Underground Construction - July 2019 - 14

Daniel Shumate | Director, FMI Capital Advisors Inc.

Utility & Communications
Construction Update

contractor to provide labor to supplement
utility workforce, and demand-driven
spending on fiber infrastructure.
Two factors influenced the challenging
operating environment during the opening
months of 2019. Extreme winter weather resulted in a decline of construction
jobs during February, and record rainfall
impacted both March and April, either
slowing footage per day or sidelining work
in the underground entirely. The result
was a decline in revenue with an increase
in costs, impacting the companies within
the UCCI. Trenchless construction, pumps,
construction mats, shoring and other
methods promote safety and allow the
underground construction company to
continue to operate. However, the work is

Mixed revenue and profitability results
marked the second quarter of 2019 for
the utility and communications industry,
particularly among the publicly traded
members of the Utility & Communications
Construction Index (UCCI). Quanta
Services continues to increase both its
revenue and profitability. UCCI companies
are near all-time highs of revenue, but
experienced declines in profit margins
during the quarter.
Near-term growth opportunities remain
strong, with investor-owned utility and
telecommunication company capital expenditures expected to increase year-over-year.
The primary drivers of this spend are
similar: aging infrastructure that requires
repair or replacement, reliance on the
20%
15%
10%
5%
0%

S&P 500
UCC index

Figure 1. YTD UCC Index. Source: FMI Research, S&P Capital IQ; as of June 19, 2019
12%
7%
2%
-3%
-8%
-13%
-18%
-23%
-28%

Figure 2. 1 Year UCC Index. Source: FMI Research, S&P Capital IQ; as of June 19, 2019

14

JULY 2019 | UConOnline.com

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S&P 500
UCC index

-33%
-38%

-19
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much-less efficient and profitability suffers.
The second factor impacting the UCCI
companies is a trend toward "megaprojects" that can have an outsized impact on
profitability, even as revenue increases.
Megaprojects increased to 33 percent
of total construction starts in 2018 and
the trend continued, with $718 billion in
megaprojects being awarded in the first
half of the year.
The trend is expected to continue over
the next 10 years to address industrial
and infrastructure challenges across the
country. First, there are the projects that
are fixed price. Here, the contractor is
most at risk and can enjoy either great
benefit or loss, depending on performance.
However, the cost of labor and materials
has increased rapidly over the past two
years, so projects that were bid in 2018 can
experience margin fade as the jobs occur
over multiple years.
Another common type of contract is
a unit-priced blanket contract. These are
typically more favorable to the contractor
because total risk is broken into units
of work, and there are usually escalators
within the contract to handle significant
price increases. However, the rate at which
labor and material costs have increased
has outpaced the escalators. If a contractor
fails to anticipate the rate at which prices
will increase in the bidding of these unit
contracts, then the ability to perform well
on those units is severely impacted.
The result is a contract that requires
the contractor to perform work at tight
margins or at a loss over an extended
period, and can weigh heavily on contractor performance. As large blanket contracts
and megaprojects continue to influence the
infrastructure landscape, strong communication in the bidding phase, healthy rate
modifiers and clear authority chains to
modify contracts during construction are
a few ways that can improve contractor
profitability and lower total job cost.
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Underground Construction - July 2019

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