Leadership through Innovative and Responsible Solutions

It seems that the market has been sending confusing signals for years now.  While the Architects Billing Index (an indicator of future opportunity for the construction Industry) shows construction opportunities flat, our internal market indexes are down and our backlog is up. 

While the future of the marketplace is unknown, what is clear is that if we want to continue to grow, we must take initiative because the market isn’t going to do it for us!

At Harris Companies, part of our strategy is to continue to grow through both market sector and geographic expansion.  As part of that plan I am pleased to announce that as of July 1st, R.M. Thornton, Inc., located just outside of our nation’s capital, has become a part of Harris.

Our relationship with R.M. Thornton dates back over 15 years as a member of our Mechanical Contractor’s Peer Group.  The genesis of the transition began in 2009 with a Peer Group visit to Superior Air Handling, which had become a part of Harris Companies in 2008. 

Bob Reaves – the then owner of R.M. Thornton who attended the audit – was impressed by how the integration of Superior had taken place, and concluded that, “this is the way I’d like to see my business perpetuated after I leave.”  Discussions began in earnest in 2012, with the deal officially sealed in July of this year.

A risk in any merger or acquisition is a lack of cultural fit.  Our long history with R.M. Thornton provided us with an insight into their people and culture that is rarely achieved in a standard business deal.  It was through this understanding that we became comfortable knowing that Thornton would be a good fit for Harris Companies.

Like Harris Companies, one of R.M. Thornton’s market filters is technically challenging projects.  This often leads their team to pursue work in challenging environments such as existing hospital work.  Both Harris and Thornton also prefer to pursue projects with a best value selection process and have a rich history of repeat business and long-term relationships with dedicated client bases.

R.M. Thornton, located in Capital Heights, MD is our first geographic expansion to the East.  While much of their work will continue to come from their existing client base, we will also leverage the new location and resources for potential work with our national customers who have either a permanent or project specific presence in the area.  In addition, the new location and local team provides us with additional resources to execute Harris Companies’ projects within the current backlog that are located nearby.

As has been our practice in the past, the business will continue to operate as R.M. Thornton and will be branded as, and become integrated with, Harris Companies

2011 is over and we are well on our way into 2012.  While markets continue to be challenging I am happy to report, that in February of this year our backlog hit a record high.  Also, for the first time ever our employee count exceeds 1,000 individuals nationwide!  While tough times are not yet in the rearview mirror, these trends provide some reason for optimism.

2012 finds us working as far west as Hawaii and as far east as Florida.  While our local offices pursue a wide variety of work, the work we find ourselves traveling for is primarily Health Care, Industrial, and Federal.

At Harris Companies part of our vision is to be a full-service contractor in the markets we serve.  To us that means HVAC, plumbing, process piping, controls, and service.  Occasionally we find opportunities to advance this vision through strategic acquisitions.  It is with this goal in mind that I am proud to announce the newest addition to Harris Companies.  As of March 16, 2012, North Glacier HVAC, an Ogden, UT based HVAC service provider, became a part of Harris Companies.

North Glacier was founded in 2003 by Darryl and Pamela Silberman.  From the beginning, North Glacier has grown mostly through word of mouth and its great reputation.  Historically the company has served large industrial parks, commercial office buildings, data centers, hospitals and clinics, as well as municipal groups.  Interestingly, one of North Glacier’s customers uses a helicopter to fly Darryl in to service remotely located critical equipment!

Darryl decided to join Harris Companies when he realized that he would need better access to resources in order to meet his customers growing demands.  He is very excited to have the platform and support of Harris Companies’ extended network to continue to grow and develop further in the HVAC market.

North Glacier will become a part of Harris Service operating out of our Salt Lake City office.  North Glacier employees will become a part of the Harris Service team and will be integrated into our existing operations.  To avoid confusion in the marketplace, we will transition the North Glacier name and logos to Harris Service over the course of the next few months.

Please join me in making our new team members feel welcomed and supported!

If you’ve ever read Jim Collins’ “Built to Last,” you’ll recall one of his principles to sustainable innovation is to “Preserve the Core/Stimulate Progress.”  When speaking of evolution and innovation he further goes on to ask two fundamental questions of a new idea; ”does it work?” and “does it fit with our core ideology?”

