5 Lockwood, C. (2006.) Building the Green Way. Harvard Business Review.6 Autodesk (2007). Sustainable by Design. Retrieved on April 14, 2008 from:

http://usa.autodesk.com/adsk/servlet/index?id=9484418&siteID=1231127 Lockwood, C. (2006). Building the Green Way. Harvard Business Review.8 Burr, A. (2008). CoStar Study Finds LEED, Energy Star Bldgs. Outperform Peers. USGBC. Retrieved on 4 ⁄ 15 ⁄ 08 from:

http://www.usgbc.org/News/USGBCInTheNewsDetails.aspx?ID=36379 Jayson, S. (2006). Generation Y Gets Involved. USA Today.

T he concept of green building has gone from a relative

new phenomenon just a decade ago to a major industry

topic in the last few years. The rapid growth of this trend

is due to increased interest in green building from both public and

private companies. In fact, between 2001 and 2008, U.S. Green Building

Council (USGBC) membership increased from 500 to 15,000 members.

Advances in the green building movement have been led in part by the development of the USGBC’s Leadership in Energy and Environmental Design(LEED) certification program. In 2002, LEED projects totaled 35 million squarefeet, while in 2007, this figure increased to more than 3.2 billion square feet.LEED provides a framework and guidelines for assessing building performanceand meeting sustainability goals in site development, water management, energy efficiency, materials selection and indoor air quality as well as innovation in design.Different LEED versions have varied scoring systems based on a set of requiredprerequisites and a variety of credits in each previously mentioned category.Buildings can qualify for four levels of certification: Certified, Silver, Gold orPlatinum. Buildings can be LEED registered during construction but cannot beLEED certified until they are completed. (See Exhibit 1.)

By Kevin Haynes and Heather Jones

Forecast Calls for Building Green in U.S.Nonresidential MarketsGrowth rates across the nonresidential building segmentsreveal construction industry stakeholders are beginning toembrace the green movement.

64 ■ forecast calls for building green in u.s. nonresidential markets

FMI predicts most nonresidential building segments will see double-digitgrowth rates for green construction in 2008. Between 2008 and 2012, total nonresidential green construction will grow by 32% to reach $26 billion in 2012.The three largest segments for nonresidential green building are office, educationaland health care. In 2008, these three segments will account for more than 80% oftotal nonresidential green construction. Green lodging will grow by 28% in 2008

to reach $458 million. This growth in lodging represents the largest increase fornonresidential green construction in 2008. (See Exhibit 2.)

25,000

20,000

15,000

10,000

In millions of current dollars

5,000

02001 02 03 04 05 06 07 2008

Value of Total Green Construction

OfficeEducationalHealth Care

Amusement and RecreationTransportationLodging

CommercialPublic SafetyManufacturing

Exhibit 1

Green ConstructionMarket Segmentation

44%

7%

29%

9%

2%

3%

100% = All Markets

2%2%

2%

Combined total of these 4 states represent 33% of all U.S. LEED certified projectsCombined total of these 7 states represent 2% of all U.S. LEED certified projects

78

68

6

149

30

14

5

4

1

2

46

10

43

0

0

3

7

3

1

9

19

6

12

30

5230

60

9

8

9 25

15

5152

26

351

86

38

11

86

48

01131125

9

Exhibit 2

U.S. Geographical Distribution of LEED Certified Projects

Source: U.S. Green Building Council


Green construction will be prevalent on both the East and West Coasts aswell as the Sun Belt region. California has the most LEED certified projects with149 followed by Pennsylvania, Washington and Oregon. These four states representnearly one-third of all U.S. LEED certified projects. Georgia with 51 projects, andMassachusetts with 48, are two of the next top-three states for certified projects.Interestingly, Michigan is the exception to this geographic distribution trend. TheGreat Lakes state has 60 LEED certified projects, which makes it the fifth highesttotal in the country. In contrast to the previously mentioned regions, green construction in the Great Plains is limited. Seven states (e.g., North Dakota, SouthDakota, Nebraska, Kansas, Oklahoma, Montana and Wyoming) in the GreatPlains have a combined 18 LEED certified projects or 2% of the nation’s total.

GREEN OFFICEGreen office construction is the largest nonresidential green building segment.

FMI expects total green office construction to be $8.7 billion in 2008. As thenation’s largest owner and operator of office buildings, the U.S. government hassignificantly influenced the green movement in the construction industry. Forexample, the government played a major role in the creation of the USGBC’sLEED guidelines, including funding a grant during its development stages.Federal, state and local governments own nearly 50% of all LEED certified projects,and more than 2,000 LEED registered government projects total more than 400

million square feet. Twelve federal agencies, including the U.S. General ServicesAdministration (GSA), have adopted LEED standards for their projects. Greenoffice construction will continue to increase as public buildings continue to serveas models of sustainability for the private sector. (See Exhibit 3.)

In addition to government office buildings, corporate office construction hasexperienced increased green building activity since 2002. This increase is a directresult of industry stakeholders realizing the financial, environmental and healthbenefits of green building. According to the USGBC, green building may increaseworker productivity by 15% and command rents 10% greater than average rates.Green building benefits, such as cleaner air and abundant natural light, will

2001 02 03 04 05 06 07 2008

Exhibit 3

Value of Green Office Construction

10,000

8,000

6,000

4,000

0


2,000


decrease employee sick days due to allergies and colds. Regarding the environment,the heating, cooling and powering of office space is responsible for nearly 40% of carbon dioxide emissions in the United States and more than 70% of total electricity usage, while office computers burn $1 billion worth of electricity peryear. Certain green building modifications, such as installation of automatic shut-offs for lighting and automatic settings to power down computers after 15minutes of idle time, can reduce energy use.

New York City is quickly becoming the nation’s center for green high-riseconstruction. The Bank of America Tower is the second tallest skyscraper in thecity, and it may soon become the greenest skyscraper in the world. Its builders hopeto earn USGBC Platinum certification. Building components include bamboofloors; large windows and glass inner walls that reduce lighting bills; rooftop

rainwater collections that decreasewater bills; and bike racks to encourageworkers to bike to work rather thandriving. The building’s green additionsshould pay for themselves within twoto four years through energy savings.Citi’s newly constructed office tower in Queens earned LEED Gold certification. Additional green officeprojects under way include the WorldTrade Center site and the New YorkTimes building. Rising constructioncosts at a rate of 1% each month maybe the major hindrance to green building. These increases will make itincreasingly difficult to sway skepticaldevelopers who are hesitant to pay agreen building premium.

GREEN EDUCATIONALThe education segment was one

of the first building segments toimplement green building practices for its construction programs. The

“No Child Left Behind Act of 2001” with its section on healthy, high-performingschools was the first major piece of legislation to include a provision for greenbuilding. Education owners are investing in green building techniques based onthis construction method’s positive environmental and health impacts as well as itscost effectiveness. Between 2008 and 2012, total green education construction willgrow by 44% to reach $9 billion, according to FMI. (See Exhibit 4.)

School buildings represent the largest construction segment in the UnitedStates at nearly $330 billion through 2010. Buildings overall are responsible for 39%of carbon dioxide emissions in the United States. The USGBC states that LEEDcertified buildings use 30% to 50% less energy, 40% less water and can reduceharmful carbon dioxide emissions. In addition to the environmental benefits,

School buildings represent the largestconstruction segment inthe United States atnearly $330 billionthrough 2010. Buildingsoverall are responsiblefor 39% of carbon dioxide emissions in theUnited States.


green facilities offer long-term cost savings and increase the well-being and productivity of students and teachers. According to the article, “Greening America’sSchools: Costs and Benefits 2006” by green building consultant Greg Kats, itcosts, on average, less than 2%, or about $3 per square foot, more to build a greenschool than to build a conventional school. And the payback occurs within oneyear of construction, based on energy savings alone. Finally, green design and construction can increase natural light, which not only saves energy but also hasbeen shown to improve student test scores.

The average age of U.S. K-12 facilities since their last major renovation is morethan 40 years. Aging facilities have prompted many school districts to undergomajor renovation and new construction programs. Since green educational facilities are a lower total cost alternative to traditional building programs, both K-12 school districts and higher-education institutions have started to use greenbuilding techniques on their campuses. Example education programs include theMassachusetts Technology Collaborative (MTC) and the Massachusetts SchoolBuilding Authority, which provide funding to help communities conserve energyand use clean-energy technologies to power schools. MTC’s Renewable EnergyTrust offers $15 million in design and construction grants to fund solar electricpanels, wind turbines and other clean-energy technologies as well as green building design and planning assistance at schools that meet new guidelines forenergy efficiency. More than 20 schools have participated in the pilot phase of theGreen Schools Initiative.

In addition to K-12 schools, many colleges and universities are increasinglyadopting green building programs. More than 30 higher-education institutions are committed to achieving LEED certification. These institutions include theUniversity of Connecticut, which requires all constructed buildings and renovationscosting more than $5 million to meet at least LEED Silver standards. At ClemsonUniversity, all facilities larger than 5,000 gross square feet and major capital renovations costing more than 50% of building replacement value must meet and acquire LEED Silver certification, at a minimum.

A potential obstacle to green building in education is a traditional lack of

2001 02 03 04 05 06 07 2008

Exhibit 4

Value of Green Educational Construction

7,000

6,000

5,000

4,000

0


3,000

2,000

1,000


planning for long-term project costs.In addition, many education ownersare still unaware of the benefits ofgreen construction. For the movementto continue gaining momentum ineducational construction, industrygroups must continue to promote the design and construction of greenschools and its impact on studenthealth and performance, school operational costs and the environment.

GREEN HEALTH CAREThere is an increasing trend

toward building green health carefacilities. FMI predicts total greenhealth care construction will grow toalmost $2 billion by 2009, a 70%increase from 2006. Green building isattractive to health care owners and operators for several reasons, including its financial, operational and

environmental benefits as well as the positive impact on patient health and recovery times. For example, productivity increases from building green can leadto earlier patient discharges of two to three days. Increased industry awareness ofthese benefits and the continued development of best-practices guides and ratingssystems, such as LEED for Health Care, will lead to more opportunities for greenhealth care facilities. (See Exhibit 5.)

The American Hospital Association reports that there are nearly 6,000

registered hospitals in the United States. The combined environmental impact ofthese hospitals is significant, ranking second only to manufacturing facilities in

2001 02 03 04 05 06 07 2008

Exhibit 5

Value of Green Health Care Construction

2,500

2,000

1,500

1,000

0


500

Green building is attractive to health careowners and operatorsfor several reasons,including its financial,operational and environmental benefitsas well as the positiveimpact on patient healthand recovery times.


electricity usage per square foot. The Consortium for Energy Efficiency reportsthat hospitals spend an average of $1.67 per square foot in electricity costs.Around-the-clock operations require high energy levels for ventilation, equipment,sterilization, laundry and food preparation and contribute to hospitals’ intensiveenergy use. Green buildings reduce the amount of energy used, which can reducegreenhouse gases and improve air quality.

In addition to the environmental benefits, reducing energy use can strengthena hospital’s bottom line and public image. Financial pressures constantly drive hospitals to seek ways to operate more efficiently. The Energy Star Financial ValueCalculator estimates that each dollar of energy savings is equivalent to a $20 increasein revenue. In response, an increasing number of health care owners and operatorsare becoming aware of green building and its impact on financial savings. Accordingto McGraw Hill Construction’s Healthcare Green Building SmartMarket Report,19% of survey respondents expect thattheir organization will be significantlyinvolved with green building in 2008, more than triple the 2007 level.Additional findings suggest that nearly70% of health care and hospitaladministrators understand that greenbuildings reduce energy use by morethan 10%.

As with the educational segment,the primary obstacle facing greenhealth care building is its perceivedhigh costs. A high initial capital investment, often required by energy-efficiencymeasures, has contributed to this perception, which makes green building lessattractive to hospitals with financial constraints. Low profit-margins and tight capital keep energy projects, which many view as optional, from being implemented.One way to overcome this obstacle is to promote the long-term energy savings ofgreen building as a method to cut costs without cutting services.

GREEN AMUSEMENT AND RECREATIONFMI expects green amusement and recreation construction will decrease in

2008 by 2% and continue to decline through 2011. In 2012, green amusement andrecreation construction will increase 18% as more and more industry stakeholdersaddress and adapt to the building interests of owners. For example, HOK Sport,one of the nation’s largest designers of major sports stadiums, in its guidebook tosustainable design included a section on sports arena design. The company hasalso advocated for the creation of a unique LEED program for stadiums and arenas.In response, the USGBC is working with several design firms to tailor LEED for stadium-specific design opportunities and is considering the adoption of an industry-specific program. This proposed program would make it easier fordesigners and builders to make a unique building type, like a stadium, meetLEED criteria. (See Exhibit 6.)

Attracting corporate sponsorship of stadiums is another potential driver ofgreen construction. Teams and organizations may look to implement sustainable


features in new or existing venues to meet the interest of corporate sponsors ingreen building. Interestingly, the most sustainable part of a stadium may not haveanything to do with the structure itself but with where it is located. Access to mass transit, reuse of an existing site and the overall impact on communities whereprojects are located will determine the stadium’s sustainability as much as its design.For example, the New Jersey Nets are planning to build a new stadium in Brooklyn,N.Y., that includes a $50 million cleanup of the existing, environmentally damagedsite, which will create eight acres of open space, surrounded by environmentallysustainable mixed-income housing and office buildings.

Finally, the new ballpark being constructed for the Washington Nationals may raise the bar for green stadiums. The $311 million Nationals Park will featurea 6,300-square-foot green roof over the concession stands, a field lighting systemthat achieves an energy savings of more than 20% and water systems that reducewater use by nearly 40% through low-flow fixtures. The most interesting featuremay be the water-filtering mechanism underneath the stadium that mimics wetlands by naturally filtering pollutants from the water in an effort to assist thelarger goal of restoring segments of the adjacent Anacostia River.

GREEN TRANSPORTATIONSince 2004, green transportation construction has grown by nearly $200

million to reach $604 million in 2007. In 2008, green transportation constructionwill increase by 11% to $673 million, according to FMI forecast data. Similar toother building segments, a challenge facing the use of green construction in thetransportation industry is its tendency to emphasize initial costs rather than long-term operational expenses. As with amusement and recreation, there is a lackof design standards and LEED guidelines, which complicates the green buildingprocess. In response to this need for incorporating sustainable development withtransportation construction, several organizations have developed targeted programs.The Green Airport Initiative (GAI), which was developed by the Clean AirPartnership, is designed to help airports achieve quick and measurable benefits in environmental quality and energy savings, and reduce conflicts with local

2001 02 03 04 05 06 07 2008

Exhibit 6

Value of Green Amusement and Recreation Construction

1,600

600

400

200

1,400

1,200

1,000

800

0



communities. Its goal is not just tomake airports greener but also toaccommodate their growth in a manner illustrating the principles ofsustainable development and creatingmore livable communities. The U.S.Environmental Protection Agency andparticipating airports, as well as severalother government agencies, supportthis program. (See Exhibit 7.)

In the past, environmental regulations and opposition from localcommunities have resulted in delayedor even canceled airport constructionprojects. For example, Boston’s LoganInternational Airport experienced a20-year delay in its plan to expand. Inan effort to accommodate communityconcerns over environmental issues,several of the recent airport expansionand improvement projects have used sustainable design strategies, most notablyLogan International Airport. Logan’s new Terminal A is the first airport terminalin the country to be LEED certified. The terminal used green building techniquessuch as energy-efficient HVAC equipment, construction waste and demolitionrecycling, a heat-reflecting roof and windows, low-flow faucets and waterless urinals and stormwater filtration. The new technology will save the airport nearly$300,000 in electricity costs and almost 2 million gallons of water. The Seattle-Tacoma International Airport has also utilized sustainable strategies, such as lighting and HVAC control systems. Finally, at the new Indianapolis airport terminal, HOK and the Syska Hennessy Group have designed a radiant coolingsystem into the building’s floor.

Similar to other buildingsegments, a challengefacing the use of greenconstruction in thetransportation industryis its tendency toemphasize initial costsrather than long-termoperational expenses.

