Sunday, November 6, 2016

LA Stadium Project - Marquis Projects, To Pursue or Not Pursue

The much anticipated Inglewood stadium project plans are well underway, and with that the construction marketplace resources required to execute on this $2.6 billion dollar project will be spread that much thinner.  The stadium itself is expected to be completed in 2019, with all the surrounding development (labeled a “mini-city” by some) expected to be finished by 2023.  Many contractors will eagerly pursue work on such marquis projects leaving limited resources in the market to conduct other, recurring construction activities.  This drawdown on the supply of construction resources to the LA stadium project, as well as a host of other larger high profile projects online or soon to come online, could be a support for the pricing of all other projects.  This is welcome news for the southern California construction economy.

Contractors who work on marquis/trophy projects most certainly have the privilege of saying they worked on XYZ project.  What I've seen over the years is often times, in the final analysis, the financial performance of those projects doesn’t work out quite as originally planned.  Contractors may end up “paying” for the right to say they worked on a special project.  That payment is only financial, the stress involved in executing these large projects is not measured in dollars.  Why do these projects, in some cases, not turn out as originally planned?  For starters these contracts aren't the type typically executed by the contractor.  The factors involved are usually different than most every type of job a contractor has ever done before.  Additionally, sometimes the owners of these projects can be very tough on changes, having the attitude that the contractor is “lucky” to be associated with such a name brand company/project.  Generally, the contractor just bit off more than they could chew.  The technical challenges could be new,  perhaps it's their largest contract ever, or working in a new geography they weren’t familiar with or able to effectively manage.

With the above being said, one strategy might be to steer clear of the stadium project and focus on other opportunities.  Like I mentioned, there may be a built-in support for pricing giving the supply/demand impact the stadium project is likely to have on construction resources.  It might be worthwhile to not participate on the stadium project and do other work which should have good pricing opportunities. 

Some contractors I’ve spoken with have relationships with large contractors already committed to the project and consequently, will also need to work on the project due to that relationship.  Those cases are fine as long as the history generally supports that the smaller contractor will be taken care of in a fair manner.

I am not saying that a contractor should not consider pursuing large, trophy projects.  I am saying to carefully measure the opportunity, reconcile it with your capital (including bonding capacity utilization) and personnel structure, capacity, skillsets, and your other backlog.  Also consider the opportunity cost regarding other potential projects if you don’t take on such a large contract.  Although it may be more expensive to administer ten $2MM projects, the concentration risk associated with executing one $20MM project could be too great.  So consider whether it makes sense to pursue a large, marquis project…especially if it is different than anything you’ve done before.  Remember the old saying…”discretion is the better part of valor.”