While these questions seem fundamentally obvious, most of the best ideas in life are.   It’s the discipline to honestly ask those questions and act on the responses that is important.

When we as a company stumble upon an opportunity that involves technologies we already possess, and partners we’ve already established a history of success with, it makes answering the “does it work?” question very easy.  When the opportunity is focused on reducing our clients’ operating costs while improving sustainability, the “does it fit with our core ideology?” question becomes straightforward and effortless.

In the Fall newsletter, you may remember our cover story on the Residences of Spring Hill; a luxury adult lifestyle condominium complex in Toronto being developed by Rossbro Development Corporation.  In the article we discussed that the project would utilize a CHP (Combined Heat and Power) plant provided by Buttcon Energy, integrated with our TRAK GeoExchange system to achieve unparalleled system efficiency, cost reduction, and energy independence.

Based on the success of the Spring Hill project, TRAK International, Buttcon, and Rossbro have created a new business, 4e², to collaborate, market, build, operate, and maintain these innovate systems, providing green electricity, heating, cooling, and thermal storage to the multi-family residential, healthcare, senior living, and district plant markets. 

4e² brings together partners with established track records and proven technologies to lead the market place in providing a comprehensive solution for our customers’ energy and mechanical needs.

Most of our current opportunities for 4e² are in Canada, but we have already begun marketing the systems in the United States as well.

History is just that, history.  Never the less, we can learn from, or at the very least be entertained by, history.  Sr. Vice President Randy Stewart and Vice President Rob Latta set out to learn a little more about the history of Harris Companies.  Through their research and interviews they were able to trace the roots of the company farther back than anyone had anticipated.

Some time prior to 1931 Charles and Aaron Harris started Harris Brothers, located at 1607 Selby Avenue in St. Paul, MN.  Several years later around 1948 Charlie stepped out on his own and formed Charles Harris Plumbing Company at 474 University Avenue in St. Paul; the business later moved to 229 Ohio Street.

In roughly 1959 Charlie called his son, Ron Harris, and son-in-law, Shelly Stewart, and told them he was leaving for Florida the next day, and if they wanted the business they should show up in the morning to get the keys!  Thus was born the Harris Stewart Companies.  Their tag line can still be seen on this historical society photo (http://www.artsmia.org/viewer/detail.php?v=12&id=25358), right above the first floor window:  “Choose your plumber like you choose your physician.”

In 1968 the company again moved to 2300 Territorial Road in St. Paul.  Through the years the Harris Stewart Companies grew to consist of Harris Mechanical, Northstar Fire Protection, Northwestern Service Incorporated, Allied Metal Craft, Hickory Insulation, and Hunt Electric.

In 1983 a group of managers bought the companies from Ron and Shelly, and these various companies under the Harris Stewart banner went their separate ways.  Both Harris Mechanical and Hunt Electric continued to occupy the same building at 2300 Territorial Road until 1997, when Harris moved to its current location at 909 Montreal Circle.

Harris Companies has changed dramatically since it began as the Charles Harris Plumbing Company in 1948.  As we have grown, our vision and expectations have evolved and matured.  While pursuing our goal to become one of the nation’s top mechanical contractors, we naturally begin to explore new geographies both to establish a permanent presence, and even more commonly, to target a project that meets our specific talents.

In addition to the somewhat “normal” challenges associated with a local project, travelling for projects brings its own set of challenges.  It was back in the 90’s that we began to learn the lessons that have allowed us to effectively and competitively travel for projects today.  In 2010 alone we had payroll in 18 states and provinces, as well as working with over 30 different unions.

Some of the lessons have taken longer to learn than others.  For example, in our early days of working remotely we would enter a project expecting to self-perform all of the work under our contract.  This experience in turn led to a complete reversal of past actions and generally, Harris planned to subcontract as much work as possible.  Having seen both sides of the fence, we’ve resolved that in the majority of cases it is best for us to self-perform a significant portion of the work, while still developing relationships with local contractors.

To be a contributing member of the team one needs to have a vested interest in the jobsite; for us this means self-performing work.  On the same token subcontracting smaller or less critical portions, allows us to develop local relationships which are important in learning about the local workforce and for service/warranty after the project is complete.