2001 02 03 04 05 06 07 2008

Exhibit 7

Value of Green Transportation Construction

800

300

200

100

700

600

500

400

0



GREEN MANUFACTURINGBetween 2003 and 2007, green manufacturing construction grew 322% to

$354 million in 2007. During this time span, lodging and office were the onlynonresidential segments to increase by a larger percentage. Cities such as NewYork, Chicago and Houston saw a growing number of green manufacturing warehouses. Several of these buildings are being constructed by real estate investment trusts (REIT). For example, Liberty Property Trust has broken groundon the first two LEED-registered industrial buildings in Houston. REITs, such asLiberty Property, ProLogis, IDI and AMP Property, are trying to attract tenantsthat are educated in LEED certification and are looking for green spaces sincethey can lower operating costs and improve productivity. FMI expects growth ingreen manufacturing construction will continue to increase by 12% in 2008. (See Exhibit 8.)

Green manufacturing is about reducing or eliminating any harmful impact on the environment resulting from a company’s facilities. According to Larry Bliss,a LEED accredited professional working for General Motors, it also includes,“looking for new ways to increase energy efficiency, creating healthier spaces forour employees, minimizing our site disturbance and constructing with materialsthat are more beneficial to the environment.” General Motors’ Lansing DeltaTownship Assembly Plant in Lansing, Mich., was the first LEED Gold certifiedautomotive manufacturing plant in the world. The plant, designed and constructedby the Alberici Group, produces General Motors’ crossover vehicles. Over the first10 years of operations, the facility is expected to save more than 40 million gallonsof water and 30 million kWh of electricity, compared to traditional construction.Energy efficiency was designed into every system, resulting in energy costs that are45% lower than industry standards, with a projected savings of $1 million eachyear. On average, the initial investment of 2% in green building design, results inlife-cycle savings of 20% of the total construction costs, more than 10 times theupfront investment.

NRG Systems, a manufacturer of wind assessment systems, is another industrialcompany that has used green construction techniques. In 2004, the company built

2001 02 03 04 05 06 07 2008

Exhibit 8

Value of Green Manufacturing Construction

500

150

100

50

350

300

450

400

250

200

0



a 46,000-square-feet facility in Hinesburg, Vt., which incorporates environmentallysustainable practices and materials. Occupancy sensors minimize lighting needs.The building only uses one-fourth the energy of a typical building its size. NRGproduces 53% of its own electricity through solar photovoltaics and a wind turbinebehind the building. The building is LEED Gold certified and is one of only sixindustrial buildings like it in the world.

GREEN COMMERCIALGreen commercial building has recently gained more momentum with the

increased awareness and development of industry-specific standards for green construction. Both the U.S. EPA and the USGBC have developed standards forgreen commercial construction. The USGBC has created modified LEED certification pilot programs designed specifically for commercial construction,such as LEED for Retail and LEED for Retail Commercial Interiors. Justin Doak,manager of the USGBC’s LEED for Retail Program, has seen increased activity forgreen commercial construction over the last year and is working with participantson 70 projects that are LEED for Retail registered. Doak says that retailers aremaking moves to adopt sustainability and build it into their brand equity.Companies such as Target, REI, Subway and Whole Foods are leaders in commercial green building. In addition, there has been increased interest shownby retail developers, such as Regency Centers, Forest City, Macerich, Westfieldand Federal Realty. Green commercial construction, according to FMI, willincrease by 7% in 2008 to nearly $340 million. (See Exhibit 9.)

Currently, the USGBC is working on its Portfolio Program, which could have a significant impact on the commercial industry. The program is designed to allow owners to integrate the LEED green building rating system into new andexisting buildings in their portfolio in a cost-effective way without sacrificing thetechnical thoroughness and integrity of LEED. Participants in the programinclude Best Buy, Office Depot, Kohl’s, Starbucks, Bank of America, Wachovia,HSBC and Wells Fargo. Kohl’s recently announced that it will pursue LEED certification for each of its 80 stores in 28 states planned to break ground in 2008.

2001 02 03 04 05 06 07 2008

Exhibit 9

Value of Green Commercial Construction

500

150

100

50

350

300

450

400

250

200

0



The challenge facing this program is trying to streamline LEED across an entireportfolio and deciding how to cost effectively monitor that LEED elements arefollowed at each location.

In addition to multiretail establishments, large warehouse and distributioncenters with continuous operation can have significantly lower utility costs withbetter temperature control and lighting efficiency. As a result, companies aredemanding green facilities for their operating cost benefits. In response, manyREITs are building green to meet increasing demand. According to the ProgressiveInvestor, an industry newsletter, 41% of the 300 REITs in the United States areactively pursuing energy efficiency and green building upgrades and another 27%plan to do so. Tenant demand for green buildings is at a peak with occupancyrates expected to increase by almost 4% and rents by 3% in 2008.

A lack of available data makes it difficult to analyze the return on investmentof green commercial projects, especially from a customer sales standpoint.However, it can be expected that retailers that incorporate LEED will seeincreased sales. Customers are willing to stay longer in a store with good air andlighting. A heightened customer experience can lead to brand loyalty, which

entices many retailers to considergreen building. Until this data is produced, some developers will hesitate to produce sustainable buildingdesigns, fearing that higher initial costswill place them at a disadvantage fortenant competition.

GREEN LODGINGSince 2003, the lodging segment

has experienced the largest growth ratein green nonresidential construction.FMI data shows that during the previous four years, green lodging construction has grown from $24

million to $359 million in 2007. Thisfigure will continue to grow as morehotels become aware of green buildingtechniques and requirements. Formany hotel owners and operators, the

decision to build green is a confusing and a difficult step to make. As is the casewith several other nonresidential building segments, the lodging segment lacks aLEED rating system designed specifically for green lodging. In response to thisvoid, Marriott International has established an internal green council to examinewhat constitutes a green hotel. In 2001, the hotel chain joined the U.S. EPA’sEnergy Star program and has been given recognition for using lower-energy fluorescent lighting and reducing greenhouse-gas emissions. Marriott Internationalhas more than 200 properties with the Energy Star label, and it expects to increasethat number by 33 percent in 2008. In addition to Marriott, there are more than250 Energy Star-labeled hotels listed on the U.S. EPA’s Energy Star for Hospitality

Customers are willing tostay longer in a storewith good air and lighting.A heightened customerexperience can lead tobrand loyalty, whichentices many retailers toconsider green building.


web site. The majority of these listedhotels average 200 rooms but rangefrom 60 to more than 2,000 rooms.(See Exhibit 10.)

According to the InternationalEcotourism Society, an estimated 17 million U.S. travelers consider environmental factors when decidingwhich travel companies, includinghotels, to patronize. In response tomeeting increased customer demand,several worldwide hotel chains haveconstructed or plan to construct green

hotels. Hilton Hotels has several LEED certified hotels in its portfolio, includingthe Hilton Vancouver Washington. Starwood Hotels & Resorts Worldwideannounced that its new green brand, Element, which is described as an environmentally and socially conscious hotel, will open its first location in 2008

and plans to build 500 worldwide. In addition to the worldwide hotel chains, several smaller boutique hotels are also seeking LEED certification. For example,New York City’s Crosby Street Hotel will have 75 rooms and is expected to openby 2009. It will be one of the city’s first LEED certified hotel projects. Additionalgreen lodging properties include Austin’s Habitat Suites and the Orchard GardenHotel in San Francisco.

GREEN PUBLIC SAFETYBuilding green correctional facilities requires striking the right balance

between sustainability and safety and security. Due to the highly secured and rigidnature of correctional facilities, green building can be difficult. In addition, lowermaintenance and operational costs must offset initial higher construction costs in order to justify green building techniques. Many correctional owners and operators have used green construction practices. Since 2004, green public safety

2001 02 03 04 05 06 07 2008

Exhibit 10

Value of Green Lodging Construction

450

150

100

50

350

300

400

250

200

0



construction has grown 69% from $152 million to $257 million in 2007, accordingto FMI. (See Exhibit 11.)

Currently there are nearly 200 LEED certified prisons in the United States. In 2005, the medium-security Federal Correctional Institute in Butner, N.C.,became the first and only LEED certified federal prison. The total cost for theproject was $98 million and included more than 530,000 square feet of new construction and more than 850 cells. LEED points were awarded in all six programcategories. Moseley Architects worked with Hensel Phelps Construction on thisdesign-build facility. In 2007, the first juvenile justice facility to be awarded LEEDGold certification was completed by Hensel Phelps Construction and HOK inSan Leandro, Calif.

Finally, the Washington Department of Corrections is committed to achieving LEED accreditation for all new construction projects larger than 5,000

square feet and has constructed four LEED certified buildings. The state’s largestprison, Monroe Correctional Complex, became Washington’s first LEED certifiedprison in 2007. The $40 million complex includes 75 buildings, covering nearly

300 acres, and houses 2,500 inmates.Energy- and resource-efficient designcomponents of the facility include theutilization of natural lighting and rainwater harvesting.

CONCLUSIONS AND IMPLICATIONSConstruction industry stakeholders

are beginning to embrace the greenmovement and sustainable design forits environmental, economic and social advantages that benefit everyone,including owners, occupants and thegeneral public. According to FMI’sNonresidential Construction Index

2001 02 03 04 05 06 07 2008

Exhibit 11

Value of Green Public Safety Construction

450

150

100

50

350

300

400

250

200

0


As industry awarenessfor green building andits benefits continues toincrease, the amount ofgreen construction willcontinue to grow.


(NRCI), contractors report backlogs for green construction projects will growfrom 15% of total projects in 2008 to 40% in 2013. More owners than ever aredemanding that their building partners use green building techniques. In response,contractors are training their employees in green construction methods, and thereare an increasing number of LEED certified professionals. In 2007, more than15,000 design and construction professionals in the U.S. became certified throughUSGBC’s LEED Accredited Professionals program. Contractors that understandand utilize green building practices and products will have a competitive advantageover those that lack this knowledge. As industry awareness for green building andits benefits continues to increase, the amount of green construction will continueto grow. (See Exhibit 12.) ■

Kevin Haynes is a senior research analyst with FMI Corporation. He may be reached at 919.785.9275 or via

e-mail at [email protected]. Heather Jones is a construction economist with FMI Corporation. She may be

reached at 919.785.9335 or via e-mail at [email protected].

Exhibit 12

Construction Put in Place: Estimated for the United State — 3Q2007

NonresidentialBuildings

Lodging

Office

Commercial

Health Care

Educational

Public Safety

Amusement and Recreation

Transportation

Manufacturing

Total Nonresidential Buildings

28

1,564

68

241

644

125

437

312

51

3,471

22

1,232

70

406

1,586

150

500

382

60

4,408

24

1,719

118

516

2,439

171

534

402

84

6,007

36

2,748

144

670

3,061

196

580

433

138

8,008

94

3,700

206

878

3,696

232

606

462

224

10,098

193

5,102

250

1,182

4,365

272

1,197

544

307

13,413

286

6,942

328

1,552

5,399

334

1,315

622

379

17,157

383

9,460

393

1,921

6,084

389

1,412

705

440

21,186

2001 2002 2003 2004 2005 2006 2007 2008

Millions of current dollars

NonresidentialBuildings

Lodging

Office

Commercial

Health Care

Educational

Public Safety

Amusement and Recreation

Transportation

Manufacturing

–21

–21

2

69

146

20

14

22

17

9

39

70

27

54

14

7

5

41

50

60

22

30

25

14

9

8

65

160

35

43

31

21

18

4

7

62

106

38

21

35

18

17

97

18

37

48

36

31

31

24

23

10

14

23

34

36

20

24

13

17

7

13

16

2001 2002 2003 2004 2005 2006 2007 2008

Percent change from prior year—Current dollar basis

T he construction industry has experienced its fair share

of shortages and scarcity. Concrete and steel shortages

have both had recent deleterious effects on various

aspects of the construction industry relative to project cost and

schedule. Price stability is only one of the challenges a firm faces in

a volatile marketplace. Managing schedules, meeting customer

expectations and long-range planning are all examples of how material

scarcity in the construction industry further complicates an already

complicated process.

It is difficult to fathom that one of scarcest resources available to contractorstoday is not manufactured, mined or processed. The shortage of qualified fieldpersonnel represents the single greatest predicament facing contractors today. The effects of a diminished labor force are multi-faceted and extremely complexwhen considering how the problems affect other elements of the business. Poorlytrained and poorly led crews leads to mounting quality, safety and schedule issuesthat then forces firms to address the attrition of key customers while continuing

By Gregg Schoppman

Develop Them and They Will Stay

The greatest source of skilledlabor and field leaders will comefrom within, requiring firms to cultivate their own leaders andtechnicians in order to meet futureindustry demands.

80 ■ develop them and they will stay

to attract new ones. Training and developing talent in an organization appears adaunting and expensive affair when attempting to manage these increased costs.Unlike the aforementioned materials shortages where new mills and plants areconstructed to accommodate the market demand, the supply of qualified fieldlabor lacks such a bolstering injection.

THE SCARCITY OF LABOR AND ITS ROOTSConstruction leaders also face a distinctive shortage in field leadership. In

addition to the general shortage of field labor to do the work, firms are hamstrungwith their lack of experienced field supervision and foremen to lead the work.While no one should dismiss the need for competent field workers, an urgencyexists in identifying people to lead the field in a productive, efficient, safe andprofitable manner. Interestingly enough, the decline in the number of competentfield leaders is further exacerbated by aging and the impending retirement ofmany such individuals. The disparity in age amongst the personnel in the officeand field is common. It is familiar to see an average of 10 years age differencebetween a firm’s project management and its field supervision. On one hand, theveteran, more seasoned field supervision serves as excellent teachers for entry-levelproject engineers and junior-level project managers. Conversely, this does nothingto help the shortfall that firms will continue to experience without careful scrutinyof how they recruit, attract, train and cultivate future field personnel. To under-

stand the problem, it is important tolook deep at the root causes of howthis problem is perpetuated.

Construction schools and engineering programs have done asuperb job in training and educatingthe current generation of project engineers. Yet, it would be a fallacy tothink that graduates of these programsenter the workforce completely armedto deal with the challenging world of construction. Construction firmsare slowly realizing the benefits of mentoring and training in order toprotect these highly coveted humanassets. Compare this to the equivalenttraining grounds for the field. It would be false to say that vocational

and apprenticeship programs across the country are doing a poor job in training carpenters, electricians, sheet metal workers, etc. In fact, one could argue thattechnology has enabled these programs to do a more effective job in teachingthese tradesmen. Digging deeper, it becomes apparent that high school studentsdo not lack the ability or the resources to do well in these programs. Rather, theysimply lack the desire to enter these programs. Industry pundits have conductedstudies on the attractiveness of the construction industry to graduating high schoolseniors. While attorney, doctor and engineer always surface as the most au courant

In addition to the generalshortage of field labor to do the work, firms are hamstrung with theirlack of experienced fieldsupervision and foremento lead the work.


of professions, construction tradesconspicuously dwell at the bottom ofmost lists. Not everyone is suited orskilled to endure medical school.However, it may be the increase intechnology-related positions that haveprovided would-be constructiontradesmen an alternative. Imagine thealternatives: Work in an air-conditionedoffice environment at a call centerwith a computer, consistent scheduleand seemingly limitless personal growthpotential or endure searing/chillingtemperatures while exerting considerable

energy-framing homes or installing sewer lines in 10-foot deep trenches completewith all of the safety hazards and lack of formal career path and upward mobility.It quickly becomes clear that the allure of being a construction worker does notcarry the same charm as it did 50 years ago. Times are changing, and it would be asafe assumption to say that the supply of construction labor lags demand with nosolution on the horizon.

With supply on the decline, firms must realign their strategy. The constructionindustry is extremely competitive in terms of client acquisition, and the battle forlabor resources is becoming equally as heated. Exhibit 1 embodies this struggle in asimple economic model.

It is easy to see that as the demand for labor increases and the supply decreasesover time, wages steadily increase commensurately. Over the long term, wagesbecome inflated. It is important to note that the one point that this graph cannotaccount for is the quality of the labor. As wages increase for the high-quality producers, so does it for the lower-quality producer. Now firms are subjected to

Exhibit 1

Economic Model Demonstrating the Scarcity of Labor

Demand

Quantity of LaborQuantity of Labor

Illustration ofThe Law of Supply and Demand Model

Illustration Depicting theDecrease in the Supply of Qualified Field

Labor and the Increase in Demand of Qualified Field Labor

Pric

e (d

olla

rs)

Pric

e (d

olla

rs)

Supply

Demand

Supply

NewDemand

NewSupply

IncreaseLabor Costs


endure this shortage while dealing with higher project costs. Fortunately, even asthe firm experiences these wage increases, so does the competition. However, theopportunity to gain a competitive advantage disintegrates. Firms need to consideralternate methods to gain an edge on their competitors.

