SEC Roundtable
By Roibín Ó hÉochaidh (05/25/2010)

Correctional News extended invitations to several leading security electronics contractors to participate in a roundtable discussion about the industry, major challenges, fundamental shifts and future trends. Dave Easter of Easter Owens, Jerry Forstater of Professional Systems Engineering and Warner Speakman of ESI Companies shared their insight, experience and opinions on a range of industry issues.

Q: To what degree has the economic downturn affected the corrections market, a sector often characterized as recession proof?

Speakman: The fact that crime is down is reflecting into the market. Any time you see a private corporation with a large surplus of beds — which I think is the case across the board with all the large private prison guys — that tells you the economic downturn and tax-base issues are having a deep impact on the market.

If these guys don’t have their beds full, then they don’t have the funds to build new beds or, potentially, even to maintain old facilities. If it’s discretionary, then it doesn’t happen. Everybody is watching expenditures; that’s what I’m seeing across the state and county levels.

Forstater: Private corrections is a two-edged sword where you have a combination of public and commercial justice facilities. With the latter, you’ve got investor groups tied to the facilities beyond the owner/operator.

Unfortunately, we’ve seen a lot of emphasis placed on immigration recently with a lot of detention centers being built. From a social or economic standpoint, that kind of facility is not self-sustaining. I don’t think anybody in corrections believes they will be housing these people for years and years.

From left: Forstater, Easter, Speakman

While it might help cities and counties to defray costs in the short run, that won’t be the case in the long run. Then the question for many jurisdictions becomes, “How do I sell my bed space? Who can I turn to?”

On the government side, the mandate of those charged with handling and managing detainees and the incarcerated has become much more difficult to manage because of the overage in population, limited funds and costly benefit commitments.

On the one hand, while there are going to be ICE facilities built, the bulk of what is not being done by the government right now will have to be done in the future. We’ll likely see a rebound this year or next that will involve everything from studies to programming, plus the facilities themselves have to be renovated every 10 years.

Due the to 24/7 operations and extreme conditions of correctional facilities, 10 years of use actually equates to 30 years of use — the standard building lifecycle. So every three years, owners and facilities departments should be thinking about the next renovation. If you look at it that way, everything has to be done next year or the year after, otherwise the whole thing falls apart.

The economic changes we’ve seen have really affected companies in the corrections market and everybody’s been hit to some extent. From our standpoint, PSE — it’s our 25th year — happens to have a lot of momentum in justice and corrections. For some reason, jails are being built in Pennsylvania, New York, New Jersey and North Carolina, and we’re involved in much of that work, plus some smaller renovation projects out West and down South.

In fact, since December 2009, we’ve seen a big uptick. Of course, it may be specific to PSE and our network, but we’ve got more than $1 billion in construction in our portfolio right now, mostly state and borough jobs, about 50-50.

Easter: Like any other market, ours is being affected greatly by the economic downturn, and in a broader sense, I don’t believe corrections is recession proof. At one point, I used to think that this market was resistant to just about any kind of hit, economic or otherwise. That was until we had our experience in Illinois with Gov. [Rod] Blagojevich, which made me realize that the government can do anything it wants. It can suspend projects halfway through, if they choose, and essentially leave everybody hanging. Now I’m pretty gun-shy, even when I hear that a project has been funded, because that really doesn’t mean anything anymore. I’m cautious about how we proceed on projects and how we collect payment.

Having said that, we’re also very fortunate right now in that corrections is probably only 20 percent to 25 percent of our business. That’s changed significantly since the ’90s, when it accounted for about half our business. Then again, that could all change, depending on how the economy turns around.

Right now, it’s brutal out there. There isn’t a lot of work and we all know what happens then: margins go down as competition to win projects increases. As a company, we really try to pick and choose our projects in this kind of climate. The retrofit sector — going back to jobs we did 15 years, 20 years, even 25 years ago — is our most successful sector at the moment because it doesn’t require quite as much money. It’s not new construction, so they don’t require any sort of bond issue or passing of any kind of additional tax measure to secure the funding to move the project forward.

Speakman: Clearly, Jerry and I are also in agreement on this question. I think the general consensus in our industry is that we’re not bulletproof. We have to face the economics every day and the decisions that are made at the state and federal level.

Q: A number of industry professionals have expressed the view that the market activity has shifted from the state level to county and municipal projects. Where are you seeing the bulk of the work right now?

Speakman: I’d like to comment on one of the points Jerry made, which relates to your question. While the duty cycle of these buildings is 24/7, a 10-year cycle is really the ideal. In reality, you see that getting pushed out to 15 years. That’s been the case with most of the facilities we’ve worked on over the last 25 years. Having said that, after 15 years, the facility is certainly worn out.

Now, reflecting back to another marketplace in 1983: The hospital-construction industry shut down almost completely — new construction, renovation, everything. But guess what? It didn’t take but one or two years until all of the hospitals were back. And they had to spend money to renovate, to upgrade, to build new facilities, and that has never really shut off since that time.

So, while I think we’re up against a similar scenario in prisons today, we all know you’ve got to maintain those buildings. And we’re busy; our business mix is about 50 percent new construction and 50 percent remodel, with a little heavy remodel and maintenance work. The majority of that is at the state level.

Q: Dave mentioned shrinking margins and increased competition. What kind of market changes are you seeing?

Speakman: Well, with increased competition squeezing margins further, the way to get a project today, with the way the market is, is to leave out a certain amount of the job. Price point is the only consideration in many cases, and as far as I’m concerned, to win a project on that basis, you have to miss something. The guy that leaves out the most is the one who’s going to win the project.

Q: So cost is the driving consideration for owners at the moment?