Certainly a challenge we face on a regular basis is developing a team to travel.  It is critical when self-performing work to have a Superintendent that is committed to the site full-time, and if at all possible positioning the Project Manager on site full-time as well.  On large scale projects it is conceivable for the team to include CAD/BIM personnel, assistant project management, and project engineers.  While it is at times possible to hire some of these individuals locally, the majority of the team must be existing Harris personnel.

Undoubtedly learning the talents and skills of a local workforce is challenging as well.  As a union contractor we have the advantage of having a skilled labor pool to draw from.  However, every union is different, and the relative skills and capabilities vary by geography; for example, some have more of an industrial focus, while others are commercially oriented.  It is with time and experience that we have learned to better work with local unions to help bring about success on a project.

While all of these challenges are surmountable, they create additional risk.  It is only through 20-plus years of experience that we have learned what it takes to manage these risks in order to survive and prosper while performing work on the road.  The flexibility to handle work nationwide has certainly helped us over the last few years of challenging construction markets, and it remains a part of our business plan both now and in the foreseeable future.

The dust has settled on 2010, and despite a difficult market, it was a great year for Harris Companies.  Our backlog rose to record levels at the end of 2009, and continued to grow at a controlled pace throughout 2010. 

Looking forward, 2011 holds promise for greater revenues, increased backlog, and a number of great opportunities both locally and nationally.  I would like to take a moment to update everyone on some past initiatives as well as talk about what’s new for 2011.

Our investment in Algaedyne Corporation continues; Algaedyne’s mission is to provide the world with a cost competitive replacement for fossil fuels, while having a positive impact on the world’s environment.  The pending patents held by this company allow algae to be grown in a variety of environments and with a variety of feedstocks.  Progress continues on a pilot project in Chili, Wisconsin, and we are under contract to provide additional algae reactors for an existing client in New Jersey.

In addition to our involvement with Algaedyne, Harris, in partnership with Adolfson & Peterson Construction has constructed a mobile anaerobic digestion plant for Novus Energy, LLC.  The mobile plant will be used to demonstrate the waste mitigation and energy production capabilities of this advanced anaerobic digestion technology.  The plant is currently running in our St. Paul warehouse using onion waste as a feedstock.

Last year’s acquisition of Salt Lake City based, Wasatch Controls also finds us branching out into new market segments.  In addition to expanding our controls possibilities, which has long been a part of our core business at Harris, Wasatch provides alarm, access, and CCTV, all of which are new offerings for Harris.

New for 2011, I’m excited to introduce Harris Energy Services.  The mission of Harris Energy Services is to provide capital solutions to our clients’ facilities, and finance these projects through a reduction in operating expenses.  Any contractor worth their salt is already making recommendations for high efficiency equipment, documenting the benefits, and maximizing utility rebates.  Harris Energy Services takes it a step further, from conducting a proactive analysis of the entire facility, to assisting with funding, grant writing, and maximizing tax advantages.  While we have been performing these projects for some time now, forming a separate group reflects our focus and commitment to this promising market.

At Harris our core purpose is “Leadership through innovative and responsible solutions.”  While it is easy to see how the opportunities presented above are environmentally responsible, I’d like to point out that “responsible” to us also means financially responsible for our shareholders and constituents.  These new initiatives, while certainly representing changes in our business, responsibly use the existing talents, resources, and structure of Harris Companies, and position each where the probability of success is greatest.

Whether or not the economy improves in 2011, it will be an exciting year filled not only with new challenges, but also valuable opportunities!

A week or two ago I had the opportunity to visit several of our projects in San Francisco.

Two of the projects are being delivered under an IFOA (Integrated Form of Agreement) contract.  On these projects, we are part of a multi-party contract with the project Owner, Sutter Health, and other key project participants including the General Contractor (DPR), design-team, and other key specialty subcontractors.

In an IFOA agreement there is a shared profit pool established for the project.  Before work begins the parties agree to a percentage share of that pool.  Throughout the project the pool can either grow, as we beat our estimates, or reduce in size, as we encounter issues.  The key is that everyone shares in either the increase or decrease proportionately.  The theory is that by aligning everyone’s interests financially, the best solution for the ultimate project outcome will be achieved at every decision point throughout the project life-cycle.

