After years of acquisitions and nearly nonstop expansion, Century City infrastructure firm AECOM is shedding some of its financially riskier construction projects.
AECOM Chief Executive Michael Burke said during the company’s quarterly earnings teleconference call with analysts last month that AECOM is exiting what he called “at risk” construction work in international markets and is reviewing similar construction work in the United States. These are projects in which the firm uses its own workers for the actual construction work or agrees to a guaranteed maximum price for contracts with project developers, leaving the company on the hook financially for most cost overruns.
The company would focus more on what it considers lower-risk construction services, such as managing subcontractors or providing consulting and other professional services related to project development and construction.
“(We are) de-risking and honing our focus on higher-margin, lower-risk professional services markets, and we have said all along that we are taking a very hard look at our at-risk construction,” Burke said in the earnings call. “We have totally withdrawn from at-risk construction in the international markets. … We are working to exit our at-risk construction businesses with hard-bid, fixed-price contracting.”
Exiting this business involves two steps: selling off some existing “at risk” construction contracts to other construction companies and passing up future bidding opportunities for this type of work.
AECOM is not the only major engineering and construction firm to shed construction work. According to Gary Tulacz, senior editor at Engineering News-Record, a publication of Troy, Mich.-based BNP Media Inc., several companies that provide both engineering and contracting services have moved away from the contracting side in recent years.
“Contracting is a competitive field, and the margins are low for the amount of risk involved, so it is natural for a company that provides both engineering and contracting to focus on the engineering side, which is higher-margin work,” Tulacz said.
In AECOM’s case, Burke said the decision to exit the at-risk construction business is part of the largest restructuring effort the company has ever undertaken after years of rapid growth through acquisitions and aggressive pursuit of contract opportunities.
Since Burke joined the company as chief financial officer in 2006, the company has made some 50 acquisitions, including spending more than $500 million for three major construction firms: Tishman Construction Corp., Hunt Construction Group Inc. and Shimmick Construction Co. Inc.
AECOM’s revenue last year topped $20 billion, and its contract backlog is more than $50 billion.
But a substantial portion of the revenue and backlog consists of lower-margin construction projects — an issue of concern for investors, especially at a time when construction costs for both materials and labor have soared.
Burke said in a December presentation to investors that another step in the restructuring is a plan to reduce general and administrative expenses by $225 million. And he said the company has repurchased $210 million worth of stock in an attempt to boost shareholder value.