This same phenomenon exists amongst the firm’s management. However,firms are engaging in a more proactive approach to deal with this challenge.Consider the annual spend of firms to train and cultivate project engineers and

managers. Newer generations of collegegraduates are seeking much more than competitive salaries from theiremployers. Most want to know howthey are going to be developed andtrained and ultimately, their careerpath within the firm. Firms are forcedto dedicate the appropriate resourcesto ensure they can attract and retainthese “superstar” graduates or losethem to the competition. In practice,great firms that employ this tactic typically have the best and brightestproject managers. No one can argue, a bright and competent project manager will have direct impact onthe profitability of a project and thegrowth of the firm. However, firmsneed to recognize that the core purposeof management is to support andrevolve around the actions taken in thefield by the crews and their supervision.The project manager serves the crew.The accounting department serves thecrew. The firm exists because of the

crew. This paradigm is not new to the industry, but represents a hard concept tograsp. The builders of the project sustain the business. With this guiding principlein mind, what percentage of the budget is portioned to cultivate the core of thebusiness? What is being done to invest in the field’s future and training?

EVALUATING FUTURE LEADERSMore often than not, most construction superintendents did not enter the

workforce as superintendents. They began as general laborers or carpenters, exhibited traits that separated them from their peers and rose through the ranks.Top producers may still continue to be identified and promoted in this manner.While the talent pool may appear thinner than it did 10, 20 or 30 years ago, thecritical step that is missing is a consistent methodology to identify those individualswith potential. Often carpenters, operators, finishers, etc., that express some levelof initiative or superior technical ability are promoted to foremen and so on. Their promotion often comes at the encouragement of some superintendent to

Newer generations of college graduates are seeking much morethan competitive salariesfrom their employers.Most want to know how they are going to be developed andtrained and ultimately,their career path within the firm.


senior management or through theindividual’s own tenaciousness anddrive. However, other individuals withequal potential, but lacking the rightforum to exhibit their talents, may beignored or discarded. It is evident thatthis manner of promotion also has the potential to create an invidious environment amongst the rank andfile. The same need for a career pathexists at the field level as it does in theoffice. Some people will argue that this

timeless method of hiring/promotion has worked for decades, and plenty of qualityemployees have been found in this manner. They themselves may have ascendedin this fashion. Finding quality people in the future will require a more innovativeapproach. A “hit-or-miss” approach to finding future leaders is not only risky butmay fail to identify many other master tradesmen. After all, if the firm is dependenton the field, why not invest in its growth?

The first step to proactively managing the human resource component of theconstruction business is to plot a career path for every position within the firm.This means every position from laborer to superintendent has a defined set ofexpectations and guiding trajectory through the mastery of certain skill sets. Thecareer path assists not only the individual but also the firm in identifying futureleaders. Exhibit 2 provides a conceptual sketch of the skill set mastery process.

Climbing this “career staircase” would require satisfactory completion ofnumerous critical skills sets complementary to the current position. A person’sfoibles and inadequacies can be identified and appropriate training can take placeto educate and reinforce. The key to a successful program will be to send the message that the firm is not only serious about the program but is committed tothe development of every employee.

Exhibit 2

Laborer� Employee handbook

� General OSHA

33

� Tool and equipment usage

� Cross-training opportunities

Career Path Skill Set Mastery

Foreman� Scheduling

� Daily huddle

� Look-ahead planning

� Material ordering

� Advanced layout

Operator/Carpenter� Basic layout

� Basic maintenance of tools and equipment

� General welding

� Competent person


Measuring employeeprogress through compli-ance graphics will be one way of providing thenecessary feedback to theentire staff. An exampleof a typical graph is illustrated in Exhibit 3.

This simple metricdemonstrates the opportunities for fielddevelopment comparedto the firm’s actual performance. For example,the firm employs fouroperators. Within thefirm’s growth program,there are 15 modules or

skill sets required to achieve a promotion of some kind. According to the data collected, within a year’s time, there are 60 total opportunities for growth (i.e. four operators x 15 modules = 60 opportunities). By the end of March, 10 moduleswere completed. Similar graphs can be developed for all positions to illustratecompliance. This aggregate total can be filtered further to examine specific positionperformance as well as individual performance. Exhibit 4 illustrates the performanceof the operators on each skill set.

In this case, three of the four operators have mastered skill sets four and eight.Upper management can quickly review this data and use it to examine the firm’sperformance relative to the skill sets complete and not complete. For example, ifthe firm is continuing to perform unproductively because of poor daily planning

0

Total career development opportunities

10 20 30 40 50 60

June

Exhibit 3

Operators: Career DevelopmentCompletedTarget

MayApril

March

February

January

December

November

October

September

August

July

3

4

2

1

0

Skill Set Number

1 2 43 5 6 7 8 9 1110 12 13 14 15

Goal = 60 skill setsTotal to date (March) = 10 skill sets

Number of Operators

Exhibit 4

Operators: Skill Sets Mastery GraphMastered skill sets


and substandard short-interval planning, it may be because employees’ haven’t yetfully mastered this skill set. Exhibit 5 examines the performance of each individual.

Keep in mind that this tool is as much a training and development tool forthe individual as it is a tool to aid in identifying top producers within the firm. By monitoring individual performance, management can make conscious humanresource decisions and mitigate the risk of using ill-trained personnel on complicatedconstruction projects.

Many people will reject this system, finding the strict adherence to their professional growth bothersome and too rigid. Their caviling is a flag that they are not only wrong for promotion and advancement but also wrong for the firm.Once again, this program is as much for them as it is for the good of the firm.This same structured program can be used as a recruiting tool to help capturesome of the precious supply of labor.

While some people may not be right for the firm and will filter themselves outthrough this process, not every person in the field is qualified to be a foreman orsuperintendent. The objective is not to simply pan for the most desirable candidatesand toss away the rest. Rather, the aimis to build people, including those atthe crew level in order to have thegreatest technicians and leaders in all positions. It is an inalienable truththat some individuals can be greattechnicians, but lack the business acumen and communicative abilityrequired to be a leader. Years ago, it may have been acceptable to be a “great builder” but be a “weak business person.” Now more than ever,superintendents need to be exceptionalbusiness people. In light of the competitive margins, managing projects with the bottom line in mindis paramount. This doesn’t mean that a construction firm’s superintendents andforemen need to be enrolled in the local university’s MBA or CPA program.Simply put, the best leaders in the field understand that what they do in the fieldhas a direct correlation to the profitability of the firm. Furthermore, we shouldnot abandon those workers who do not have the desire or ability to reach the nextlevel. It is just as important to continue to motivate and challenge people that

The aim is to build people, including thoseat the crew level in orderto have the greatesttechnicians and leadersin all positions.

5/15 33%

Exhibit 5

Individual Performance – Operator, “Joe Digger”

Skill Set

Status

Joe Digger Position OperatorCurrentAccomplishmentEmployee

11 12 13 14 156 7 8 9 101 2 3 4 5


have their goals and futures aligned with the firm but cannot physically or mentallyachieve the next level. Retention of these individuals is also important from aresource perspective. Further, by retaining these tradesmen, it promulgates themessage that the firm is an employer of choice for those that are great at their trade,making the firm desirable to other tradesmen with equal ability. A career path,however high or low the target may be, will also require the investment of training.

CULTIVATING THE NEXT GENERATION OF FIELD LEADERSTraining at the lowest levels within the firm provides employees at this

level with incentive and growth opportunity while providing management withopportunities to screen the next generation of foremen and superintendents. Allof the aforementioned skill sets require that employees receive some exposure tonot only the basic principles but also to the organization’s procedures and protocol. Exhibit 6 demonstrates a three-tiered training methodology that givestradesmen the opportunity to educate themselves while allowing management the opportunity to identify key producers and potential leaders. Within Tier 1,tradespeople are given the opportunity to learn specific operational skills. Tiers 2and 3 begin to indoctrinate the next level of employee to more leadership/businessskills directly associated with their position. The more technical subjects shouldinclude interpersonal training such as “communication” and “negotiating skills,”specifically suited to the needs of the position.

Cross training is another beneficial training tactic. While not every companywill be able to do this (for example, contractors operating under union guidelines),

Exhibit 6

Field Training Pyramid

BusinessProcesses

• Business Development• Contracts• Accounting Principles

Construction Processes

• Scheduling• Closeout

• Productivity Principles• Integration/Coordination

Technical Skills

• Equipment Operation • Equipment/Tool Maintenance • General Construction Technologies

Tier 3Cultivate and Retain Leaders

Identify Motivated LeadersTier 2

Identify KeyProducers

Tier 1

Soft Skills I

• Communication • Team Building

Soft Skills I

• Leadership • Motivation • Negotiation


those that do reap several benefits. We have already illustrated the scarcity of laborand its affects on the various trades. By cross training individuals, firms can leveragetheir ability to do work while minimizing their reliance on multiple streams oftradesmen in short supply. Of course, we can’t expect concrete finishers to becomeexpert trim carpenters or bulldozer operators to become electricians though a single training session. However, with their innate technical ability, these workersmay be able to help mitigate problems and find solutions not easily seen by theircounterparts. Further, this training gives individuals a chance to see if their trueabilities fit better within another discipline that would ultimately servethe firm better. In some cases, peopleperform their current work simplybecause of their lack of knowledgeabout better options. Exhibit 7illustrates a firm-wide strategy fordeveloping talent.

Some will argue that spendingtime and money on career advancementand training for their employees, particularly in the field, is a waste ofenergy and resources. Human resourcedepartments may be viewed as unnecessary overhead that is onlyneeded in large sophisticated companies.Regardless of whether the training and career path planning is conducted solelyin-house or with the assistance of industry experts, some level of investment isrequired. However, this investment is in a precious resource that is one of the firm’smost important. In order to manage and lead construction firms in this generation,the greatest source of skilled labor and field leaders will come from within. It willbe requisite for firms to cultivate their own leaders and technicians in order tomeet the industry demands of the future. ■

Gregg Schoppman is a senior consultant with FMI’s Tampa office. He may be reached at 813.636.1259 or


Exhibit 7

Labor Scarcity Strategy

Become theEmployer of ChoiceRetain

Top P

roducers

Attract

Top Producersand Measure

Train, Monitor

Career Path

Define a Top Producer

s

Invest in

Successful Strategyfor

Labor Scarcity

Doc Fails, founder of FMI, identified FMI’s “cause” in

the construction industry more than 50 years ago. He

viewed the construction industry as very high risk with

low return on investment. Simply stated, for the risk contractors take,

they do not make enough money. He took up this industry condition

and envisioned an organization that built value for the entire

construction industry.

This central theme continues to evolve after more than 50 years and as industry conditions change. The organization that Doc and his partners builttoday is a consulting firm with offices in Raleigh, Tampa, Phoenix, Napa andDenver, focused on building value for the worldwide construction industry and itsleading organizations. Doc inspired his employees with this vision. Several earlyemployees became his partners and continue to build on this vision, inspiringpeople inside and outside of the company and the construction industry.

Pause here and recall your company’s vision statement. If you cannot rememberit or do not have a vision statement, this is your first sign of trouble. Vision statementsneed to be “unforgettable.” The following highlights vision and mission requirementsand their purpose in the organizational development and the role of leadership.

By Ken Roper

What Is All That MumboJumbo About Vision andMission Statements?

More than a wordsmith exercise,vision and mission statements are leadership tools that providefocus and motivation.

90 ■ what is all that mumbo jumbo about vision and mission statements?

VISIONSearch the Internet for “vision statements” and you will receive almost one

million hits. Sites include “simple methods for writing your vision statement” to “the three statements that will change your world.” For $24.95, you can buy software online to write your company’s vision. The Dilbert web site(http://www.dilbert.com/comics/dilbert/games/career/bin/ms.cgi) has a wonderfulgame to help you develop your vision and mission statement by simply rearranging,verbs, nouns and adjectives that provide a wordsmithing pundit’s dream. For somecompanies, the vision statement of the firm is nothing more than a motto on awall or a statement in the employee manual. Some users have continued to marginalize the business vision, by failing to understand the power of a unifyingand compelling vision in motivating and inspiring the people those users wouldlead. The vision is not simply wording, but the passion of the leaders that bringthe vision to reality.

The strategic direction of an organization is fundamental to corporate success; it all starts with answering the question of: What do we aspire to createand build with this business in the future? Vision is the foundation of strategy aswell as the compass heading of your company. One client, in particular, beganarticulating its vision as being the first choice for construction services, with the aimof dominating the regional market. The client’s strategic initiatives aligned with itsvision. Over a period of 10 years, the company’s commitment and passion aroundits vision continually elevated its market position. Its vision aligned customers,employees and stakeholders into a competitive advantage in the company’s targetmarkets. Currently, this client dominates its regional market. Its vision was thestarting point of their strategy.

The strategic planning process begins with defining the organization’s cultureand purpose as well as early thoughts about future possibilities. If we want all

of our people headed in a common direction, it only makes sense to startwith a common destiny.

Jim Collins and Jerry Porras,authors of Good to Great, collaboratedon the article, “Building YourCompany’s Vision.” In it, they coinedthe phrase BHAG or “Big, HairyAudacious Goal.” The BHAG is “clear,compelling, serves as a unifying focalpoint of effort and acts as a catalyst for team spirit … sets a clear finishline.”1 The BHAG is a critical element

of a company’s core ideology that, when blended with a full understanding ofyour firm’s core purpose, sets the direction of your envisioned future. If you donot know where you are going or what your direction is, then why expend theenergy to plan?

Vision is more than a touchy-feely morass of words coupled with mysticalpredictions of our imagined self 30 years from today. The underpinnings of thevision should be set on plausible market forecasting and educated assumptions.

Vision is the foundationof strategy as well as the compass heading ofyour company.


Yes, visions are idealistic and yes, they may never come to total fruition, but visioncreates the far boundary of the strategic planning process and a clear notion ofdirection. As some firms begin the strategic planning process, they misconstrue the

relationship of planning and vision.Strategic planning is not an alternativeor replacement for vision or directionbut a complement. A never-better-than-mediocre company that nowcontends its vision is to be No. 1 in an industry in a short time frame isengaging in delusional fantasy.

A client that participated in the strategic planning process had developed an exceptional vision:“Building a Company that is a MarketLeader.” The company sustained significant profit erosion resultingfrom the competitive hard-bid market.The supporting strategy was to transition into the negotiated market.The leadership began its action planjust as the hard-bid market picked up.They won two projects and shelved the

strategic plan to manage these projects. The plan and vision are currently sittingon the shelf, and they continue to struggle in the hard-bid market, even losingseveral key players in the process.

John P. Kotter, a well-respected author on corporate culture and performance,says that bad vision negates the importance of your customers, your employeesand your stockholders or is strategically unsound. Strong vision statements elicitpassion, emotion, inspiration and energy, and are motivating. The minimum standard is that a vision should not invite cynicism or snarky internal comment.

Professor Douglas Ready of the London Business School and Professor JayConger of Claremont McKenna College conducted a survey of 40 global companiesto determine best-practice models for translating visions into reality. They foundfive best-practice phases that successfully enable organizations to make this leap.

The first phase frames the agenda. Company leaders and employees arespending energy and time on competing initiatives, but the leadership of the firmcreates the vision based on the core capabilities of the firm, culture, values, behaviorsand the external brand of the firm. The leadership generates a requirement forurgent action through identifying priorities, assessing capabilities and analyzingalternatives given an unpredictable future. The leadership drives the vision to thetop of all other priorities. In this phase, they take into account present and futureperformance and the current organization restraints that can be overcome by aninspirational vision.

