Skanska’s NYC blueprint

How the construction juggernaut became the city’s primary infrastructure builder

Jun.June 01, 2016 11:00 AM
Skanska-570

Clockwise from top left: A rendering of the new LaGuardia Airport, the 7 train station at Hudson Yards, the Oculus at the WTC hub and tunnel construction for the Second Avenue subway

LaGuardia Airport, which last year saw nearly 30 million travelers, is one of the most derided transportation hubs. It’s been compared to a Third World country, criticized for its outdated facilities and relatively puny size. So when Gov. Andrew Cuomo announced a $4 billion redesign last summer, it was considered one of the most important public infrastructure projects in the country. To win the redevelopment competition was a chance to create a city icon and win a plum contract. But at the end of the day, given its scope, only a handful of companies could vie for the project.

“These jobs are so big, they are a lot to chew on for one company,” said William Gilbane III, who heads Gilbane Building Company’s New York office and opted out of the LaGuardia bidding process.

Within the industry, it came as little surprise that the award went to Skanska, a global construction juggernaut that over the years has become one of the leading contractors for high-profile infrastructure projects in New York City. The redevelopment of LaGuardia represents the biggest construction contract in the Swedish company’s history. Skanska will lead the first half of the project as part of a team designing and rebuilding the airport’s main terminal.

All told, it will be at least the 17th major transportation redevelopment in NYC that Skanska has won in the past two decades. In recent years, it has worked on the World Trade Center Transit hub (as well as the steel dome above it, referred to as the Oculus), the No. 7 train extension, the Second Avenue Subway and the first phase of the Moynihan Station at the James A. Farley Post Office — projects that together represent more than $10 billion worth of construction. Skanska is currently awaiting word on its bid to expand the Javits Center, a $1 billion project that will add 1.2 million square feet to the convention hall.

Simply put, when it comes to big public projects, Skanska’s got game. As the city faces the crisis of aging infrastructure, the company — whose U.S. division has over the decades morphed from a relatively unknown player into the third largest construction company in the country — is primed to take on a lot of the rebuilding. In January, Cuomo laid out a $100 billion infrastructure plan that in addition to LaGuardia would also include the redevelopment of JFK Airport and Penn Station. As part of a trend in public infrastructure construction, many of these projects are slated to be “design-build” — assigned to a single contractor, which tackles both the design and construction. Such projects, which function as public-private partnerships and shift some of the financial burden onto contractors, have become increasingly favored by cash-strapped government agencies.

Of the players, Skanska, which took in $7.1 billion in U.S. revenue last year, has positioned itself as design-build veteran. After a series of acquisitions in the 1990s and a somewhat difficult restructuring in the mid-2000s, the company has developed a wide breadth of project management skills. Its bonding capacity of $10 billion reflects its sizable financial net.

For example, with LaGuardia, which is set to break ground later this year, Skanska is working with a group of well-known aviation pros, including the Vantage Airport Group, Parsons Brinckerhoff, Walsh Construction, HOK and Meridiam Infrastructure. The consortium, known as LaGuardia Gateway Partners, will issue $2 billion in bonds backed by airport revenue to help pay for the project, and will operate the new terminal through 2050, giving a portion of the facility’s revenue to Port Authority.

Skanska“That was a huge, very complicated team,” said Thomas Webb, general manager and executive vice president at Skanska USA Building. “There’s very few in the country that can do something like that, let alone in this area.”

‘Out to conquer the world’

Skanska’s history in the U.S. goes back to 1971, when it began tunneling work in Manhattan. At the time, the company was primarily known for its civil work, which includes building core infrastructure like pipelines, highways, roads, bridges and subway tunnels. But over the years, it began acquiring local construction companies. The companies, which tacked Skanska to the end of their names, largely functioned independently from its parent corporation. But the acquisitions allowed Skanska to erect buildings and take on more complex architectural structures.

“When they bought us, we were a small regional player. When I left, we were doing $4 billion in business,” said Michael Healy, who worked at Sordoni Construction, a company Skanska bought in 1990, before rising to become the head of Skanska’s U.S. building division in the 2000s. “We were out to conquer the world,” he added. “And we sort of did.”