One of the projects is now nearly 30% constructed, and the other is just coming out of the ground.  After visiting these two project sites the real question becomes, does the IFOA truly create the environment it has intended to create; does it improve on the traditional construction arrangement?

The first thing you notice when you step into the job trailer is that there is only one shared job trailer.  All of the IFOA team members work in the same collaborative work space, including the Owner.  This is important not just from a cost standpoint (one copier, one receptionist, one IT infrastructure, etc.), but it is also important for the message it sends.  We do not want walls to separate the team members either literally or figuratively.

I was curious to see if the same atmosphere extended to the jobsite; it turns out it does.  One of the first examples is strict adherence to the BIM model that was developed.  On one project scanning had actually been implemented to verify the systems were installed as modeled.

When we were short a Trimble station, the General Contractor let us borrow theirs; after all it hurts everyone if any team members’ activities are slowed or made less efficient.

When walking the project with our superintendent he mentioned that one of our ductwork crews had moved ahead of schedule, and installed ductwork in an area that wasn’t yet scheduled.  On a typical project the temptation would be to go ahead with the installation, as it is much faster for us when no one else is in the area.  However, on this project our superintendent held the crew back to allow other trades to get their work in as scheduled.

In addition the jobsites were also some of the cleanest and most organized I have been on.  When your mess costs you money, you are likely to clean it up!

When I mention these jobs to peers in the industry, one of the concerns they often raise is that these contracts have not yet been tested in the courts, and the lack of legal precedent on their interpretation is concerning.  I find that interesting, since the whole point of the IFOA agreement is that the parties will work out their issues without the need for lawyers!

Life in general, and business life in particular, would certainly be much easier if we had a reliable way to predict our economic future.  While things generally look better than they did last year at this time, there is incredible variability in the opinion of economic experts as to what 2011 will bring.  The consensus forecasts tell us that things will be getting better, albeit slowly, with unemployment dropping to around 9% by 2011 year end, GDP growth reaching 3% by the fourth quarter, a Federal Funds Rate hovering around 1%, and inflation at roughly 1.5%.

While all of these statistics are better than they are today, taken together they certainly do not signal a robust recovery.  Additionally, many economists paint a much gloomier picture, with Real GDP growth at less than 2% next year, and unemployment rising to a peak of approximately 10% before it levels off.  One thing is certain; when times are difficult businesses need to evolve in order to survive.  With that being said, how has Harris positioned itself?

In this tough economic climate we continue to grow our focus on energy based work.  Over the last several years of focus, Bundled Energy Solutions and Energy Based Projects have continued to become a more significant part of our portfolio.  We have begun to push this initiative outside of Minnesota, bringing these solutions to Arizona and Utah.  In order to enhance this effort, a Bundled Energy Solutions group will be created in 2011.  Headquartered in St. Paul, this group will bring focused and direct resources to the energy market.

In order to offset some of the hardships experienced in individual markets, we will also continue to grow our national footprint.  We are currently working in sixteen states, spanning the country, from Hawaii to Florida.  When deciding to look nationally for work, one has to filter the number of opportunities and target specific projects so as not to be overwhelmed with the number of possibilities.   We continue to base our selection process on 3 factors: the first of which is working with repeat clients, secondly choosing projects that use a value-based selection criteria, and lastly seeking projects that are large and technically complex.  Applying these factors has led us to a diverse but robust backlog of work.  Our current backlog represents not only the largest we have ever carried, but has been consistently high since late 2009.

Our focus on Building Information Modeling has continued as well.  Currently we have over 24 full-time BIM specialists working mainly in St. Paul, MN, and Clearfield, UT.  We have found the benefits of BIM to be clear; fewer changes, more opportunities for fabrication, increased schedule control, and a heightened level of communication with the owner on a project’s outcome.  Not only have we found BIM to be a differentiator for us, but we’ve also begun selling our BIM services to other contractors, turning it into a multi-source revenue stream for Harris.

In spite of the down economy, 2010 has been an exciting and rewarding year with the purchase of Wasatch Automation and Alarm in Salt Lake City, UT.  In addition to travelling for specific opportunities, geographic expansion has become an important part of our growth.  We will continue to look at opportunities for a presence in new markets through the remainder of 2010 and into 2011.

