by DEBORAH JONES
The Globe and Mail Report on Business magazine, 1997
Ted Kirk starts each morning cautiously, with one wary eye on the weather. The assessment has become a daily habit for Kirk, PCL assistant project manager, because the project is a vast, 28-kilometre bridge between Virginia Beach and Cape Charles in Virginia, right where the North Atlantic routinely hurls squalls, and occasionally a hurricane, at the mouth of Chesapeake Bay. The pressure is intense: An epic tempest–a 100-year storm–during the vulnerable construction phase of the $197-million (U.S.) development could erase not only the project but the entire company. It doesn’t help that since work began in 1995, the Chesapeake has endured some of the worst winter weather in two decades, that seven workers died during construction of a parallel bridge in the 1960s–a history that still weighs heavily–and that rancour toward Edmonton-based PCL Construction Group Inc. percolates through the Virginia business community, still miffed that a local firm lost the contract to an outsider, a foreign one at that. As the construction team labours over the capricious whitecaps, Kirk and PCL’s other employee-owners are all too well aware of this and a more salient point–that it’s mostly big risks that yield big profits. u Risk doesn’t always pay, of course–just look at PCL’s recent past. It ventured into Asia hoping to build the Shanghai stock exchange, but nationalist politics gave the contract to a local firm. It abandoned its new Mexico City office after the 1994 peso crisis. A concrete stump is all that remains to testify to its abortive plans for an office tower in downtown Toronto, where PCL had achieved a major presence before the last recession hit. In fact, the construction industry is so fraught with risk–not to mention brutal competition and scrawny profit margins– that most new companies close within five years.
PCL, too, is susceptible–although, unlike its ephemeral competitors, it has managed to survive for some 90 years. With a record $1.8 billion (Canadian) in billings in 1996, it is the biggest general contractor in Canada and among the top 10 in North America. Quietly sandwiched between the artistic designers and the bold developers, it’s been responsible for much of the nuts-and-bolts architectural landscape in North America. In a notoriously volatile business, it has thrived for two principal reasons: solid fundamentals, laid down by its founders, and a deft ability to adapt to changing conditions.
And yet, despite that success, PCL is approaching a major crossroads. Its exposure to risk is high and increasing, as project owners force contractors to assume more responsibility–to the point of sharing ownership. At home, domestic growth is hampered by a maturing market and tough competition. Abroad, it confronts political uncertainties, currency fluctuations and some dubious ethical standards. Despite recent setbacks, though, PCL plans to venture abroad again, hoping that its no-nonsense approach can manage the swashbuckling risks involved.
Imagine a map of Canada and the United States, dotted with construction sites. Like Tonka toys in a giant sandbox, PCL’s own heavy equipment sprouts from the soil at a startling range of places. There’s the bridge on majestic Chesapeake Bay; a gravel road carved through a black pine forest in northern Alberta; a convention centre in Honolulu; a reconstructed office building in Toronto; and a new mine in northern Saskatchewan. Its standing structures range from Seattle’s KeyArena to Greater Vancouver’s Alex Fraser bridge to downtown Toronto’s BCE Place. All of this can be traced back to the ambitions of one Ernie Poole, a small general contractor who started building Prairie farmhouses, barns and small schools in Rouleau, Sask., in 1906.
As the West developed, Poole Construction Ltd. matured, eventually moving to Edmonton under the ownership of two of Poole’s sons, John and George. There, it grew steadily, in scope and ambition, building office towers in numerous cities. By 1977, the Poole brothers were ready to retire–with no obvious successor in line. Enter Robert Stollery, an Edmonton engineer. “At the time, we thought it was huge–we were doing $100 million a year in business,” recalls Stollery, who bought the company, became CEO and remained PCL’s driving force until 1993, when he stepped down as chairman.
To take control, Stollery assembled an imaginative financing and share-ownership package. The elements included a bank loan, deferred payments to the Poole family on 20% of the shares, and the sale of a 15% stake to Great-West Life Assurance Co. (that stake was bought back by PCL employees in 1990). Stollery acted on his belief that spreading ownership increases employee commitment and, ultimately, profitability. He invited 25 senior managers to buy an initial 15% of the company, to be followed by more later. All bought in. “A company is typically started by a founder/entrepreneur,” says chairman and CEO Joseph Thompson, an engineer who was one of the first to buy shares. “The second generation takes over and builds it up, and a third generation takes over and it goes to hell. We found a formula that provides for a successful succession.”
A few years after the employee buyout, recession and Ottawa’s National Energy Program hit Alberta like a blizzard. “It sent the construction industry into a tailspin,” says Merv Ellis of the Alberta Construction Association. “It’s never recovered. In 1982, we did $15-billion worth of work, and it dropped to $7 billion annually. Contractors who’d been in business for 30 to 50 years disappeared.” In 1982, PCL relied heavily on Alberta for revenues of more than $1 billion, which slumped to $850 million and held steady for the next eight years, with thin profit margins. PCL laid off 15% of its staff and froze salaries for all employees except senior executives, who took a 5% cut in pay.