The company’s leadership engages the organization in the second phase.This is more than communicating what the vision is and where the company isgoing. This moves a leader beyond evangelizing the direction. Great visions

Yes, visions are idealistic and yes, theymay never come to totalfruition, but vision creates the far boundaryof the strategic planningprocess and a clearnotion of direction.


create “tension and anxiety” with thestatus quo performers. In an effort for the vision to gain traction and minimize resistance, leaders encourageopportunities to listen to varying viewsand paradigms, appease legitimatearguments and build buy-in of theorganization.

Truly great visions require companies to expand and build mission-critical capabilities in thethird phase. There will always be a gap of core capabilities between yourcurrent situation and your envisionedfuture. There may be missingresources, new markets or insufficientbusiness process infrastructure. You may not currently be able to perform at a leveldemanded by the envisioned future. Addressing the missing capacities or processesprevents the vision from becoming hollow and merely words on a wall. A visionprovides the direction and inspiration to build the capabilities and address obstaclesthat confront organizations in the environment. By developing the specific detailsin terms of customers and services and delivery, the leadership flows from thevision and defines the organization mission discussed below.

In the fourth phase, leadership creates alignment with great visions.Visions are most often derailed by internal paradigms systems, processes or cultureor are discordant with the very executives who are charged with enabling the visionto take root. One of the most difficult assignments for our clients is selling the message to top leadership. Being part of the creation of the vision truly helps seniorleaders, but those that do not participate are subject to confusion and acceptanceof the “new” vision. Aligning senior management teams to not just the vision but

what it means and how to interpretthe concept is fundamental to implementation.

The vision energizes the organization through the power ofpeople in the final phase. The enthusiastic support of the employeesthroughout the company, embracingand reinforcing the importance of thevision, moves it from “inspiration toimplementation.”

Acclaimed leader Jack Welsh said, “Good business leaders create avision, articulate the vision, passionatelyown the vision and relentlessly drive it to completion.” The vision shouldinvoke passion, strong desire to

A vision provides the direction and inspiration to build thecapabilities and addressobstacles that confrontorganizations in the environment.


execute, excitement and dedication. Achieving superior performance from peoplein an organization is what great leadership is all about, and selling the vision is one tool to accomplish this objective. Senior leaders expect action. According toJoel Barker, a leadership theorist, “Vision without action is a dream. Action without vision is simply passing the time. Action with vision is making a positivedifference.”

Vision is the embodiment of the leadership of a company and its employeesand also instills discipline and encourages execution. A survey, published in theHarvard Business Review, of 197 global companies with sales exceeding $500 millionmeasured the translation of strategy to performance. Those companies that faileddid not track performance against projections; the value of the vision was lost throughpoor communication, abysmally formulated plans and limited accountability.Most strategy performance breaks down at senior levels of the company, “whichfosters a culture of underperformance.” Key survey points include:

• Keep it simple, and make it concrete.• Use a rigorous framework.• Identify and discuss resource deployments early.• Identify priorities.• Continuously monitor performance.• Reward and develop execution capabilities.

The survey ultimately discovered that vision, translated into action, propagates success. Passionate leaders like Bill Gates (“A computer on every deskand every home”) or Peter Kiewit (“The greatest contractor in the world”) havebeen able to translate their vision into success. Ironically, it does not just requirevision or action to equate success. It takes strong vision and mission to facilitatethe transition from being a “pickup-truck contractor” to a dominant competitorin your chosen markets.

Exhibit 1

Strategic Concepts Defined

Strategic Concept

Vision

Mission

Value Proposition

Core Competence

Core Values

Core Purpose

Definition

Inspirational expression of where an organization desires to be in the future.

Clarifies short-term strategic intent and defines organizational priorities.

Delivering a combination of unique products and services to customers that provides superior value and benefit.

A bundle of skills and technologies that enables a company to provide a particular benefit to customers.2

Essential and enduring tenants that exist in an organization. A small set of timeless guiding principles.3

The organization’s reason for being.4

2 Gary Hamel and C.K. Prahalad. Competing for the Future. Harvard Business School Publishing. April 1996. 3 “Building your Company’s Vision.” 4 “Building your Company’s Vision.”


MISSIONA mission statement defines the purpose of the business. Some leaders and

managers think that the mission statement is only for marketing to their customers and deal with the mission accordingly. Others take the mission as avaluable exercise in defining the business.

To simplify this notion, Exhibit 1 presents an example with the basic elementsof the mission for ease of comprehension. You need absolute clarity around themission of the business. Some leaders prefer to frame these issues in a missionstatement, and this is acceptable as well. The table condenses the key issues andenhances communication of the mission’s core components. The organizationalmission should meet these objectives:

• Answers the question: “What is our business?”• Defines the foundation of organizational priorities and aligns resources.• Identifies key strategic elements.• Clarifies the short-term (three- to five-year) strategic intent.• States our reason to exist for stakeholders.

The mission defines the specific direction in the market that the business ispursuing. Three critical strategic questions to ask in formulating your mission arewhat customers, what services and how do we differentiate delivery to create a sustainable competitive advantage? Each one of these elements provides strategicand operational implications.

An organization’s core purpose is the fundamental reason for the existence of the organization. An owner may initially think “providing for his own job” and“survival” his primary motivators, but ultimately something larger motivates anowner to start his own enterprise. The question, “What would be missing if this

Exhibit 2

Mission Now and the Future

Strategic Element Now Future (three- to five-year view)

Core purpose

Primary customers

Primary services

Geographic footprint

Basis for differentiation

Core competencies

Competitive advantage

Market position

Earnings growth rate

Creating opportunities, building solutions and delivering value

High-tech and industrial clients

Design/build

California

Project specific knowledge and service

Design/build delivery and conceptual estimating

Relationship focus generating repeat work opportunities

Value-added provider

5%

Creating opportunities, building solutions and delivering value

Medical clients and industrial

Building information modeling (BIM)

California and Pacific Northwest

Design team and delivery capability

Three-dimensional design and integration with all contract parties

Team member with full integrationof BIM

Value-added provider

15%


organization ceased to exist?” is a leading discovery question for the core purpose, according to Collins and Porras. The vision and missionare dynamic and change with marketsand leadership of the organization, butthe core purpose remains the same and does not change. Ask the question,“Why do we exist?” and examine what thoughts and answers this question generates.

Primary customers are likely to change in the short term for the business, particularly due to the cyclicalnature of the construction industry. In early 2000 and 2001, the high-techmarket crashed. Contractors thatfocused on this segment experienced

severe downturns in this segment of their business, with concurrent erosion ofprofitability. Strategy development increases the likelihood that proper marketassessments occur and anticipates market softness such as in the high-tech marketof the early 2000s. In Exhibit 2, the blue highlighted client transition is one of the important strategic assignments for this contractor to transition from the high-tech market to the medical market where sector growth is in the future.

In 2001, a client approached FMI for strategic planning assistance. Althoughthe residential market (about 80% of its revenue and gross profit) had been strongfor several years, there was concernabout a potential downturn in the residential market. Its “mission” was todiversify into the commercial marketsector, and from 2001 to 2007, thecompany transitioned to a mix of 60%commercial and 40% residential. Itlooks like a genius in today’s market.

Service offerings are evolutionary.External market focus requires thatfuture client offerings enhance clients’service and satisfaction. The trends indesign/build and building informationmodeling (BIM) are examples of new and unique ways to provide value to clients.Clients do not always know what they want. Part of the strategic assignment is tocontinue to innovate and package service offerings with higher value to clients.These offerings are detailed in the contractors’ mission.

The basis for differentiation identifies the contractors’ uniqueness in the market. What new service enhancements for targeted clients will increase value to these clients and sustain a competitive advantage? In Exhibit 2, the orange-highlighted area represents the strategic intent to evolve from a design/build delivery

The vision and missionare dynamic and change with markets and leadership of the organization, but thecore purpose remainsthe same and does not change.


contractor to a fully integrated BIM design partner. This transition requires development of new core competencies.

Core competencies currently exist in the delivery of a design/build deliverymethod. What additional core competencies are required to become a BIM partner? How will the business develop and promote these new offerings in themarket? The mission and subsequent strategy development depict the road mapfor the evolution of the organization.

A competitive advantage exists in this example in the long-term relationshipswith existing clients. To sustain this advantage, service delivery must continue tobe enhanced and new offerings that come online must fit and reinforce this competency. The strategic intent of becoming a fully integrated design partnerwith BIM capabilities supports this competitive advantage.

Market position is the selection from a few viable choices: cost leader, value added or product offering. So many contractors believe that all three positions should be chosen to avoid missing opportunities in the constructionmarket. Outside the construction industry, you rarely find a best-of-class companyattempting this market positioning strategy. In Exhibit 2, the green-highlightedarea indicates the contractor will continue to focus on the value-added providermarket position and strengthen its value-added offerings using BIM.

The growth rate targets the strategic intention for the stakeholders. Growth is fundamental to increasing the value of the enterprise. Stakeholders have a stakein ensuring that the leadership of the enterprise is sustaining the value creationprocess. As the strategy is deployed and actions are taken, the ultimate metric isgrowth in earnings and cash flow.

Exhibit 2 enables an organization to summarize its mission (purpose) in clearstrategic terms. Although only summary-level detail is available, it is easy for allmembers of the organization to comprehend their mission over the next five years.Whether in mission statement form or table form, all of these components are keyaspects of the mission of the business. Stakeholders can readily see the anticipated

transition and the steps requiredto support continued sustainablecompetitive advantage in themarket.

Vision statements and missions lead to the next step inthe strategic planning framework:to create strategic goals. Exhibit 3illustrates how the framework tiestogether. This is one of manyplanning models, but most models begin with the vision andmission of the enterprise.

Collins and Porras in theirbook Built to Last identified ashared characteristic central themein their visionary companies.Visionary companies experienced


extraordinary success in their markets. These companies had a core ideology thatwas comprised of their core purpose and core values. They had inspired theirorganizations by creating a vision that moved the companies forward beyond theircompetitors. Rather than view visions and missions as a wordsmith exercise andwaste of time, think about the vision and mission as invaluable leadership toolsthat provide focus and motivation and assist in building an enduring company. ■

Ken Roper is a principal with FMI Corporation. He may be reached at 303.398.7218 or via e-mail at

[email protected].

1 James C. Collins and Jerry J. Porras. “Building Your Company’s Vision.” Harvard Business Review. September — October 1996.

Exhibit 3

Strategic Planning Framework

Objectives

Goal

Strategy

Action

Action

Action

Strategy

Action

Action

Objectives

Goal

Strategy

Action

Action

Objectives

Goal

Action

Strategy

Action

Action

Strategy

Values

Vision

SWOT

Mission

It’s priceless,” replied one of FMI’s clients when asked to describe

the value he and his organization received from his coaching

engagement. Then he added, “The construction industry is so

business-relationship-oriented. We build buildings and projects, but

it is as important for whom we build as what we build. Many of our

conflicts are based on people not being able to understand each other.

Communication is so important to us; it helps us have a successful

project and stay out of litigation. People get into problems because,

frankly, they do not communicate very well. A lot of us understand the

technical side — most of us are very good at bricks and sticks — but

the personal side is the tough part.”

Executives at companies throughout the nation are buzzing about the personalbenefits they’ve gained from their coaching experiences. In addition to these personal accounts, the statistics are impressive and support the notion that coaching

By Jennifer Jones and Jake Appelman

Blowing the Whistle: The Buzz on ExecutiveCoachingExecutives who have beencoached have found direction,purpose and confidence in achieving their goals more quicklythan they would have without their coach.

“

100 ■ blowing the whistle: the buzz on executive coaching

helps executives find direction and purpose while helping them to achieve theirgoals faster. According to a 2008 Sherpa Executive Coaching Survey, 90% of HRprofessionals and coaching clients see the value of executive coaching as “very high”or “somewhat high.” Fast Company’s survey on the same subject, published April10, 2006, found 92% of leaders being coached plan to use a coach again; 63% oforganizations say they plan to increase their use of coaching over the next fiveyears; and 71% of senior executives and 43% of CEOs have worked with a coach.

Fifty executive coaching clients from FMI were surveyed. Of those, 96% saidthey will be able to make a greater contribution to their company as a result ofcoaching, while 98% were either “very satisfied” or “satisfied” with their overallengagement. Additionally, 94% believed that it was worth the financial investmenttheir company made. The buzz about executive coaching is simple: When takenseriously, it can be an effective solution for many of the current issues facing construction companies.

WHAT COACHING ISNowadays you can get a coach for just about any need or issue you have.

There are “life” and “personal” coaches who help to resolve behavioral, spiritualand a variety of lifestyle issues. This form of coaching encompasses the broadestspectrum of client needs. There are also career coaches, financial coaches, healthand nutrition coaches, fitness coaches and the list goes on. The type of coach whohelps construction-industry professionals produce business results is referred to as an“executive coach.” Although there are tremendous benefits from executive coachingthat will spill over into your personal life, the main distinction of executive coaching is that it helps clients achieve bottom line-business results.

An executive coach helps to effectively bridge the gap between where the clientis and where the client wants to be in terms of goals. It is a powerful one-on-onerelationship where the coach helps an executive reach established goals more efficiently and, in many cases, helps the executive to reach heights simply notreachable on his or her own. The coach serves as a guide and partner to the executive. Although some companies have internal coaches (employees of anorganization who coach colleagues), a key quality of external coaches is that they

are an independent party not swayedby the politics of the organization —their viewpoint is not tainted by beinga part of the company. The coach iscompletely neutral and can moreclearly see all sides of an issue, goodand bad. Executive Vice President Bob Ferguson of Hunter RobertsConstruction Group understands thiswell. He said he benefits from “havingsomebody accessible to call and bouncethings off, who is not vested in theoutcome. It is hard to be objectivewhen you are fighting the fire. Havingan outsider’s perspective is healthy

An executive coachhelps to effectivelybridge the gap betweenwhere the client is andwhere the client wantsto be in terms of goals.


because sometimes we get caught up in the day-to-day running of the businessversus strategically growing the business.”

In time, similar results may be achieved without a coach, but this often comesthrough trial and error, confusion, regret and lost opportunities along the way.The cost of failure, lost opportunities and time is extremely high to organizations.

This is especially important to construction companies who are findingit increasingly difficult to attract andretain talent and who want to decreasetime spent on the learning curve. Notonly is this cost high in dollars, but itis also a high price to pay in terms of loss of individual motivation andlowered morale. Sometimes individuals,particularly in younger generations,may not have the patience to endurethe trial-and-error approach, resultingin higher turnover. Thus, more timeand money are wasted. With the helpof an executive coach, managers andleaders can ramp up their effectivenessin a new position much more quickly than they can without the assistance

of a coach. Seasoned executives can create a well-thought-out succession plan,develop a team of rising stars, develop staff more intentionally or execute a planfor organizational change. In any case, motivation increases and new possibilitiesemerge faster with the help of an executive coach.

For example, another executive in the construction industry gave credit to his executive coach for a career advancement. He explained, “Before coaching, I was all over the place — I had tons of different objectives and things to accomplish. My coach helped me weed through these tasks and come up with aset of goals, which I then had to achieve by a certain date. It was a big win.”Stephen Brague, COO of Casey Industrial Inc., echoed the executives’ comments:“To me, the value in coaching is having that other set of eyes to help me thinkthrough problems. I usually find the coach helps me come to the solution myself.The coach is not giving you the answer; he is just asking enough questions to helpyou get there. The coaching is not about gaining skills as much as it is about gaining insight.”

WHAT COACHING IS NOT Some tend to confuse executive coaching with prescriptive consulting, therapy

or mentoring — each valuable fields, yet serving different purposes:

• In prescriptive consulting, an expert is hired to analyze a situation andadvise the company about what to do. Prescriptive consultants are specialists in a given field and offer expert knowledge. In contrast, coachesask provocative questions and bring clarity to an issue to help the client

In time, similar resultsmay be achieved withouta coach, but this oftencomes through trial anderror, confusion, regretand lost opportunitiesalong the way.


discover the best answers for his or her unique situation. A similar approachis used for groups and organizations by process consultants.

• Therapists help sort out past relationships and feelings so that they do notadversely affect the client’s ability to function today. Therapy is about recovery whereas coaching is about discovery. Coaching provides insightand focus so that a person can more efficiently move forward to where he or she wants to be.