Harris, like all other businesses that survive, will continue to evolve.  We are a much different contractor today than we were just five years ago, and hopefully, in 2015 we’ll be able to say the same thing!

On a recent flight to Phoenix I finished “Here Comes Everybody” by Clay Shirky.  It had been recommended to me by a business associate a couple of months ago.

The book discusses group action, and how new social technology tools (Twitter, Facebook, Meetup, etc.) are changing the way we interact by enabling group conversation, contribution, and action on a scale not previously possible.

Early in the book the author states, “Group action gives human society its particular character, and anything that changes the way groups get things done will affect society as a whole…For any given organization, the important questions are ‘When will the change happen?’ and ‘What will change?’  The only two answers we can rule out are never, and nothing.

Construction is an industry resistant to change, and as a subset of that, slow to adopt new technology.  We don’t generally use services like Twitter, and our business tends to produce a tangible, physical end-product that is difficult to deliver electronically.  We tend to judge these technologies by the inane uses we hear about on the news.

Never the less, this revolution will change our business.  Perhaps we will simply use these tools to foster cooperation within our company.  Perhaps entire projects will use them to help create a collaborative environment.

As the author states, it will be the people who take these new technologies for granted that use them to change our business.  I’d encourage you to read the book, and think about how your life might change.

It’s January, and it’s a good time to look back on 2009 and talk about where we are headed in 2010.

2009 ended with a pleasant surprise, being named the 2009 PHC (Plumbing and Heating Contractor) Magazine contractor of the year.  It was an exciting and humbling honor to receive.  If you’d like to check out the article you can visit it on line at http://www.phcnews.com/pdf/phc12_2009.pdf.

2009 was a challenging year, but we still managed to meet many of our goals.  While revenues declined from 2008, we still met our financial targets.  We were also able to exceed our sales target, and increase our backlog through the year.

As important as the numbers are, we have to keep in mind our strategic goals.  One of those is to establish Harris as the clearly recognized leader in our market place of creative solutions and sustainable construction.  We made strides towards this goal as well, expanding our resume of GeoExchange projects to include projects underway in Wyoming and British Columbia.  We were also selected for a GeoExchange conversion of an existing conventional school in Whiteriver Arizona that currently awaits funding.  This focus on GeoExchange, and creative and sustainable solutions, is one of the things that sparked the interest of the PHC editorial staff and led to our selections as Contractor of the Year.

During the year we also continued to expand our geographic reach and market depth as we booked new contracts in states including Washington, South Carolina, California, Arizona, Utah, Wyoming, Minnesota, Iowa, South Dakota and British Columbia.  We were also successful in a new market segment, procuring several Federal projects, an initiative that began in 2008.

2010 offers many of the same challenges and opportunities as 2009.  Doing the basics well in a tight market will continue to be critical, as will balancing resources devoted to strategic goals like Sustainability and continuing to develop BIM and pre-fabrication capabilities and efficiencies.

We once again anticipate our work coming from new geographies and markets in addition to growing our presence in markets where we have a permanent presence.  While everyone would prefer the construction Market of 2007, we are optimistic that 2010 will be a successful year for the Harris Companies and we feel we our taking steps to determine our own destiny, rather than the market determining it for us!

The National Association for Business Economics reported recently that during the last quarter industry demand expanded for the first time in five quarters.  The group also expects a rise in inflation-adjusted GDP in 2010.  This seems positive news for our industry.  Reading further though, another trend emerges.  When asked about plans for spending on structures, only 18% of the same survey expected an increase in the next year, and 24% actually expect a decrease!  Not good news for our industry.

I recently met with a representative from the Construction Industry Roundtable.  According to his data the construction market in the US was around $1.2 Trillion in 2007.  The market is projected to have fallen to $950 billion in 2009.  That’s a contraction of over 20%.  The contraction becomes even more sever when we consider the fact that, in the past, construction spending was generally 80% private and 20% public.  This year we see a change to over a third (34%) being public.  Since the public dollars are more likely to be spent on horizontal construction, this makes the decline in vertical construction even more severe than it appears just looking at the $250 billion decline from 2007 to 2009.

Construction unemployment also continued to rise this year in all states but Louisiana, with Nevada and Arizona (one of our target markets) leading the pack.