Still, the bitter recession left a sweet legacy for PCL: expansion. To maintain even its reduced revenues, the company needed a bigger share of a smaller pie. Its base in the unforgiving Alberta climate gave it an edge in operating in all seasons and conditions. “Our people are mostly Western Canadians,” says Thompson. “They have a good work ethic and they’re pretty entrepreneurial.” In fact, PCL had already made inroads in the United States. Oxford Development Group Inc., then partly owned by the Poole brothers, had taken PCL with them as they developed urban areas such as Minneapolis. Now, PCL was taking its can-do Alberta initiative across the continent.
By the late 1980s, PCL had fine-tuned its business strategy, diversifying both by geography and by new types of construction–bridges, mines and sewage plants. When one area or type of construction lagged, it could simply shift to another. That approach had worked in Toronto. Before the recession, PCL had 300 salaried employees at its Toronto branch office, working on such prestigious projects as BCE Place and the Scotia Plaza. But, inexorably, the economic whirlwind that levelled development titans Bramalea Inc. and Olympia & York Developments Ltd. finally hit PCL. Its Toronto office shrank to 100. But “when Toronto went into the slammer, other areas were starting to get busy,” Thompson says. In Central Canada, PCL focused on smaller, tendered public works projects, shifting staff to Ottawa and other communities and taking advantage of the renovation work– from remodelling interiors to modest additions–that increases when new construction declines. (One area in which PCL has been relatively underemployed is British Columbia, largely because PCL is a union shop and non-union firms in British Columbia tend to wield a competitive cost advantage.)
Meanwhile, PCL also aimed to grow its market share abroad, starting with the United States. Other builders were doing the same. Eight years ago, for example, one of PCL’s largest competitors, Ellis-Don Construction of London, Ont., did no work in the United States; today, the United States accounts for more than half of its projects. “We look at it as a North American market,” says Ellis-Don marketing director Stephen Gash. The same pattern of revenues applies to PCL; in 1991, the company erected $428-million worth of construction in the United States and $932 million in Canada. Last year, it constructed nearly $1-billion worth of buildings in each country. Indeed, PCL has become so entrenched in the United States that most Americans assume it’s a U.S. company. PCL likes that just fine, because it helps the company avoid protectionist sentiments. “We deliberately play down our Canadian connections in the U.S.,” says Thompson, noting that shareholders include American as well as Canadian employees, and that PCL has a U.S. headquarters in Denver.
At the same time, PCL has moved aggressively into heavy construction, building mines, structures for the Hibernia oil field off Newfoundland and civil construction projects–a sector that has grown for the company from $145 million in 1991 to $331 million in 1996. Industrial and civil projects yield more profit, largely because some 80% of traditional commercial construction is subcontracted out, compared with only 5% of heavy civil/industrial construction like the Chesapeake Bay crossing. There is, however, a serious downside: The amount of risk rises proportionately.
Risk, in fact, is an issue that haunts PCL. A decade ago, it barely escaped paying all insurance costs resulting from a fire on a Minneapolis construction site that was set by children playing with matches. “It could have cleaned us out, because our insurance wouldn’t cover that type of problem,” says Stollery, 72, who still keeps a seat on the board. A plasterer’s son raised in the Depression, Stollery began his career as a bricklayer, then finished a degree in engineering after serving in the Second World War. “We’ve done very well for 20 years,” he says. But future managers, he fears, won’t fully understand how risky construction is. “Our people have never seen a year that we lost money, and now they look on us sort of like the government–and don’t realize how hard we worked to keep the wolf from the door or how close we were at times to being in serious trouble.”
For now, Stollery’s hand-picked successors, Thompson and chief operating officer Ross Grieve (he’ll become CEO in July) seem acutely aware of the dangers. “It’s a very, very high-risk business that warrants a high return on what we put into it,” says Grieve. “But there’s a lot of competition that puts pressure on profitability.” Although PCL says it made money last year (the company will not reveal figures), billings were $600 million below the $2.4-billion target. “We had some disappointments,” explains Grieve. Construction on the new Toronto Raptors arena was delayed, and plans for a semi-conductor manufacturing plant in Utah were cancelled. “It’s a tough business.”
That toughness may account for PCL’s dominant characteristic: conservativism in both image and day-to-day operations. Although it has built many of the sleek office towers that overlook Edmonton’s handsome river valley, the company’s own headquarters is set in a cluster of modest two-storey buildings amid the suburban sprawl of four-lane roads and industrial/commercial buildings of South Edmonton. The offices are spartan, and bosses still answer their own phones.
The old-fashioned style has served PCL well in the past; the next century may call for a more daring approach. For one thing, the industry is evolving, becoming more sophisticated, more competitive, more service-based, more global. The construction market in North America is maturing: For years, as the continent was developed, per capita spending on construction was five times higher than in Europe. Now, though, says Grieve, the boom is over. Eventually, if PCL wants to maintain its share or grow, it must look to markets in other countries–where the rules of the game are constantly in flux.