The ramp-up in its building side coincided with Skanska’s move toward design-build work, which began in 1989. The transition proved to be prescient: Soon after, the federal government began focusing on such contracts. Other public agencies followed. As of 2014, 25 states permitted their agencies to use the method, according to the Design-Build Institute of America. This year New York, which has lagged behind other states, expanded the number of state agencies, including the Empire State Development Corporation, that can authorize design-build. As an already seasoned design-build contractor, Skanska will have a distinct advantage in the bidding process. The small list of competitors in this arena include AECOM, which worked on the Barclays Center and One World Trade Center, as well as Turner Construction, Lend Lease and Tutor Perini. Representatives for these companies declined to comment.

“They’ve been a major player in the [civil] construction arena for a very long time, but we’ve seen them grow and take on more and more on the building side in the past 10 years,” said Aine Brazil, vice chairman of engineering firm Thorton Tomasetti, which worked with Skanska on building the MetLife Stadium in New Jersey and is now working with it on LaGuardia.

But while its business in NYC appears to be booming, last year was a bit bumpy for the U.S. company’s construction division, which reported a 29.7 percent decrease in operating income, bringing it to $459 million. The company attributed the drop to $88.9 million in write-downs stemming from client design changes across six projects. In November, Skanska CEO Johan Karlstroem told Bloomberg that the “turbulence” wouldn’t change the company’s strategy in the U.S. but said the company should make sure that it doesn’t “go faster than what we have people and capabilities for.”

High-stakes projects

While there is certainly prestige associated with having one’s banner attached to major public projects, the role is not without risk. Given the number of stakeholders, politics, public financing and complexity, public projects come with heightened scrutiny and liabilities.

One of the company’s biggest projects, the Oculus, opened in March to decidedly flat reviews. The transit hub’s construction was punctuated by soaring unforeseen costs, a series of delays and even a natural disaster in the form of Hurricane Sandy. The project’s cost had swelled to $4 billion — roughly twice its initial estimated cost. As a result, it has drawn the ire of critics and public officials who have labeled it a boondoggle and a symbol of government inefficiency. And since at least 2013, the 7 train extension has been plagued with leaks. Lawsuits against subcontractors on the project blamed the use of spray-on concrete or “shotcrete” for the leaks.

Back in 2011, Skanska settled federal fraud allegations for $20 million. The company was accused of hiring minority-led subcontractors to help win lucrative government contracts but who didn’t actually perform any work on the projects. The company has since reviewed its practices and created training programs for subcontractors, Webb said.

Asked to comment on some of these recent issues, a Skanska spokesman issued the following statement: “We are proud of our work on these projects. Sometimes, there are factors outside of our control when a project is getting off the ground, or issues that are beyond our scope of work, but we always try to under promise and over deliver and work hand in glove with our partners. It’s part of the territory that comes with the job.”

With regards to the Oculus, Skanska has pointed to the public’s generally enthusiastic reception — the very first visitors were so taken by the soaring ceiling that they snapped photos of it lying down.

“Right after it opened there were, like, 50 people on their backs,” said Mike Viggiano, who heads Skanska USA’s Civil Northeast division. “I’ve got to say that that’s one of the biggest compliments that we could have gotten. People are stopping just to take pictures with this amazing structure.”

Like many infrastructure projects, the Oculus required a lot of jumping through hoops. Construction couldn’t interrupt the No. 1 train and couldn’t interfere with the rest of the World Trade Center construction. Its 588 structural steel pieces — which weighed 11,500 tons — had to be shipped by boat from Italy to Red Hook and then driven by truck over the Manhattan Bridge at night.

“We’re really proud of how it came out, but it took everything that we had to get it right,” Viggiano said. “It was a really tough project. The tolerances were very negligible. We compare it to the thickness of an iPhone. That’s how the steel had to align. That’s how tight it was.”

Private-sector hurdles

Skanska’s commercial property-development business is fairly young in the U.S., having only launched in 2008. But earlier this year, it announced that it would expand commercial development in major U.S. cities, including New York, San Francisco and Miami.