• A mentor teaches skills based on the mentor’s personal experience to onewho is usually less experienced and often in the same profession. Thecoaching process does not rely on the coach’s experience or being in thesame profession. Instead, the coach guides the client on a unique path inorder to help the client meet his or her goals and objectives.

To illustrate these differences, pretend you want to hire someone to help youlearn to ride a bike. You are not sure whether to choose a consultant, therapist,mentor or a coach. The prescriptive consultant would provide expert advice onthe best bike to buy and how to balance yourself on the bike. He may touch onNewton’s laws of motion. He will help you understand the principles of bike riding and leave you with some documents about proven bike-riding programsthat you could implement. The focus is on his expert advice about the topic. A

therapist will want to discuss eventsthat occurred in your past that mayimpact your ability to effectively ride abike. He would explain why learninghow to do this and being successful iscrucial for your self-esteem. He wouldlisten to all your fears about riding a bike and your fears around the possibility of falling. The focus is onyour past experiences and feelings. Amentor would enjoy telling you abouthis own bike-riding experiences, whyhe chose his particular bike, how oftenhe rides it and where he enjoys riding.He would tell you his version of proper maintenance and proper safety.

You may pick up some good tips from him based on his experiences. The focus ison the mentor’s experiences. If you hired a coach, the coach would first take timeto understand what you wanted to get out of bike riding — what your purposeand goals are. Then he would help you design a customized plan for learning toride a bike. He would help you discover the best bike for your needs and wouldinquire as to what path you wanted to take. He may provide insight as you makeyour decisions. He would ride alongside you, helping you navigate the bumpyroads and dimly lit paths, mainly by requesting your input. Your coach would letyou take control of where you wanted to head, challenge your thinking and pro-vide insight and awareness when needed. The focus is 100% on you, your goalsand helping you to achieve them.


WHY USE EXECUTIVE COACHING?Most leaders are inundated with

new demands, responsibilities andopportunities as they progress in their careers. Leaders often end up in survival mode, trying to keep theirheads above water as they treadthrough the learning of their new role.According to Manchester Consulting,the failure rate of newly promotedexecutives is up to 40% in the first 18 months at a cost of two to five timestheir annual salary. High potentials(individuals whom senior executivesperceive to be the future leaders of an

organization) are especially vulnerable since they are often placed in high-profileor stretch roles without appropriate support. Given these statistics and a highlycompetitive marketplace, organizations cannot afford to make mistakes as theypromote new executives. Without the proper support in place for these individuals,it becomes a gamble that can risk the financial stability of an organization.

Christina Zeigler is a vice president at Hunter Roberts Construction Group.After her executive coaching experience, she believes that, “Coaching is for anyonewho is transitioning into managing people. At this point, you are no longer just a tactician; you now have to be strategic and do different things with differentpeople — one size does not fit all. Anytime you bring somebody on in a seniorrole that has never been in that role before, coaching would benefit him.”

Christina’s comment that “one size does not fit all” is an important point.Large training conferences and seminars attempt to address specific developmentissues through a one-size-fits-allapproach. Conferences and seminarshave their place, but without follow-up coaching, their benefits can beshort-lived. By their nature, seminarsare not personalized. Often, there isno follow-up, no accountability andno focus on individual issues or organization-specific circumstances.One study showed that follow-upcoaching after formal training led toan 87% increase in the effectiveness oftraining, compared to training alone.Another study showed that team performance improved by 22% withtraining alone — but when coachingwas added to the training program,day-to-day work performanceimproved by 88%.

Leaders often end up insurvival mode, trying tokeep their heads abovewater as they treadthrough the learning oftheir new role.

Conferences and seminars have theirplace, but without follow-up coaching, their benefits can be short-lived. By theirnature, seminars are notpersonalized.


“The construction industry needs to catch up about five decades, and coaching might be the only way to do it,” said another construction industry executive. “Senior leaders don’t know how to deal effectively with today’s employees,

especially Generation Y. This industryneeds to learn quickly because we can’t just use the old, ‘Do it my way or else’ anymore.”

Those who do work with an executive coach will likely find theexperience tremendously beneficial.One industry executive reported that85% of his communications wereimproved using the tools from hiscoach. He said, “I got so much moreout of coaching than I thought I wasgoing to.” Mark Payne, vice presidentwith Davis-Ulmer Sprinkler CompanyInc., commented, “I wasn’t properlygrooming our company’s future leadersbefore, but now I am working togroom my junior managers and project

managers for larger roles in the future. I would not have been able to accomplishthis without my coach. Coaching has been very fruitful for me.” Similarly, GeorgePliml, senior project manager of APi Electric reported success with coaching. “I am passionate about a lighting program that I am doing, but I am very muchan introvert. Through the techniques my coach helped me with, I am now able toget up in front of groups and share my passion about the program. I feel very comfortable using the techniques.” He continued, adding another benefit: “Beingable to listen to my customers better has proved invaluable. Instead of going in,talking strictly about the job and getting ‘yes’ or ‘no’ answers, I am able to reallylisten and hear what they are sayingabout their project and their concerns.That was the biggest thing for me.”

The importance of interpersonalskills increases as the younger workforce takes on managerial roles and asseasoned managers transition intomore senior leadership positions. (See Exhibit 1.) In order to continue to advance and succeed at these higher levels, leaders need effective interpersonal skills in order to impacta variety of personalities. MarshallGoldsmith, the prominent author andexecutive coach, puts it this way, (thetitle of his 2007 book), “What Got You Here Won’t Get You There.”

In order to continue toadvance and succeed atthese higher levels, leaders need effectiveinterpersonal skills inorder to impact a varietyof personalities.

Why Use Executive Coaching?

• Leadership Transitions • Personalized Leadership Development• Communication • Talent Development • Generational Differences • Succession Planning • Team Building • Strategic Goals • Work/Life Balance • Derailment Issues • Burn Out • Stress Management• High Potential Development • Purpose Creation• Behavioral Issues • Delegation


Sherpa CoachingLLC trains and certifiesexecutive coaches at PennState, Texas Christianand the University ofGeorgia. In January2008, the companyreleased its third annualsurvey on executivecoaching. The reportstates, “Among thosewho purchase or usecoaching services, 70%believe executive coachingis most appropriate forthose who need leader-

ship development.” This is an increasing trend. When coaching first developed inorganizations, most efforts were geared toward helping problem employees inorder to save their career. This use of executive coaching has dipped to 32% whilethe use of coaching for leadership development has increased to 50%. The 2008

survey states, “Compared to 2006, about 7% of coaching has moved from specificproblem solving to general leadership development. In a billion-dollar business,that represents reallocation of $70 million dollars over 2006.”

CAUTION: COMMITMENT AHEADAlthough executive coaching offers major benefits to executives who invest

the time and energy required, it is not a catch-all, easy answer to developmentissues or conflict. Coaching will prove to be a waste of time and money unless theexecutive is committed to the process.This means making the time in your schedule for conversations withyour coach, honoring that time with no distractions, being honestwith yourself, being open to candid feedback and being open mentally to doing and thinking about thingsdifferently. Clients who were less than satisfied with their coachingexperience did not blame the processor their coach — it came down to alack of self-admitted dedication on the client’s part. Executive coaching is only for those who are serious about change — individually and organizationally — and who are willing to do the work needed to getto where they want to be.

Low High

Field Level Executive Level

Low

Hig

h

Impo

rtan

ce

Exhibit 1

Relative Importance of SkillsInterpersonal skillsManagement skillsTechnical skills

Clients who were lessthan satisfied with theircoaching experience didnot blame the processor their coach — itcame down to a lack ofself-admitted dedicationon the client’s part.


THE BIGGER PICTURE To get the most out of an investment in coaching, coaches should understand

first the bigger picture of the organization — the organization’s mission, vision,values and strategy — before focusing attention on their individual client. Oncethis occurs, then an experienced coach is able to address both individual and

organizational goals todevelop a more effectivework plan for the client.In other words, there is a triangular relationshipbetween the coach, the executive and the organization (stake-holders). See Exhibit 2.

Here is an exampleof how this triangularrelationship works. JimSample, a vice presidentfor a large general contractor, was forward-thinking, rational,extremely competent —

and volatile. Jim was being considered for a promotion, but the CEO, CharlesWilber, a strong supporter of Jim, perceived developmental issues. Jim was abrasivewith colleagues at times and “too busy” to develop subordinates. Some colleagueswere avoiding Jim in an unspoken standoff that was affecting important work.Charles asked the human resources director to find an executive coach for Jim.Initially, the coach met with Charles to identify organizational objectives thatCharles wanted to achieve as a result of Jim’s coaching engagement. They also discussed the corporate culture as well as the values and vision of the organization.This gave the coach a good foundation from which to start Jim’s coaching. Theinitial assessment phase of coaching motivated Jim to take stock, and the 360°feedback confirmed the problems that Charles had observed. Analyzing the feedback with his coach, Jim realizedthat his behavior was holding himback from being as successful as hewanted to be. Although initially stungby the candid feedback of the 360°,with the coach’s insight and support,Jim was ready to change. With hiscoach, Jim focused on three areas ofimprovement: maintaining composureunder pressure, mentoring directreports and developing more trustingrelationships with peers. Jim took hiscoaching development plan toCharles, and, after incorporating

Guides Individual Growth

Exhibit 2

The Triangular Relationship

ExecutiveCoach

Organization

Provides Context

Prov

ides

Sup

port

Cha

nge

Occ

urs


Charles’ suggestions, his plan was approved. Then Jim and his coach started thenext phase of the coaching process through private conversations they had together approximately two to three times a month. Jim’s coach suggested that hestart a journal and record each time he lost his cool, along with the name of thepersons involved, the provocation, his response and the outcome. By discussinghis issues candidly with Charles and his colleagues, Jim created a network of people interested in supporting his ongoing growth. By the end of his coachingengagement, Jim mastered the basic mechanics of keeping his cool, mentoring hissubordinates and strengthening relationships with peers. Also, Jim was able tomonitor his own behavior consciously and make the needed adjustments. Thecoaching worked because the triangular nature of the coaching relationship wasacknowledged right from the start. The coach focused on business objectives;Charles helped shape those objectives as well as provided support, and Jim wasdetermined to learn and change.

THE BOTTOM LINE More and more executives are realizing the benefits of this relatively new way

of influencing leader development and organizational change. Executives who havebeen coached have found direction, purpose and confidence in achieving theirgoals more quickly than they would have without their coach. The value in coachingis in “its ongoing value,” summarizes Ken Hilgert, chief estimator and marketingdirector for D.H. Blattner & Sons Inc. “It is an investment in the individual andhis or her career, which will have ripple effects throughout the company.” ■

Jennifer Jones is the assistant director of Executive Coaching at FMI. She may be reached at 303.398.7236,

or via e-mail at [email protected]. Jake Appelman is a consultant with FMI’s Leadership and Organization

Development Group and co-director of the Executive Coaching practice. He may be reached at 303.398.7220

or via e-mail at [email protected].

W e have all heard the saying, “If it sounds too

good to be true, then it probably is,” and, in most

instances, we are quite adept at identifying the

shortcomings of opportunities that fall under this category. Of course,

these “too-good-to-be-true” opportunities are generally presented

to us by telemarketers or spammers rather than our trusted advisors.

Consequently, we find it easy to quickly dismiss these opportunities

and hang up the phone or delete the e-mail.

However, what if one of your trusted advisors came to you with the followingmessage: “Bob, when you are ready to sell some or all of your business, I knowhow you can sell at a fair price, defer or completely avoid taxes and keep the company employee-owned.” Would you be so quick to dismiss the opportunity?

These benefits are generally available to those who chose to sell their companies to employee stock ownership programs (ESOPs), and as a result,ESOPs have become quite popular among engineering and construction companiesover the past 10 years. However, as you may have imagined, there are a host ofconsiderations that a business owner should weigh before acting on this “too-good-

By Curt Young

Do Leveraged ESOPs MakeSense for E&C Companies?

While ESOPs offer a number ofbenefits, they are not the rightorganizational structure for all companies. If you are thinking about selling to an ESOP, considerthe following criteria.

110 ■ do leveraged esops make sense for e&c companies?

to-be-true” opportunity. The following will help you to decide if your company isan ideal candidate for an ESOP.

WHAT IS AN ESOP?An ESOP is a qualified defined benefit plan in which plan assets are

invested primarily or exclusively in the securities of the sponsoring employer. As a qualified plan, ESOPs must satisfy certain requirements defined within theInternal Revenue Code and the Employee Retirement Income Security Act(ERISA). Setting up an ESOP entails establishing and funding a trust throughannual contributions. Generally, these contributions must be allocated in adefined and equitable manner to all employees who have completed a full year ofservice with the company. If desired, the contributions may be subject to a vestingperiod, which, depending on the structure of the vesting schedule, may be nolonger than three or six years in length. Employees receive the vested value of theiraccounts, via lump sum or installment, at the time of plan termination, disability,death or retirement.

The concept of ESOPs has been in existence in one form or another for morethan 50 years; however, ESOPs were not formally defined by federal legislationuntil Congress passed ERISA in 1974. Several new laws have been passed since

ERISA, which have enhanced the benefits and appeal of ESOPs. Today,ESOPs offer an array of exemplary taxbenefits to selling owners, employeesas well as the company itself. Anoverview of some of the primary taxbenefits associated with ESOPs follows.

SELLING OWNER(S) TAX BENEFITSUnder Section 1042 of the Internal

Revenue Code, if an ESOP acquires30% or more of the outstanding stockof a closely held C corporation, anycapital gains tax on the transaction isdeferred indefinitely, provided that the seller has held the stock for at leastthree years before the sale and reinveststhe proceeds in “qualified replacement

property1” within 12 months of the date of sale. Furthermore, sellers using the Section 1042 rollover can avoid taxation completely by retaining the replacementproperty until death, at which time the property transfers to their heirs with astepped-up basis.

EMPLOYEE TAX BENEFITSEmployees do not pay tax on the stock allocated to their ESOP accounts

until they receive distributions. Beginning at age 59.5, employees are able toreceive distributions, taxed as ordinary income, without incurring a 10% excisetax. In certain circumstances, such as death or disability, employees may make

An ESOP is a qualifieddefined benefit plan in which plan assets are invested primarily or exclusively in the securities of the sponsoring employer.


distributions prior to age 59.5

without penalty. Upon termination of employment, an ESOP account can be rolled over into another qualified,tax-deferred plan, such as an IRA orsuccessor ESOP, without incurring taxor penalty.

COMPANY TAX BENEFITSEmployers can contribute up to

25% of covered compensation to anESOP. Generally, these contributionsare fully deductible, as the IRS allows

companies to deduct up to 25% of their eligible pay2 to defined contribution plans(i.e., ESOPs, 401(k) plans, etc.). Furthermore, deductible contributions can be madeto pay principal and interest on any debt that was used to establish the ESOP.

Since 1998, S corporations have been allowed to have ESOPs as owners. Asnontaxable entities, ESOPs do not pay federal income tax on their pro-rata shareof corporate earnings. Consequently, S corporations that are 100% owned by anESOP do not pay federal income tax, and, depending on the state of incorporation,may not pay any income tax whatsoever. However, unlike C corporation ESOPs,S corporation ESOPs do not qualify for Section 1042 treatment (discussed above)and do not allow for the deductibility of dividends.

IS YOUR COMPANY A CANDIDATE FOR AN ESOP?While ESOPs offer a number of compelling benefits, they are not the right

organizational structure or exit alternative for most companies. In FMI’s opinion,companies that are considering establishing an ESOP should thoroughly considerthe following seven criteria before making the plunge.

Criteria No. 1: Selling-Owner PrerogativesSelling owner(s) should carefully consider their objectives and options prior to

adopting an ESOP. In circumstances in which there is no secondary market for acompany, an ESOP provides a path to liquidity and diversification. Furthermore,an ESOP allows ownership to be transferred to employees, rather than outsiders.However, when a company is marketable to third parties, selling ownership to an ESOP generally does not maximize the company’s value, even under highly tax-advantaged circumstances. This is because ESOP valuations are generally conservative and do not capture the synergistic value that a strategic buyer may bewilling to pay above fair market value.