PCL found that out the hard way when it tried to establish a presence abroad. In Asia, it worked with Webb Zerafa Menkes Housden, the Toronto architectural firm that designed the Shanghai stock exchange building. “We worked for the best part of a year and were given a letter of intent that we were to proceed,” recalls Grieve. “Joe [Thompson] was asked to fly over to sign a contract. Then it seemed that forces from Beijing made the decision that the project should be done by Shanghai contractors. It underscored the high risk of dealing in new parts of the world.”
After the Shanghai fiasco, PCL decided to focus on Latin America. Alas, its timing was off–it arrived seven months before the Mexican peso crashed. Eventually, the company pulled its staff out of Mexico and put the office building it had bought up for lease. In hindsight, say company officials, PCL should have opened an office in Chile, where business is booming among Canadian mining companies. Part of PCL’s discomfort in many developing countries, says Thompson, is based on ethics and the company’s understanding of different values. “It’s really difficult to succeed without paying bribes,” he says.
For now, says Grieve, PCL is busy bidding on contracts in dynamic North America. Even here, however, PCL finds itself on unfamiliar terrain. Today, the company is part of several consortia, and owns parts of several developments, including part of a sewage treatment plant in Seattle and a dam near Red Deer, Alta. It routinely bids on privatization projects, such as toll highways, throughout North America. It is partnering with architects and engineers in competitions for work, and has signed joint-venture agreements, worth about $150 million, with a number of Canadian aboriginal communities, including a power plant near Yellowknife and several roads in northern Alberta. Recently, the Terra Nova Alliance, of which PCL Industrial Contractors Inc. is a member, won the tender to develop Petro-Canada’s Terra Nova oil field off Newfoundland–a $1-billion development.
Inevitably, Thompson reluctantly concedes, PCL will have to venture again into foreign markets. “We’re still keeping an eye on what’s going on offshore,” he adds. “We’d like to return to Mexico, and still think that’s a possible market for us. And we recently took a look at Chile. We found it interesting, but aren’t planning to jump in.” When it does jump, it will impose a stringent set of criteria on contracts, including safe accommodation for personnel, an owner that PCL knows and trusts, and an assurance that it will be paid without the risk of unusual currency fluctuations. And the project environment, he insists, will have to conform to PCL’s code of corporate ethics, which rules out payment of bribes or kickbacks.
That idealism may seem naive, especially when you’re swimming in the shark-infested waters of global construction and finance. But PCL didn’t become a big fish in a big pond by acting like a pushover. In Virginia, it won the 1995 contract to build the Chesapeake Bay crossing quite simply by submitting the lowest bid. The award was met with howls of protest by a local competitor that built the original bridge more than 30 years ago and had tendered a bid less than $4 million above PCL’s winning submission. When the loser filed a formal protest and threatened legal action, PCL stayed quietly above the fray, letting the local bridge commission, the project’s owner, fight the battle and give its own explanations. The strategy worked. Says a Norfolk, Va., journalist who covered the story: “PCL played a very cool hand against some very tough lawyers in town who didn’t get anywhere with their case.”
What its Norfolk critics didn’t know was that PCL plays an equally circumspect hand on almost all its projects, trusting that events will unfold as they should. Indeed, for such a large company, PCL remains remarkably low profile; construction industry observers from Vancouver to New York say that even now, they don’t know much about it. That, too, appeals to the PCL brain trust. It may be Canada’s biggest construction company, but it doesn’t want to be big for its own sake. “We don’t have a dying ambition just to grow larger,” says Thompson. “We want to grow with control.”
PCL’s Stakeholder Strategy
Unlike many corporations in this era of lean and mean, PCL has maintained a stable or growing level of employment, relying on the people it considers its strongest asset. That approach is dictated largely by its ownership–the company’s nine million shares are now owned by about 750 of its 1,300 salaried employees; no one person holds more than 10%. “It’s very much to our advantage to have people who have a vested interest,” says Ross Grieve, who will become chief executive officer in July. “There are 750 sets of eyes watching that we’re doing a good job.”
PCL requires that shareholders at all levels of management divest themselves entirely of their shares by age 64–a strategy aimed at keeping the company young. “Construction is not a business for guys in their 60s and 70s,” says former chairman Robert Stollery, who originally devised the ownership structure. Although the payroll includes people who have worked for PCL for four decades, the average employee is under 40. Share values are calculated on PCL’s fixed assets at market value, and a small amount of good will. Shareholders receive dividends on profit but all salaried employees participate in a profit-sharing plan in which 10% to 20% of profits–before bonuses and taxes–are distributed.
Ongoing education is also part of PCL’s total quality management program. PCL has an unusual approach to education. The company operates its own training program, called the PCL College of Construction, and in 1989 hired Peter Greene, former director of the acclaimed Banff Centre for Management, to run it. The company aims for 34 hours of instruction a year for each employee at the college, which can include continual learning at outside institutions, where PCL may chip in part of the tuition fees.
Employees, who like PCL’s ownership structure and commitment to education, also cite an intangible corporate culture as an asset. Says Chesapeake Bay bridge assistant project manager Ted Kirk, a U.S. engineer who joined the company two years ago: “This industry tends to breed a lot of highly visible characters, but PCL operates more like a team than any company that I’ve been with.”
Copyright Deborah Jones 1997