Generally the clearest driver of construction is employment, and until we see unemployment decline to normal levels, we are unlikely to see any substantial turn- around in the private construction market. 

Despite this gloomy outlook, opportunities still exist.  Many contractors, ourselves included, find themselves traveling more to find work; 2010 will mark the first year we perform more work outside of Minnesota than within.  Fortunately this is part of a strategy begun years ago, as opposed to a knee-jerk reaction to current market conditions.

All of this being said I am optimistic that the worst is over for the general economy, and that means that our industry is probably close to its bottom as well.

As I interact with other contractors, suppliers, and vendors both locally and around the country, I typically ask “How is the current economic climate affecting your company?” 

The results vary a little, with a few contractors still doing quite well, but from most the response I hear is that field employment by the end of the third quarter will be down to 50% or less of last years levels.  For specialty contractors like us this is certainly alarming.  More than other contractors, for direct installers like us, field installers are what generate revenue for our business. 

So what does this market trend mean for Harris, and why? 

Fortunately as a company we will see only a moderate reduction in revenue this year.  It is in times like this that the diversity of our portfolio truly pays off.  This diversity comes from two primary sources, geography and market sectors.

 Several years ago we identified that to be able to grow we would need to expand our geographic reach.  Two strategies developed.  The first was looking to other markets to develop a presence in.  This is what led us to Rochester, Phoenix, and Salt Lake City.  The second was improving our ability to travel and compete on a job-by-job basis.  It is the result of these two strategies that currently finds us performing work in fourteen states, and almost twenty states over the last two years.

 Markets sectors are another source of diversity.  While virtually every market is down right now, some are down less than others, and a few are actually up.  Healthcare and Industrial work have been mainstays for Harris for the last twenty years.  Over that time we have developed other market sectors.  One of the newest is certainly GeoExchange.  We currently have three GeoExchange projects under construction and several others in the planning stages.  Bundled Energy Solutions are another new addition.  By driving a project based on long term reductions in owning and operating costs we can create projects that make sense even in a down economy.  Our fabrication only businesses (which sell product to other contractors like us), Federal work, Data Centers, and Conveyor and Specialty Fabrication all provide diversity that helps to shave the peaks and fill in the valleys. 

The unfortunate thing about business strategy is that only history will tell whether you choose the correct one or not.  In the short term, this strategy of diversity provides us with some reassurance in today’s economic climate.  It has resulted in a relatively steady backlog and the strongest balance sheet our organization has ever seen.  While the consensus among economists is that the recession has either just ended, is ending, or will end shortly it will take time before our industry sees the benefit of that turn around.  I am sure that more challenges lie ahead, but we face them confident in our strategy and with the resources we will need to carry us through!

Change in our industry tends to move from the coasts inward, and Integrated Project Delivery, or IPD as it is know in the industry, is no exception.

Superior Air Handling, a division of the Harris Companies, is currently in the process of negotiating a multi-party contract for the Sutter Castro Valley Medical Center. The project is located in the San Francisco, East Bay area. The contract with Sutter Health includes the Architect, Consulting Engineers, General Contractor and the MEP team. All will sign onto one comprehensive agreement commonly called an Integrated Form of Agreement (IFOA).

The fundamental goal of IPD is to align the interests of all the parties to the contract. The contract puts at risk the fees of all of the major project participants to bring the job in under budget. The owner shares in the risk by being responsible for, at minimum, the cost of the project. Traditional delivery methods often put members of the team at odds with each other, while each party tries to protect their own contract. IPD does away with that by having the language of the contract match the stated intent of the parties to work together collaboratively towards the success of the project.

BIM is an important aspect of the IPD process. We have learned much working through this project. One of the most important aspects was evolving from a conceptual estimate to model based estimating. As the team advances the design, the model is integrated with estimating tools allowing the project pricing to be solidified as the design proceeds. The entire team can see in near real time the impact of their design decisions as the model and budget evolves.

IPD represents a significant change in the way we do business; It's a different model meant to produce a collaborative environment between the A/E, and the construction team. This collaboration allows the elimination of redundant design activities inherent in traditional delivery methods, reducing costs, eliminating rework, and saving time.

For more information on this process, check out the following link to an ENR article on the project.