Selling a minority stake of your company to an ESOP may sound like a good idea, as, on the surface, it seems to fulfill a number of objectives. Specifically,selling a minority stake in your company would seem to provide liquidity anddiversification, provide ownership incentives to employees and allow for a controllingstake of the company to be maintained. However, selling a minority stake of yourcompany to an ESOP has a number of adverse consequences. First, you will losesome flexibility in your decision-making capabilities, as you will have a fiduciary


responsibility to protect the interests ofthe ESOP shareholders. Second, sellinga minority stake of your company may not make sense from a financialstandpoint due to significant costsassociated with establishing and maintaining an ESOP (discussedunder criteria No. 3 below). Third, selling a minority stake to an ESOP canaffect a company’s ability to effectivelymanage cash. For example, if you sell 30% of your company to an S corporationESOP, and you want to dividend out enough earnings to cover your personal taxobligation, the dividends would be required to be proportionally received by theESOP, even though the ESOP has no tax obligation. Thus, cash that may bemuch-needed would be unnecessarily stripped from the corporation.

Criteria No. 2: Corporate StructureWhile ESOPs are available for both C and S corporations, the tax advantages

of establishing an ESOP vary significantly between the corporate structures. As previously mentioned, a 1042 rollover is only available for closely held C

corporations, while the ability to havefederal tax-free earnings is only availablefor ESOP-owned S corporations.Thus, two of the most significant benefits of establishing an ESOP arenot inherently compatible. However,these benefits may be jointly realizedby converting from a C corporation toan S corporation upon establishmentof the ESOP.

There are a number of potentiallydisadvantageous implications associatedwith making this sort of a conversionhowever. For example, corporationsthat convert from C to S status maybe required to recognize certain “built-in gains” upon disposition ofassets for the 10-year period followingthe conversion. In addition, Congressinstituted a number of fairly complex

rules, relating to prohibited transactions with “disqualified persons,” in order toprevent abuses in converting from a C corporation to the S-corporation ESOP.Violation of these rules can result in severe tax penalties.

Criteria No. 3: ProfitabilityEstablishing and maintaining an ESOP can be a complicated and costly

process. In addition to the initial design, feasibility and implementation processes

While ESOPs areavailable for both C and S corporations, the tax advantages of establishing an ESOPvary significantlybetween the corporatestructures.


involved in establishing an ESOP, ESOPs require ongoing administration andoversight. Oftentimes, companies are overwhelmed by the administrative dutiesassociated with an ESOP. Administration of an ESOP requires maintaining thedetails of each participant’s plan, keeping the plan current with any significant policy changes and orchestrating an annual valuation ofthe company’s stock. Furthermore,companies must ensure that ESOPshave a sufficient level of oversight.Oversight of an ESOP is bestowedupon a trustee, who has a fiduciaryresponsibility for the plan’s assets. Due to the demands and legalitiesassociated with this role, it has become increasingly popular to employprofessional trustees, such as banks ortrust companies, rather than choosein-house trustees.

Consequently, from a cost standpoint, it generally does not makesense for relatively small companies toestablish ESOPs. While there is nouniversal agreement as to how profitable a company should be before consideringan ESOP, a general “rule of thumb” is that ESOP candidates should consistentlygenerate operating earnings greater than $1,000,000.

Criteria No. 4: Maturity and Cyclicality of EarningsCompanies in cyclical and highly competitive industries, such as engineering

and construction, are generally not good ESOP candidates for two main reasons.First, ESOPs are able to facilitate ownership transition by buying out sellers withborrowed money. This means that companies that adopt ESOPs are immediatelyunder pressure to generate enough earnings to pay down the debt assumed to buy out previous ownership. Companies in cyclical and highly competitive industries will likely have a more difficult time paying off the debt assumed toestablish the ESOP. Second, the primary purpose of an ESOP is to provide aretirement fund for employees. Since most of the investment of an ESOP is incompany stock, the future success of the company is a critical factor in providingfor employee retirements. Enron serves as a fateful reminder in this regard. Highlycompetitive and cyclical businesses are more likely to fail or create highly variablevaluations of the company’s stock, which puts the comfortable retirement of eachindividual in the organization at risk.

Criteria No. 5: Employee Demographics and DepthThe demographics of an ESOP-owned company are critical to its success.

In order for an ESOP to function successfully, it is important to have a wide disbursement in the general age of employees as well as in the ages of key managers

In order for an ESOPto function successfully,it is important to have a wide disbursement in the general age ofemployees as well as inthe ages of key managersand company leaders.


and company leaders. Such disbursement helps to ensure that the organizationwill function smoothly over a prolonged period of time. More specifically, disbursement in employee ages helps to spread out the company’s ESOP repurchaseobligation; whereas, adequate disbursement in the ages of upper management andcompany leadership helps to ensure that the organization will not suffer from aloss of key employees. In order for an ESOP to be feasible from a demographicstandpoint, it is generally beneficial for ESOP-owned companies to have at least20 to 30 employees.

It is also important for employees of ESOP-owned companies to transition theirkey relationships and operational knowledge to their successors. By consciouslybuilding depth throughout the organization, employees of ESOP-owned companieshelp to ensure that their successors will be able to fulfill the ESOP’s repurchase

obligations. Self-interest of ESOP participants can be a powerful motivator in successor development.

Criteria No. 6: Bonding Requirements Establishing a leveraged ESOP

may significantly reduce a company’sability to pursue bonded work. Whilesurety companies may look positivelyupon some of the benefits associatedwith ESOPs, such as organizationalcontinuity and improved cash flow(via tax reduction), bonding lines tendto be determined by more tangibleand immediate measures, such asworking capital and net worth.Generally, when an owner sells his orher company to an ESOP, the ESOPborrows money in order to purchasethe selling owner’s shares. By adding

debt to the capital structure of the company, the company decreases its net worth,which, in turn, may decrease the company’s ability to bond work. In case of this,selling owners may be forced to gradually implement the ESOP or consider otherexit alternatives. The company may be able to implement an ESOP and avoid asignificant effect on the company’s bonding capacity, if new shareholders directlyinject additional capital into the company or loan funds to the company and subordinate the loan to the surety.

Criteria No. 7: Company Culture and HomogeneityOften, construction companies do not make good ESOP candidates because

their success is driven by a handful of entrepreneurs that thrive in a high-risk, high-reward atmosphere. ESOPs are often recognized as a successful ownershipstructure because they promote widespread employee ownership, which, in theory,translates to heightened levels of efficiency and productivity. However, ESOPs also spread out risk and decision-making duties among an entire organization.

Often, constructioncompanies do not makegood ESOP candidatesbecause their success is driven by a handful of entrepreneurs thatthrive in a high-risk, high-reward atmosphere.


Therefore, no one in the organization has all that much to lose or gain.Consequently, you lose what FMI likes to call the “3 a.m. factor.” That is, who is going to be up worrying about the business at 3 a.m.? In our experience, a high-risk, high-reward atmosphere is a critical component to the success of construction companies.

Taking that into consideration, certain companies, such as engineering firmswith more homogenous work forces may be aptly suited for ESOPs. These firmsare more likely to have a high number of employees with similar backgrounds andprofessional values. In addition, the pay scale of employees in these firms typicallyfalls within a relatively tight range. These factors help to facilitate decision makingand communication throughout an ESOP-owned organization.

So, like most “too-good-to-be-true” opportunities, “the devil is in the details.”ESOPs can be an excellent mechanism for ownership transition; however, they are clearly not appropriate in every circumstance. ■

Curt Young is a associate with FMI Corporation’s Investment Banking Group. He may be reached at

303.398.7273 or via e-mail at [email protected].

1 The IRS considers the stocks or bonds of domestic operating companies to be “qualified replacement property.”2 Eligible pay is defined as the pay of all the participants in the plan up to $200,000 (2002 dollars; indexed for inflation)

W riting in 1917 about the changes in architectural

practice since the beginning of his career in 1874,

Boston architect Robert D. Andrews noted, “The

emergence of the general contractor constitutes the most significant

change in professional practice.” It may be surprising that an architect

would single out the growth of general contracting as a watershed event,

but the emergence of the general contractor did indeed fundamentally

transform the role of the architect in building production.

Before this, separate contracts were the norm for large projects: an ownerwould make a contract with each tradesman and material supplier, and the building’s architect, or a superintending architect or construction superintendent,coordinated the tradesmen and suppliers. Andrews recalled that in the bad olddays, a “city house” might require 10 to 20 different contracts and, “The architecthad to correlate the working of all those trades,” essentially doing the work of ageneral contractor. He continued, “It required much tact and firmness to settlethe incessant questions of responsibility arising under these conditions.”

General contracting for buildings (as distinguished from contracting for

By Sara E. Wermiel, Ph.D.

Guest writer and project historian Sara Wermiel shares her research on the formation ofgeneral contracting in America.

The Rise of the General Contractor in 19th Century America

118 ■ the rise of the general contractor in 19th century america

public works, such as roads, bridges and dams) began in the United States in thelate 1860s, when builders first took single, or whole, contracts to erect all, or atleast the bulk, of large and complicated buildings, which might take more thanone year to complete. While single contracts were known earlier than this, thesewould have been for small projects, such as houses, and small churches and publicbuildings (market houses and small-town jails and courthouses).1 The appearanceof the general contractor coincides with the growing scale and complexity of

many buildings at the end of the 19thcentury and a simultaneous floweringof specialization in the building industry. This article presents casestudies of two early and influentialgeneral contracting firms — NorcrossBrothers and George A. FullerCompany — which give an idea ofthe beginnings of general contractingfor buildings in the United States.

WHEN AND HOW DID GENERALCONTRACTING BEGIN IN THE UNITED STATES?

The question of exactly when general contracting for buildings begancannot be pinned down precisely. Away to trace the emergence of generalcontracting is to see when and in whatcontext the term “general contractor”came into use. The word “contractor”was used in Great Britain in the early18th century, at which time it applied

to men who built public works, such as lighthouses, roads or bridges. Perhaps theterm originated because the individuals who handled engineering projects like thesewere not associated with any traditional trade. In the United States, the term likewise appears to be associated in its early days with people who did business withgovernmental bodies. Government agencies preferred to give single contracts, andbuilders bidding on them became general contractors at least for those particularjobs. The reason why whole contracts for large, private buildings were uncommonwas due in part to the difficulties of financing a large payroll and purchasingmaterials for projects that might take more than one building season to complete.2

General contractors begin to appear in the late 1860s. Nevertheless, for manyyears, until the end of the 19th century, various contracting systems were used;separate contracts persisted, along with day’s work and general contracting. (Underday’s work, an owner paid for labor and materials, and hired superintendents tooversee the workmen; the superintendents were paid a fee or a percentage of thecosts.) General contractors still comprised a small minority of builders by the late1880s, but had become important players in the building field, usually undertakingthe more complex building projects. By that time, the idea of taking whole contracts

The appearance of the general contractor coincides with the growing scale and complexity of manybuildings at the end ofthe 19th century and asimultaneous floweringof specialization in thebuilding industry.


was well established, according to the New York architect Oliver P. Hatfield. In an1889 paper he read to a convention of the National Association of Builders (founded1887), Hatfield called masons and carpenters “principal contractors” and said that“in most sections of our country the whole contract is taken by these [tradesmen],all other building tradesmen coming in as subcontractors, engaging to furnishtheir work directly to the principal contractors.” He may have been overstating thedominance of general contracting, but at least the business was known.

General contracting came about because of the increased scale and complexityof construction projects at the end of the 19th century. Where once governmentalbodies undertook the largest buildings, in the latter half of the century, private ownerswere erecting major buildings filled with modern amenities. City centers sproutedsoaring (for their day) office buildings, expansive department stores and lavish hotels.But while growing complexity in building was a necessary precondition, it was notsufficient to call general contractors into being. First, aspiring contractors had tosolve the problem of how to get sufficient working capital. Builders traditionallywere paid when they completed a job or phases of a job. Thus, as projects becamelarger and the time between start and completion longer, contractors had to carrymore costs (payrolls, supplies and so on) until they were paid by the owners.

Early contractors solved this problem in a variety of ways. One solution wasto own real estate, which could be used as collateral to obtain a business loan.Another was to have affluent family members willing to make loans. Contractorscould also break down or shift their costs. They could negotiate terms that committed owners to more frequent payments, which reduced the amount of capital they needed. Or they could shift the financing burden on to the materialssuppliers by getting supplies on long credit, or use subcontractors rather thantheir own workforce and make them wait for payment.

The ways early general contractors solved this and other problems are illustrated in the histories of two important early firms: the Norcross Brothers andthe George A. Fuller Company. Norcross Brothers, Contractors and Builders(Worcester, Mass.), was one of the first general contractors for buildings in theUnited States, perhaps the first to work nationwide, and also, at the turn of the

Shown from the Northeast, the RookeryBuilding located at 209 South LaSalle Streetin Chicago was one of George Fuller’s earlylarge projects, and the first project on which his company used a cost-plus contract.A transitional structure in the evolution of modern architecture, it employs both masonrywall-bearing and skeletal frame constructiontechniques. It takes its name from a temporaryCity Hall and water tank that stood on the sitefollowing the Fire of 1871. A favorite roost for pigeons, these structures were referredto as "the rookery." When Frank Lloyd Wrightremodeled the Rookery's large skylit lobby in1905, he introduced elements characteristicof his Prairie School designs. The photo onpage 116 shows the interior of the building.(Courtesy Chicago Historical Society)


20th century, the largest. The George A. Fuller Company, founded in Chicago,represented the second generation of general contractors; this firm became one ofthe most prominent builders of skyscrapers. Its contribution to the developmentof general contracting included its innovativebuilding methods; emphasis on speed, whichbecame a hallmark of American buildingmethods; and promotion of cost-plus contracts, in contrast to lump-sum contracts.

NORCROSS BROTHERS COMPANYDuring its roughly 66-year existence

(1864–1924), Norcross Brothers Companybuilt 338 known buildings (apart from monuments and other kinds of structures), a group that included some of the most important and admired buildings in their day.It would be interesting to know why thesetwo brothers, who started out as carpenters and country builders, decided to takewhole contracts and exactly how they got the resources to handle their first largecommissions. Unfortunately, no business records for the firm survive.

James A. (1831–1903) and Orlando W. (1839–1920) Norcross, the brothers whofounded the firm, were sons of a carpenter and millwright. Their family movedfrom Maine to Massachusetts, and around 1864, they went into business together asbuilders. Also around this time, they established their headquarters in the mid-sizedcity of Worcester, Massachusetts. James managed the office while Orlando (O.W.)was the outside man in the business — always traveling, figuring and visiting jobsites. According to a contemporary and colleague, O.W. was a “genius in thebuilding profession.”

The brothers showed a venturesome spirit early in their partnership. Theytook whole contracts for large, masonry buildings, although their training was incarpentry and their financial resources were modest. Probably their first large project as general contractor was the Crompton’s Block in Worcester (1868), a five-story brick commercial building. Although they briefly got in over their heads,they finished the job successfully and profitably. In 1869, they won the contract to

build a high school for Worcester — anotherlarge, brick building (completed 1871). Inaddition to raising the firm’s profile, this project introduced the brothers to its architect, Henry H. Richardson, who wouldbecome the foremost American architect ofhis generation.

Although Norcross Brothers started with very little capital, the firm apparentlyoperated profitably and used its profits tofinance work on new projects. They won contracts for ever larger buildings. A key to thefirm’s ability to be competitive, yet profitable,

James A. Norcross

Orlando W. Norcross


was O.W.’s extraordinary talent as a cost estimator. An architect who had worked with Norcross recalled that in his early days, O.W. poured over drawings, specifications, contracts and correspondence in order to work up a bid. When thefirm was large and well established, it employed a corps of assistant estimators; yetO.W. could glance at drawings and state a round sum that “in eight cases out of10 … would be fairly close to the figure arrived at by the more laborious process.”

Stone construction became the firm’s specialty. Around 1872, NorcrossBrothers had contracts for two stone buildings designed by Richardson as well asthe stone Park Congregational Church in Norwich, Connecticut. In 1873, thebrothers signed a contract for their largest commission to date: Richardson’sTrinity Church in Boston (1873–76). This enormous church was to be built ofbrown sandstone in the Romanesque Revival style.