Forstater: I agree with that, but I’d like to rephrase it somewhat. I started as an estimator almost 50 years ago, and I would frame it like this: If you want to win a job, then don’t hire an estimator. Simple as that. If you want to guarantee losing the job, hire the best estimator you can find.

Easter: Jerry’s absolutely right on that. The industry has become very, very price sensitive, to the point where there doesn’t seem to be any other consideration. That’s just the way the market is at the moment. You can’t deliver the project that was specified to the owner/end user at the required price.

A lot of things get thrown into the specification and the consultants don’t even know if they fit or work together. But they’re not responsible — we are. It’s left up to the integrator to sort it out and make sure it works. In that situation, it’s hard to put enough money in your bid for that sort of thing and still win the job.

The integrators are really rolling the dice every day, assuming we can accomplish the task or several other pieces of the integrator specification that may or may not have been there before. Really, we’re being asked to throw a dart at it. Hopefully that dart is on target and we guestimated correctly.

Forstater: Dave has hit on another important point. When push comes to shove — and the same thing happens with the contractor as it does with design firms — the firm selected for the project may have never worked on a corrections project before. Maybe they’re the local guys or they’re connected in some other way, but they don’t have the right team in place with the necessary experience. Then they’re fed information from vendors, and even by justice people who think they know technology, and they end up saying, “Oh, I want an IP-based camera system,” when really they have little idea of what’s best for the specific job.

Easter: We see more and more of that. They say they want 500 cameras, 24/7 recording and a host of other capabilities, but then want to get it all for next to nothing. How can that work?

Q: How does that impact the project?

Forstater: They honestly expect to spend $500,000 on what comes out as a $2 million job. Then everybody asks, “Why is that? What’s going on?” and they look to the architect for an answer — not to the engineer. The architect then says, “Here’s what you do — just shave this, shave that,” until pretty soon what used to be a beautiful horse has been transformed into a camel. That camel holds a lot of water, sure, but when you’ve got to get somewhere fast, you no longer have the racehorse you need to get there. Of course, that [value-engineering] happens on the design side of things as well.

Look at the Benner Township project that’s on the street now for the state of Pennsylvania. That’s on its second go-around because every bid in the first round was over budget.

They have a points system in the RFP where they tell you how they’re going to grade your submission. They’ve also insisted on a $100,000 check — submitted with your bid application — to get into the bidding process. Now, here’s the catch: If your bid is $1 over — I think it’s $181.37 million — then they get to keep the $100,000 even though your bid has been excluded. I can’t believe that’s even legal.

Q: How do the changes affect the industry or the way you do business?

Speakman: Well, that alone would put a lot of people off bidding right there. I’m thankful we’re so diversified as a firm, because we would just walk away from a job like that and go looking for some other project that’s a lot less drama and less brain damage.

In these economic times, it’s hard enough just making payroll and all that good stuff, let alone dealing with that kind of baloney.

Forstater: Going back to the Benner job, let’s say they select three bidders for the project, and each had come up with a $100,000 check. Let’s say one of them comes up with this extraordinary technological achievement that saves $10 million, so their bid came in $10 million under, while the other two guys are right on target.

State officials are going to give that information to the other guys to see if they can be more competitive. I think that gives you some idea of what’s going on in the market and how the market is reacting to the economic downturn.

Speakman: I would hope that the purchasing agent on that project would have zero bids because we’ve seen this kind of cutthroat-type logic before. Unfortunately, the general contractor that takes that job is not worried about his costs. He will simply go through the layers of sub-contractors, taking the subcontractor who walks through the door and is willing to risk taking a bath on the job, losing his house or whatever over that project. This kind of practice is really an industry loser.

Easter: That’s absolutely right. When you have these projects, it’s going to cost so much that something has got to give. With security electronics, the more complex you make the specification you put out and expect the security electronics package to meet, the more money it’s going to be. So if you’re not expecting that, then don’t specify these complex integrated systems that are going to cost real money if they are going to be done right.

Forstater: A side note on the client in this Benner project: They specified non-IP cameras, but we found going analog was vastly more costly and less powerful. That’s really where the consultant should come in to say, “No, it’s going to cost you more here, but it will cost you less there.” There are no hard and fast rules with a lot of this integration of technologies. It really applies differently in different locations.

Easter: In terms of analog versus digital, and every other solution, it depends on the size of the site, whether it’s a state facility, county facility or federal facility, how it’s laid out in terms of lines of sight, and so forth, and, of course, what they want to accomplish.

Forstater: I think the point we’re all making here is that decisions are not being made on a clear basis, but rather on the basis of cost — as troubling as that may be — due to the situation government budgets are in right now. And unfortunately, they’re not always right.

Q: What are the consequences for the owner of making decisions solely on the basis of price point?

Easter: Basically, the likelihood is that one or two years down the road, the thing is going to crash, or they’re going to have one problem after another.

In many cases, they will end up either put a Band-Aid on it and spend a lot of money on a service agreement, or they will rip the whole thing out after much less time than it should last. That’s what we’ve seen in facilities that are just six, seven, eight years old that should be working but aren’t. Often these facilities end up holding the bag, with no drawings — it’s the darnedest thing I’ve ever seen. They end up with no documentation, or very little, which makes it very hard to go in there and try to figure out what the previous guy left behind. So, you can see, in the end it’s a tough deal for the end user.

Speakman: This kind of practice creates additional exposure for the end user. Anytime you have construction conflicts, you are guaranteed to have owner issues downstream. The smoother the job goes for all parties — owner, consultant, contractor — the better the job will be for everyone through the life cycle of the facility.

Easter Owens

ESI Companies

Professional Systems Engineering

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