Destination Unknown

State and federal funding concerns leave highway contractors searching for answers

By Bruce Buckley

The region's biggest highway contractors are finding new ways to keep revenues healthy while public funds remain tight, but others are left scrambling.

Despite a lack of highway funding in much of the Mid-Atlantic, American Infrastructure picked up several major projects in 2004, including a $44 million contract for the extension of State Route 43 in Maryland.

In an industry that relies largely on the whims of legislative bodies, these are uncertain times for contractors serving the highway and transit sectors.

State budgets are tight and future federal transportation funding remains uncertain. Congress has kept the federal program on life support through a series of stopgap transportation bills since the Transportation Equity Act for the 21st Century expired Sept. 30, 2003. Many state governments in the region are pushing alternative delivery methods to handle some of their more pressing projects, while savvy company executives are seeking non-government business to drum up revenue.

The region's big players find themselves in the best position to handle the current crunch. American Infrastructure of Worchester, Pa., one of the region's largest highway contractors, saw overall sales jump 10 percent in 2004 over the previous year, while backlog increased 6 percent.

The company picked up major projects in its home state, including renovations of stretches of Interstate 81. It also landed a $44 million contract for the State Route 43 extension project in Maryland.

But Joe Prego, vice president of business development at American Infrastructure, said he sees more uncertain times on the horizon.

"We will only start to feel the effects of what's going on with the federal highway program in 2005, 2006 and 2007," he said.

Prego added that he sees dwindling opportunities in Pennsylvania, where highway funds are becoming more limited or are being diverted toward transit projects such as those needed by the Southeastern Pennsylvania Transportation Authority.

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"Unfortunately, our governor sees fit to dip into the highway funds to support these other efforts," he said.

Instead, Prego said he is focusing more of his attention on Maryland, where Gov. Robert Ehrlich beefed up its state highway program by $237 million annually starting last year.

Like many other contractors, American Infrastructure is also looking to the private sector for sales. The boom in residential development continues to be a big source of business for highway contractors who are working on the necessary infrastructure for new subdivisions.

American Infrastructure and other major contractors are also taking an increased interest in finding and funding highway work through public-private partnerships in states such as Virginia.

The story is similar at Tidewater Skanska of Virginia Beach, Va. The company logged a solid year in sales for 2004 and added new contracts in the region, including the $89 million assignment for a new bascule bridge spanning the Pamunkey River in West Point, Va.

To keep expanding it business, Tidewater Skanska is also looking at opportunities in public-private partnerships. But Edward Keeter, vice president of administration at Tidewater Skanska, said opportunities appear slim in its home state, so the company often heads south to Florida and other states in order to keep revenues flowing.

"We have the luxury of being spread out a bit more than most people, so when one state's money is drying up, we go after others that are beginning to build," he said. "If we were stuck in Virginia, I'd probably be crying."

For many other Virginia-based contractors, those woes are unavoidable.

Virginia is looking at public-private partnerships to handle some of its highway needs. The State Route 606 interchange in Dulles, Va., is one of six interchanges being built over State Route 28 by a partnership between Clark Construction Group, Shirley Contracting and Virginia DOT.

"An accurate term for the Virginia market is depressed," said Rick James, president of the Virginia Road and Transportation Builders Association.

James added that the state hadn't passed a funding increase in nearly two decades, which he said means the current funding level has lost nearly 40 percent of its purchasing power due to inflation. Since Virginia DOT prioritizes maintenance requirements first, he said new construction work is drying up fast.

"It's anticipated that by 2014, based on increased costs of maintenance, we won't have a construction program because we won't be able to match federal funds," he said.

James, who is also vice president of Roanoke-based Adams Construction, said his company and many others in the state are making the necessary moves to stay active.

"You have two options in this environment - downsize or expand your territory," he added. "Two years ago, we downsized and since that time, we've pursued other markets. So you end up thrown into markets where you weren't previously competitive. That's not the best of all worlds."

In the meantime, Virginia has encouraged contractors to pursue public-private partnerships. The state has been one of the most active on the East Coast in working with such partnerships since it passed the Public-Private Transportation Act of 1995.

But the PPTA has limited applications. Mike Martin, senior economist with the American Road and TBA of Washington, D.C., said states such as Maryland and Delaware are increasingly taking an interest in following the Virginia prototype, but the delivery mechanism only works under certain circumstances. Projects with tight timelines or high costs that would sap state funds, for example, could be candidates for such partnerships, Martin said.

But in many cases, the sites are located only near congested metropolitan areas, and in every case the private funding needs a way to see a return, such as tolls.

"Public-private partnerships are a tool in the toolbox," Martin said. "Will it be a panacea to the industry? I don't think so."

Considering the size and scope of these projects, major contractors such as American Infrastructure remain the primary candidates to land them.

"Public-private partnerships are an idea that's here to stay," said American Infrastructure's Prego. "We've got significant problems in this country with our highways and this is going to be the way to go.

"But when you're talking about billion dollar projects, we have to go out and find partners like the Washington Groups and the Bechtels of the world. It's going to involve a change in the way we do business."

While Maryland isn't authorizing public-private partnerships yet, it is beefing up use of design-build. The state started using the design-build method in 1998 and today is second only to Florida on the East Coast in its usage.

Design-build represented about 5 percent of the state's highway program in the late 1990s, but today represents nearly 10 percent, according to the Maryland State Highway Authority.

The value of its design-build projects is also going up. Initially, it was used to fund sub-$10 million projects, but recently those values have jumped. The state's highest design-build contract value to date is the $29 million State Route 29 project in Montgomery County. This summer, it is scheduled to advertise the $50 million design-build contact for the Hampstead bypass in Carroll County.

Maryland is not short on big ideas. Widening sections of Interstate 95 and the construction of the Intercounty Connector between Montgomery and Prince George's counties are big-dollar deals that continue to be discussed. Both are being considered as possible design-build projects, according to the Maryland SHA.

But observers note that such projects could be reserved largely for the biggest contractors. Although the state bumped up its highway program by $237 million annually, dedicating more of those dollars to large projects in not good news for all of the area's contractors, said Brian Holmes, executive director of the Maryland Highway Contractors Association.

"It's my larger members who are more interested in design-build," Holmes said. "The medium- and smaller-sized companies tend to like the design-bid-build process. What we are concerned about is how the state will chop up these big projects.

"If you don't divide up the work at all, then you're talking about only the biggest whales in construction being the ones able to handle them."

Holmes said he sees many Maryland contractors banking on private work from residential developers. But as interest rates rise, he said many are anticipating a slowdown in private work and are anticipating more public work coming online once a federal transportation bill gets through Congress.

"There's going to be a huge upsurge in public sector work when the federal money starts coming in and the major projects come online," Holmes added. "But the highway program won't take off until the feds get off their butts and reauthorize the funds."