Two important features of the company were in place by the 1870s. The first was that the firm hired tradesmen and worked with its own employees ratherthan subcontracting. In the early 20th century, when subcontracting became commonplace in many cities, the Norcross Brothers’ methods seemed old-fashioned.But since the firm started up before specialized subcontractors existed, their original business model was unavoidable. Norcross Brothers employed mechanicsin all the necessary crafts and appointed a foreman to oversee each department.The second was that it supplied much of the material it used in its projects, andfor this purpose, operated quarries, a brickyard and workshops.

Norcross Brothers first began supplying stone around 1873, when it leased a quarry to obtain stone for the Trinity Church project. In 1881, the firm built a

An impressive example of The Norcross Brothers stone work, Trinity Church is located inBoston and has appeared on the architectural community’s “top 10” lists of significant buildings for the past 100-plus years. The celebrated style, “Richardsonian Romanesque,” isnamed after the building’s architect, H.H. Richardson. The brother’s bid was accepted just asa depression hit the economy, and the project swept away all their financial concerns. Shownhere first from its west (front) elevation, south side, and then a view from the rear of thechurch to the altar. (Courtesy Library of Congress)


workshop in Worcester, which hadshops for cabinetmaking, painting,blacksmithing and machining as wellas space for storing lumber. At theturn of the 20th century, the firm, orO.W. individually, had interests in atleast nine stone (granite, sandstone,marble) companies in several states.O.W. was president of BlandfordBrick & Tile Co., with works inRussell, Massachusetts. Presumably,the rationale for owning the quarriesand shops was to allow NorcrossBothers to get materials to its job siteswhen needed and thereby minimizecostly delays. Having supplies on sitewhen required was one of the mostcritical factors in being able to completea building on time. Norcross Brotherswas not unusual in owning sources of supplies; many New Englandbuilders at the time did likewise.

The Trinity Church project was a turning point for the firm. The job was full of risks; among these was the fact that the architect designed the buildingwhile it was going up, yet Norcross Brothers had a lump-sum contract. But thefirm got favorable terms in their contract: they agreed to build the church and furnish nearly all the materials (on a contract worth $435,000) while “giving nobond” and were to be paid monthly in cash, with only about 10% of the contractamount retained until completion. The firm publicized their new status as “contractors.” Formerly called “carpenters and builders,” the firm described itself

in an 1872 advertisement as “NorcrossBrothers, Contractors and Builders.”

By the end of the 1870s, thebrothers had accumulated a respectableamount of working capital as well assome financial backers. They emergedfrom the depression of that decadecomparatively wealthy and, with their

The Trinity Churchproject was a turningpoint for the firm. Thejob was full of risks;among these was thefact that the architectdesigned the buildingwhile it was going up, yetNorcross Brothers hada lump-sum contract.

A corporate brochure for The NorcrossBrothers shows their work on Sever Hall atHarvard University in Cambridge, Mass.Another H.H. Richardson design, the building was constructed through a giftfrom Anne Sever in honor of her deceasedhusband, James Warren Sever. It is estimatedthat 1.3 million bricks were used in its construction. (Courtesy Philip Norcross)


growing experience, poised to expand operations. As a sign of their comfortablecircumstances, they built handsome stone houses for themselves, side by side, at 16 and 18 Claremont Street in Worcester (1878).

An unusual move by the firm was to take contracts for jobs far fromWorcester. Most builders at the time operated within a community or region;Norcross Brothers developed a national business. The way the brothers got projects in distant cities was by bidding on contracts designed by architects they knew. Thus, Norcross Brothers built Stephen C. Earle’s library in RhodeIsland and church in Connecticut, and Richardson’s commercial building inConnecticut. In 1873, while building Trinity Church, the firm opened a Bostonoffice. At the end of the 1870s, Norcross Brothers broke into the New York City market, when it won a contract to build the Union League Club Housethere, designed by the Boston-based architectural firm of Peabody & Stearns.In the early 20th century, NorcrossBrothers Co. had offices in Boston,Chicago, New York and Washington,and in Montreal and Toronto,Canada, in addition to Worcester.

Norcross Brothers grew steadily.In 1886, the firm reportedly had morethan 1,000 men on its payroll. At that time, it was working on a massivebuilding in Pittsburgh: Richardson’sAllegheny County Buildings (1883–88),worth $2.27 million. The followingyear, the firm was busy in Chicagoerecting Richardson’s celebratedMarshall Field Wholesale Store(1885–87). The firm also worked onstructures other than buildings, suchas bridges and seawalls, and it was the contractor for clearing ledge fromthe channel at the Portsmouth NavyYard in Maine.

After James’s retirement in 1897, O.W. carried on the business by himself for a time and then inJanuary 1902, incorporated the firmunder the name The Norcross Brothers Company. The following year, the firmreportedly had $9 million in work underway and employed thousands of men. In the early 20th century, Norcross Brothers expanded into Canada. Some of theirCanadian projects were designed by American architectural firms, e.g., McKim,Mead & White (Bank of Montreal, Montreal, Quebec [1901–04] and Bank ofMontreal, Winnipeg, Manitoba [1910–12]) and Carrère & Hastings (Bank ofToronto, Toronto, Ontario, 1910–12). In the United States, Norcross Brothers continued to focus on buildings for institutional clients: schools, hospitals,

By the end of the1870s, the brothers had accumulated arespectable amount ofworking capital as well assome financial backers.They emerged from thedepression of that decadecomparatively wealthyand, with their growingexperience, poised toexpand operations


libraries, clubhouses and religious buildings, as well as government buildings.Norcross Brothers may have found it easier to win commissions in Canada

than in the Unites States in the early 20th century, when they faced stiff competition from new contracting firms like the George A. Fuller Co. andThompson-Starrett Co., a Fuller spin-off. Norcross Brothers supplied stone forprojects for which it was not the general contractor, such as New York’sPennsylvania Station and the Field Museum in Chicago. On the latter project,the firm lost $500,000. In the 1910s, O.W. spent much of his time defending hispatents for flat slab concrete floor construction. In 1920, at age 80, O.W. was

still working when, riding on a streetcar, he suffered a heart attack and died. The companydissolved in 1924. But the Canadian branch of the firm continued as a separate company,called Anglin-Norcross, until 1967.

GEORGE A. FULLER COMPANYWorcester, Mass., spawned another

important builder, George A. Fuller (1851–1900).Unfortunately, no records of this company arepublicly available, so its history, too, must bereconstructed from disparate published sources.

Fuller trained as an architect, at first in the office of his architect uncle James E. Fullerin Worcester. If he started sometime between

1869 and 1871, he could have learned about the Norcross firm from a project in hisuncle’s office: the Worcester High School. James’s partner at the time, Stephen C.Earle, served as the superintending architect for this project.

Fuller was exposed to Norcross Brothers again through his next employer, theBoston architectural firm of Peabody & Stearns. He joined this large firm in 1874

and remained until about 1881, becoming its chief designer. During this period,Norcross Brothers built several of Peabody & Stearns’ projects, including HarvardUniversity’s Hemenway Gymnasium (1878–81) and the Union League Club Housein New York City (1879–80).

At Peabody & Stearns, Fuller gained experience working on tall, iron-framed,fireproof buildings. When he joined the firm, one of its projects was the NewYork Mutual Life Insurance Co. in Boston (1873–75). This six-story building wasone of Boston’s first fireproof buildings. Fuller superintended the construction of astructurally similar fireproof building: the nine-story United Bank Building(1880–81, also called the First National Bank Building) in New York City.

Around 1881, Fuller moved to Chicago and began working as a contractor.The exact reason for his relocation is uncertain. Likewise, why he left architectureand entered a new career is unknown. Perhaps like a later president of the FullerCo., Paul Starrett, he concluded he was not cut out to be a designer but had an instinct for construction, and he expected building would prove a more lucrative occupation. It was probable, too, that Chicago at this time offered more opportunities for builders than for architects. The city in 1880 was on the verge ofa boom in commercial construction. It was also a center of innovation in building

George A. Fuller


materials and construction technology, notably fireproof construction. With hisexperience working on fireproof buildings, Fuller was in a good position to sethimself up as a contractor to meet the growing demand for fireproof structures.

In 1882, Fuller established the George A. Fuller Co. with capital of $50,000.One of his first large projects was the Chicago Opera House Block. It was here,according to the Chicago builder and building official Henry Ericsson, that the“general contractor” was born. What Ericsson must have meant was that the cost-plus type of contract was born, which is implied by his calling this developmenta “factor that entered the industry at this pivotal stage to pad the costs of building.”Nevertheless, it seems to have been around this time, with the Opera House orperhaps the subsequent contract for the Rookery Building in Chicago (1886–88),that Fuller first used a cost-plus contract.

The cost-plus contract differed from the usual contract, which was the lump-sum contract. In the latter type, the contractor agreed to erect a building for a set price. With a cost-plus type, the general contractor was paid a fee to manage the work, while the owner paid the actual construction costs (labor andmaterials). Typically, the fee was figured as a percentage of the construction costs,although it could be a flat fee. A cost-plus contract might or might not specify amaximum construction cost, which today is called a guaranteed maximum price.While one might assume that the cost-plus contract is a recent invention, actuallysomething like it was used in New York City in the 1860s, in connection withday’s work construction.

Fuller therefore did not invent cost-plus contracting; nevertheless, the systemwas uncommon when he began to sell the idea to owners. He undoubtedly helpedmake the cost-plus system acceptable to owners. Perhaps it was his background inarchitecture that inclined Fuller to think of himself as a professional and to chargea fee for service based on construction costs, which was how architects at the timeoften figured their fees.Fuller apparently wasable to convince ownersand architects that he, a contractor, was a professional, not a meremechanic. Necessity may also have led to its invention. Cost-pluscontracts entailed lessrisk for the contractorthan lump-sum contracts,especially when the contracts did not have aguaranteed maximumprice. In addition, bysubcontracting most of the work and havingthe owner pay the subcontractors, the

The Equitable Building located at 25 Pryor Street Northeastin Atlanta, is an early skyscraper designed by the Chicagofirm of Burnham and Root, pioneers in the development of skyscraper design, and built by Fuller. The building stood as the first example of the new architectural form tobe built in Georgia. (Courtesy Library of Congress)


general contractor needed less working capital, especially if the subcontractorswere reimbursed by the general contractor on a pay-as-paid basis. Through thefirst half of the 20th century, the Fuller Co. did mainly (although not exclusively)cost-plus work.

The cost-plus contract won acceptance because it offered advantages for owners and architects. For the owner, construction could begin before all architectural drawings and specifications were complete — which would otherwisebe necessary for soliciting bids — and thus design and construction could proceedsimultaneously. Some architects preferred the cost-plus contract because it allowed

them to work more collaborativelywith a builder than under a lump-sum arrangement. However, since thecontractor’s fee rose along with construction costs, cost-plus contractsthat were loosely drawn or lacked aguaranteed maximum encouragedbuilders to overspend — the paddingEricsson disparaged.

Like Norcross, Fuller became acollaborator with architects in thedesign process and helped develop new solutions to construction problems.Fuller was the first builder to have atar-paper roof put over a building siteso that foundation work could go forward in bad weather. He did thison the Rookery Building and this

project, Paul Starrett believed, helped establish both the building’s architects andFuller as “the leading men in the building business.” The Tacoma Building inChicago, built by Fuller (1888–89), is a landmark in the evolution of skeletonframe construction, being the first structure with curtain walls on its two streetfaçades. According to Raymond Daly, president of the Fuller Company in the late1950s, when skyscraper construction was being developed, “Chicagoans broughttheir building problems to Mr. Fuller and those problems were solved time andagain. As a builder with architectural training, working closely with architects, hewas so trusted on all sides that for many years after the Tacoma Building not a single important building went up in that city [Chicago] that did not bear theimprint of George A. Fuller Company.” While Daly exaggerates Fuller’s dominancea bit, certainly his firm built many of Chicago’s pioneer skyscrapers.

Like Norcross, Fuller was able to build outside of Chicago by bidding onbuildings designed by architects he knew. One of his first buildings outsideChicago was the eight-story Equitable Building in Atlanta (1890–92), designed by Burnham & Root and considered Atlanta’s earliest skyscraper. Another was theD. S. Morgan Building in Buffalo, N.Y. (1895), designed by Holabird & Roche. In 1898–99, Fuller built the Massachusetts Building, later the Union TrustBuilding in Baltimore, which was designed by the Boston architectural firm ofWinslow & Wetherell.

Like Norcross, Fullerbecame a collaboratorwith architects in the design process and helped develop new solutions to construction problems.


Fuller used his connections with architects and investors to expand his operations to the East Coast in the late 1890s and to break into the New York Citybuilding market — the center of skyscraper construction. In 1896, Fuller openedan office in New York City and worked with some Midwestern and Boston men ona project for a building at Broadway and Chambers Street (Broadway-ChambersBuilding). This project took several years to come together, and in the meantime,Fuller got his first New York commission: the Coe Estate Building (1896–7), a narrow, 10-story building designed by George B. Post.

The Broadway-Chambers Building project came to fruition in 1899 (completed1900). At 18 stories with a small (about 51 x 94 feet) footprint and a skeletonframe, this building qualified as a true skyscraper. Fuller’s firm put up $100,000

of the $500,000 cost, and Fuller helped arrange a loan for the principal investor.What this suggests is that at first, Fuller got work in New York City by developingprojects with out-of-town architects and investors, rather than by competing withlocal builders. As a specialist in erecting skyscrapers, he soon became established.In 1900, the Fuller Co. had the contract to build the Broad-Exchange Building inNew York — at 20 stories and 326,500 rental sq. feet, the largest office building in the United States.

It was in a project like Broadway-Chambers, in which the steel frame went up in only three months, that the cost-plus contractor earned his fee. In this andother projects, construction began before all drawings were complete. Speedbecame an obsession at the turn of the century. Skeleton-frame construction madeit practical to build structures very tall, but it also made it possible to build veryquickly because once the frame was erected, work could proceed on any level.Contractors seemed to compete with each other to set records, egged on by thepress. Newspaper articles celebrating this breakneck construction were good publicity for the Fuller Co., but the speed obsession put a strain on all involved.

Nevertheless, Americancommercial constructionbecame more efficient.

Fuller remained inChicago and did not liveto see these New Yorkprojects completed. Hedied in December 1900,at the young age of 49 — “burned himselfout with hard work” according to Paul Starrett.

At this point, thefirm’s headquarters movedfrom Chicago to NewYork, where it remaineduntil it closed nearly 100

years later. In the 20thcentury, the George A.Fuller Co. continued to

A present-day view of Memorial Continental Hall built by George Fuller. Located at 1776 D Street, NW, inWashington, D.C., the building serves as the headquartersof the Daughters of the American Revolution. The buildinghas been recognized as one of the area’s most elegantbuildings with its classical revival style and has since beendesignated as a Registered National Historic Landmark.(Courtesy Sara Wermiel)


be one of the nation’s largest builders and put up many prominent structures,including such landmarks as the Fuller (a.k.a. Flatiron) Building (1900–03); LincolnMemorial (1914–22); Philadelphia Savings Fund Society Building (1929–32); theUnited Nations Secretariat Building (1949–50); Lever House (1952); and SeagramBuilding (1957). After 1970, the company changed hands many times and declined.It closed finally in 1994.

It is interesting that the Fuller Company did not consider Norcross a competitor, perhaps because Norcross did not bid for skyscraper projects. At theturn of the century, Norcross Brothers was doing millions of dollars worth ofwork in New York City, e.g., building the New York Public Library and ColumbiaUniversity’s new campus. The two firms worked together on at least one building:Pennsylvania Station in New York (Fuller built it, Norcross supplied the stone).

Yet in recounting the construction of Penn Station, Paul Starrett refers to Norcross simply as “the NewEngland granite man.”