One potential vulnerability, when it comes to private-sector clients, is the growing prevalence of non-union work in the city. The company hires only union subcontractors in New York, Webb said, because it believes union outfits are the best trained and have better safety records. Public projects often require union labor anyway, but when it comes to private-sector jobs, the lure of less expensive open-shop labor could make competing a harder sell to prospective clients.

“Is it a concern down the road? Yes, it’s a concern. Look, there are statistics out there, there are projects being built now in Manhattan that are open shop, non-union that never would have been totally non-union five, 10 years ago,” Webb said. “My hope and wish is that, working together with organized labor, we can find a solution there to continue to work union here on major projects in the city because I think they are the best-trained individuals.”

Not surprisingly perhaps, Skanska’s executives have a strong presence in union-friendly organizations in the city. Skanska USA CEO and President Richard Cavallaro was recently named chairman of the New York Building Congress, an organization that lobbies for the construction industry. Meanwhile, Richard Kennedy, chief operating officer for Skanska’s building division, is co-chairman of the Building Trades Employers’ Association.

Quote

Despite Skanska’s strong commercial presence, residential and high-rise projects aren’t part of its core business. 

“In this city, many times, you’re not chosen for a project unless you can show that you’ve done five exactly like it, usually about a stone’s throw from the project they’re proposing,” he said. “So there are some barriers to entry there.”

One of Skanska’s most recent forays into the residential arena in New York City was somewhat disastrous. Skanska and Forest City Ratner teamed up in 2012 to build B2 BKLYN, a tower in Prospect Heights that the developer touted as the tallest modular in the world. Forest City selected Skanska to create and help run a modular factory in Brooklyn and to assemble the 32-story tower. But following a series of delays, relations between the developer and construction company soured, culminating in dual lawsuits. Forest City imputed delays and tens of millions of dollars in cost overruns to Skanska, claiming that the company was incapable of properly erecting the prefabricated modules and halted work to hide its subcontractors’ shortcomings. 

“The more Skanska floundered, the more it manufactured excuses to evade responsibility for its own malfeasance,” the lawsuit claims. “Simply put, Skanska was in over its head from the outset and lacked the wherewithal or the willingness to invest the time, energy and funds to recover from its delays.”

Skanska, however, claimed that Forest City’s project design was flawed and company head Maryanne Gilmartin exaggerated when she told the press that the company had “cracked the code” of modular construction.

In November 2014, Forest City bought out Skanska’s share in the project.

Forest City declined to speak about the ongoing lawsuits.

Webb said the situation won’t change Skanska’s strategy when it comes to pursuing residential and modular projects.

“While there are lessons learned with every project that we do, in rare cases, there are just some conflicts that can’t be resolved,” he said. “We will continue to pursue high-rise and residential projects by identifying the right partners and projects for our business.”

Moynihan Station

In 2012, Skanska won a $148 million contract for the first phase of the Moynihan Station project, which includes constructing a concourse west of Eighth Avenue that will provide access to the LIRR and Amtrak tracks and connect Moynihan with Penn Station.

Skanska is expected to complete the first phase by September 2016.

Like LaGuardia, Penn Station has earned some unflattering superlatives, most recently being compared to various “circles of hell.”

Its redevelopment has dragged on for roughly two decades. In January, Cuomo booted developers Vornado Realty Trust and Related Companies off the Moynihan project and issued a joint request for proposals for the redevelopment of Penn Station and the second phase of Moynihan. Skanska is now working with Vornado and Related to compete for the latter. 

With the number of developers and contractors involved, projects like Moynihan stress collaboration. David Rodrigues, who works as the onsite representative for the project’s architect, Skidmore, Owings and Merrill, said Skanska has a strong organizational structure and doesn’t play any “contractor games,” like slowing down productivity in order to get paid for additional hours.

“There’s sort of a quality level that’s been better than some of their peers that I’ve worked with,” he said.

Speaking generally about the dynamics of a design-build relationship, Webb said that sometimes disagreements arise but that it ultimately fosters a more collaborative work environment.    

“At times, there’s been some head-banging between design firms and construction management firms. What I like about design-build is that it almost forces you to build those relationships and invariably, it results in a better project,” he said. “It’s like a family. There’s going to be disagreements, but you ultimately provide the best product for the client. And yes, you’re taking on the risk, but you’re solving it together as a team.”


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