Around 1900, the NorcrossBrothers and Fuller companies wereprobably the largest general contractorsin the Unites States and both wererenowned for the quality of theirwork. Norcross Brothers pioneered the business of general building contracting when it took whole contracts — lump sum — for largebuildings and grew in capacity so thatit was able to undertake projects acrossthe United States and in Canada. Its specialty was massive, masonry, bearing-wall buildings. The Fuller Co.began as a general contractor anddeveloped a different business model

using the cost-plus type contract. Fuller specialized in erecting tall commercialbuildings, which owners wanted put up rapidly so they could produce income assoon as possible. Owners accepted the cost-plus system because it allowed the contractor to begin working on a building before all drawings and specificationshad been completed. Fuller subcontracted for most of the labor and materials usedon his projects, unlike Norcross Brothers, which worked with its own employeesand produced its own materials. They were at opposite ends of the spectrum, andat the turn of the 20th century, other contracting firms fell along the spectrum —neither model dominated. The emergence of the general contractor was a manifestation of the trend toward specialization in the U.S. building industry. ■

Sara E. Wermiel is an independent scholar who received a doctorate in urban history and history of technology

from the Massachusetts Institute of Technology. Her specialties are the history of 19th century American

technology, industrialization and urbanization. She has written many articles and a book on the main subject

Around 1900, theNorcross Brothers andFuller companies wereprobably the largestgeneral contractors inthe Unites States andboth were renowned forthe quality of their work.


of her research: structural fire protection and the development of new materials and systems for constructing

buildings in the 19th century. Her most recent book, Lighthouses (Norton/Library of Congress Visual

Sourcebooks series, 2006), treats American lighthouses according to construction types. She works as a

historic preservation consultant and researcher, and teaches building history at Boston Architectural College.

She may be reached at 617.524.9483 or via e-mail at [email protected].

1 An exception was the contracts for large buildings erected by the federal government, such as those awarded by the U.S. Treasury

Department in the 1850s. But this was an unusual case, and the Treasury Department’s venture into whole contracts in the

antebellum period did not jumpstart the general contracting business in the United States.2 Readex, America's Historical Newspapers, 1690–1922, including Early American Newspapers Series 1 – 3; accessed December 2007.

Search done on the years 1823–89 for “building contractor” and 1823–1860 for “contract for building.” Whether private contracts

were less likely to be reported than government contracts and this is the reason for the preponderance of government “contracts” is

unknown. Examples of the few references to private contracts during this period include a contract for building an “extensive block

of stores” (reprinted in Hudson River Chronicle, 17 July 1838) and three churches in Maryland (Baltimore Sun, 11 March 1843, 22

April 1847, 14 July 1857).

Sources“A Big Real Estate Deal,” New York Times (18 Dec. 1898), p. 10, ProQuest Historical newspapers, The New York Times.

American Institute of Architects, 1906. Proceedings of the Fortieth Annual Convention.

Andrews, Robert D., 1917. “Conditions of Architectural Practice Thirty Years and More Ago,” Architectural Review, ns 5, pp. 237-8.

Architectural Record, 1977. Great American Architects Series, No.s 1-6; May 1895-July 1899, New York: Da Capo Press.

“Big Builder Collapses; Staff, Projects in Limbo,” 1994. Crain’s New York Business (29 Aug. 1994), p. 1.

Blackall, Clarence, 1994. Seed Time and Harvest; Memories of Life, S.l. : s.n., typescript.

Dahl, Curtis, 1987. Stephen C. Earle, Architect, Worcester, Mass.: Worcester Historical Museum.

Daly, Raymond C., 1957. 75 Years of Construction Pioneering, George A. Fuller Company (1882-1957), New York:

Newcomen Society in North America.

Ericsson, Henry, 1942. Sixty Years a Builder, Chicago: A. Kroch & Son.

“Failure of Norcross Brothers,” 1903. New York Times 23 July 1903, p. 6.

Gilbert, Cass, 1900. “The Financial Importance of Rapid Building,” Engineering Record, 41, pp. 623-24.

Girr, Christopher, 1996. “Mastery in Masonry: Norcross Brothers, Contractors and Builders, 1864-1924,” M.S. thesis,

Columbia University.

Gross, Philip N., “Norcross Brothers of Worcester, Massachusetts,” website (2004) http://norcross.ca/NORCROSS%20

BROTHERS%20FOLDER/NB_1864_Norcross%20Brothers%20of%20Worcester.html.

Hatfield, O. P., 1889. “The Relation of the Architect to the Builder,” Inland Architect and News Record, 13, pp. 16-17.

Hobhouse, Hermione, 1971. Thomas Cubitt, Master Builder, New York: Universe Books.

Horowitz, Louis J., 1937. The Towers of New York, New York: Simon & Schuster.

Irish, Sharon, 1999. Cass Gilbert, Architect, Modern Traditionalist, New York: Monacelli Press.

Landau, Sarah and Carl Condit, 1996. Rise of the New York Skyscraper, 1865-1913, New Haven: Yale University Press.

“Memoir of Orlando Whitney Norcross,” 1921. Transactions of the American Society of Civil Engineers, 84, pp. 896-898.

“New Chesebrough Building,” New York Times (14 March 1898), ProQuest Historical newspapers The New York Times, p. 3.

Ochsner, Jeffrey K., 1982. H. H. Richardson, Complete Architectural Works, Cambridge: M.I.T. Press.

O’Gorman, James, 1973. “O. W. Norcross, Richardson’s ‘Master Builder:’ a Preliminary Report,” Journal of the Society

of Architectural Historians, 32, pp. 104-113.

O’Gorman, James, ed., 2004. The Makers of Trinity Church in the City of Boston, Amherst & Boston: University of Massachusetts Press.

Prideaux-Brune, Diana, 1988. “Builder as Technical Innovator: Orlando Norcross and the Beamless Flat Slab,” M.A. Thesis,

Cornell University.

R. G. Dun & Co. Collection, Baker Library, Harvard Business School.

Schweinfurth, Julius A., 1931. “Great Builders I Have Known,” American Architect, 140, pp. 48-49, 92-96.

Starrett, Paul, 1938. Changing the skyline; an autobiography. New York: Whittlesey House.

U.S. Dept. of Labor, Bureau of Labor Statistics, “NAICS 23: Construction,” http://www.bls.gov/iag/construction.htm

(accessed Sept. 7, 2007).

Wermiel, Sara, 2000. The Fireproof Building; Technology and Public Safety in the Nineteenth-Century American City, Baltimore:

Johns Hopkins University Press.

L eaders today face the challenge of having to do more

and more with less and less time: Achieve better results.

Take on additional responsibility. Develop people. Stay

on top of the constantly changing environment. Leaders are asked to

do all this and more while remaining upbeat and positive.

It comes as no surprise, then, that many leaders, on occasion, feel a bit overworked or overwhelmed. In fact, the sheer volume of their daily tasks can beenough to frustrate some leaders into not knowing where to begin. Leaders in the construction industry have many tools at their disposal to aid them with eventhe most challenging circumstances. One of the most useful, but underutilized,tools is delegation.

Delegation involves one person handing over specific tasks or assignments to another person as well as the accountability and responsibility for completingthe task. Delegation is such a valuable tool for leaders since, when used effectively, it serves the dual purpose of reducing the leader’s workload while alsoempowering others to take on a greater leadership role. In a similar way, effectivedelegation offers individuals stretch assignments that challenge and motivate themwhile at the same time freeing up the leader to pursue more challenging andmotivating assignments. This allows leaders to do less managing, and more leading.In the process, delegating builds trust between leaders and followers, increases

By Tim Tokarczyk and Willie Hepworth

Delegation: A Win-Win Strategy

Delegation is a valuable, yet often underused, leadership tool. It reduces the leader’s workloadwhile also empowering others totake on a greater leadership role.

132 ■ delegation: a win-win strategy

organizational productivity and provides an additional means of examining a subordinate’s capabilities.

Why, then, is delegation so underutilized as a leadership device? The reasonscan vary, but most center around a mistaken understanding of delegation. Someleaders worry about losing their place in the organization if they delegate majortasks, since credit for completing the task would go to others, instead of themselves.Others feel that the process is far too inefficient, and the task could be completedmuch quicker if they just did it themselves. Both of these reasons take a limited

view of delegation. Consider the viewthat delegation is inefficient because itrequires an investment of upfronttime. For example, a leader may notwant to delegate a task because itrequires only two hours a week tocomplete, and it would take eighthours to train someone else to do it.Although the investment of time islarger upfront, delegation of repetitiveduties would pay off greatly in thefuture. By investing eight hours totrain someone else, the leader wouldsave two hours per week, eight hoursper month and 96 hours per year.

When delegation is used properly,the organization and individualsinvolved will reap these benefits.

However, taking the wrong approach to delegation could result in the oppositeeffect — less efficiency in the organization, less trust between leaders and followers and even disempowerment when things go badly. Leaders need tounderstand when to use delegation and with whom to use it, what types of tasksand assignments to delegate and how to monitor the process to ensure it is working properly. When done correctly, delegation can greatly transform organizations and individuals and can serve as one of the most valuable toolsleaders have at their disposal.

DELEGATION AS A WIN-WINIncrease Productivity

Research from the productivity team at FMI suggests that construction executives have approximately 400 hours of work on their desk at any one time.Even after 400 hours, these executives won’t likely reach the bottom of their inboxsince as tasks, functions and projects are completed, the inbox continues to fill up.Most construction executives will never completely “catch up” with their worksimply by plowing through it with their head down. To make any real progress ona task list far too extensive for any one person to complete, construction leaderswill need to delegate. Data obtained from 360º feedback assessments of constructionleaders at FMI’s Leadership Institute suggests that delegation is an area in whichmost leaders need to improve.

When done correctly,delegation can greatlytransform organizationsand individuals andserve as one of the mostvaluable tools leadershave at their disposal.


Improve RetentionIn addition to productivity gains, delegation is a sound strategy for improving

retention. Research conducted by Career Systems International illustrates the toptwo retention drivers:

1. Exciting and challenging work2. Career growth, learning and development

The construction industry faces one of the highest turnover rates in all businesssegments, and this rate is currently increasing. Organizations desiring to do a betterjob of retaining their key employees will do well to explore the use of delegation.When employees are given challenging, stretch assignments that allow them tolearn new skills and gain new experiences, they are much more likely to stay withtheir current organization. When employees are relegated to the same old routines,they often no longer experience the same level of excitement or challenge in their daily work and are much more likely to leave the organization and seek those experiences elsewhere. Delegation can greatly reduce the desire to leave theorganization for key employees.

Develop TalentMoving beyond retention, delegation gives a leader's direct reports

developmental opportunities to increase their skill levels and experience. In thisway, delegation is a win-win proposition. One specific approach to delegation forconstruction leaders is to shift to an “ask, don’t tell” method. For example, askyour people: “How do you think this situation can be handled?” or “What do you think may have led to this problem?” This will spur solution-based thinking,providing an opportunity for you to assess your direct reports’ capabilities as well as conveying to your people that you value their input. This is far more beneficial than simply telling people how you think a situation should be handledor what you believe is the cause of a problem. By allowing employees to thinkthrough the issue and come up withtheir own solutions, you will empowerthem to solve their own problems, and they may come up with answersthat you might have missed. This willalso work to build ownership withyour people. Since they have come upwith the solution themselves, they willbe more likely to buy into the processthan if they were simply following anorder. Ask your staff to tell you aboutwork projects or interests that they are passionate about. People who arepassionate about what they are doingneed little supervision as they will generate innovative solutions to problems on their own.


DELEGATION CHALLENGESWhile delegation has a number of benefits, one caveat to consider is that in

offering people new challenges, mistakes will be made. When people try new things,take on more responsibility or do something unfamiliar to them, the chances amistake will be made increase. Leaders need to treat mistakes as learning and growthopportunities and not land too hard on employees when the inevitable happens.Leaders should be less focused on their people making a mistake and more focusedon ensuring that the same mistakes do not occur repeatedly. Environments in

which perfection is the standard areenvironments where very little risk istaken, and people will constantly play it safe. Leaders need to delegate,but they also need to be aware of thepossibility of more mistakes.

THE DELEGATION PROCESSIdentify Goals

When preparing to delegate to anindividual, a leader needs to thinkthrough the process to ensure the actof delegating will result in a win forboth parties. On the front end, theleader should establish clear goals,including expectations for completingthe task and the desired learning outcome. This is an ideal time to discuss career development and howthis task relates to the employee’s path. This will orient both parties andensure no misunderstandings remainabout the assignment.

Clarify ExpectationsLeaders then need to give their

direct report the opportunity to askquestions, clarify their role and expresshow they feel about the assignment.Here, leaders need to encourage theirreports to think through the assignmentand how it will affect them personallyand the organization. This is a valuableopportunity for the leader to gatherfeedback. Is the assignment challenging,

or is it overwhelming? Does the individual feel he or she has the capabilities tosuccessfully complete the delegated task? Is the individual excited about the stretchassignment or anxious about it? This information is invaluable for leaders as theycontinue to refine their ability to delegate.

Here are some guidelines to helpincrease the effectiveness of your delegation efforts:

• Be specific about what you wantdone and the timeline for it. The less ambiguity around your expectationsand the final product, the easier itwill be for your employees.

• Do not delegate only uninspiring, boring tasks that you would like toget off your desk. Be open to delegating jobs that you enjoy andthat offer real developmental opportunities to your staff.

• Offer opportunities on projects thatwill increase the visibility of yourdirect reports within the company.

• Get to know your people and theirstrengths and challenges well, anddelegate to those individuals whoseingenuity, experience and abilitiesyou trust.

• Do not pile work on staff memberswho are barely treading water, even ifthey are your most conscientious.

• Take into consideration how much of your time will need to be investedin your direct report in order toaccomplish the task.

• Make sure your staff has all of the resources necessary to reach the goal.

• Keep the communication lines open,provide feedback and coach yourpeople to success.


Action PlanningNext, leaders need to fully plan the action with their direct report. This is a

good time to establish timelines and key interim points during which the leaderwill receive an update on the status of the project (without giving the impressionof micromanaging the process). The leader can also clarify the scope of authoritythe individual has to complete theassignment. These questions are essential to ensuring both parties clearly understand the structure of theassignment so the individual beingdelegated to does not do too much,not enough or constantly seek permission for what it takes to completethe assignment. Leaders need to have a discussion around the level of autonomy the employee can expect ashe or she works to complete the task.

Remove Obstacles and Monitor the Process

As the individual begins work onthe delegated assignment, the leaderwill need to be conscious of any roadblocks that arise. The leader’s task is to remove these obstacles. This mayinvolve communicating with others about the individual’s new role and increasedauthority during the assignment as well as gathering any resources needed to successfully complete the task.

During the assignment, the leader should frequently communicate with theemployee, making sure the employee is supported. This is perhaps the most challenging part of delegating for the leader — working to make sure the directreport is successful. Close monitoring of the assignment will help by alerting leaders

to early signs of difficulties. It also provides leaders with an opportunity tocoach and give feedback, which shouldbe used to provide encouragement,without interfering. Leaders shouldremember that accomplishing the goalcarries more significance than theiropinion on how exactly it should beaccomplished.

After-Action ReviewFinally, once the assignment is

completed, the leader should performa recap. During this meeting, theleader gives feedback to the employeeabout his or her performance and

As the individual beginswork on the delegatedassignment, the leaderwill need to be consciousof any roadblocks thatarise. The leader’s task isto remove these obstacles.


solicits feedback about his or her own performance in delegating. Both leader andfollower can use this review of lessons learned to improve future performance and review how the task fits into the employee’s career development.

BUILDING THE LEADERSHIP PIPELINETo maximize their leadership efficacy, leaders must learn to delegate

effectively. Delegation is a far more complicated process than simply shoving theleast exciting assignments onto any individual who happens to enter your office.

To truly benefit the individualsinvolved, delegation needs to be anintentional, purposeful activitydesigned to develop those in yourorganization. Leaders need to spendtime selecting the right assignment for the right person, taking into consideration the individual’sstrengths, weaknesses and areas fordevelopment. Leaders must providenecessary coaching and mentoringwhen the situation calls for it andopenly communicate throughout theentire process.

Performed in this way, delegationempowers individuals throughout anorganization, strengthens levels of trust and frees up leaders to perform

higher-level tasks. Delegation is a tool that allows organizations to build up theirleadership pipelines and increase the overall effectiveness of the work force.Delegation is an essential skill that is an important one for individuals to learnand master as they proceed on their leadership journey. ■

Tim Tokarczyk is a consultant with FMI. He may be reached at 303.398.7260 or via e-mail at

[email protected]. Willie Hepworth is a staff consultant with FMI. He may be reached at 303.398.7262

or via e-mail at [email protected].

Delegation is a far morecomplicated processthan simply shoving the least exciting assignments onto anyindividual who happensto enter your office.

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