Mark Green: Please provide us with a brief history of Gray Construction from its founding in 1960 by your parents, James Norris Gray and Lois Howard Gray, to today.
Stephen Gray: Mom and Dad had five children. Dad was kind of a farmer, kind of a deal maker, a little of this, little of that. He grew up in Cumberland County, Ky., where his parents were owners of a little general store. Specialty of labor had not arisen to where it has now, so you did a little bit of everything. Dad farmed for a while, and next thing you know they had five kids, and Dad was like: This is not getting it. And my mother was probably highly in agreement.
So her father got him a job building – his first job was a tobacco barn on his farm. But Daddy and Mother were always about friendships, and that transferred into doing business with friends. In a small Southern town (Glasgow, Ky.), that translated pretty well. Their first projects were small commercial stuff: schools, banks, hospitals, a little addition here, a little addition there. Manufacturing was starting to roll into the South, and Kentucky was starting to benefit. You can kind of trace the history of our business a little with the history of manufacturing, when it became enchanted with the South, for a lot of reasons: good workforce, good work ethic, and education was sufficient. They did some small manufacturing projects, and that really laid the foundation to where we are today; 80 percent of what we do is manufacturing.
MG: When did the company move to Lexington?
SG: My brothers Jim and Howard made that decision. We had an office here in ’85; we moved our headquarters here in ’88, and that had to do with chasing a market.
SG: Yes. And manufacturing, the Japanese market, foreign manufacturing. You look at what we do today, and it’s still very consistent. We knew we needed to be here at that time. Toyota (Motor Manufacturing Kentucky in Georgetown) got all the sexy headlines, but to keep Toyota supplied, you had to have 100 (other) plants.
MG: How did Gray go from building small projects in Barren County to getting that Toyota contract?
SG: Our number-two (company core) value is being customer-relationship driven. We understood – my brothers Jim, Howard and Franklin and all the people who worked with them – we would get a part of that deal if they could build a strong relationship. They still had to compete, clearly, to win it, but the part of that project they bit off in ’86 was the result of building strong relationships and building a level of trust so that (Toyota) wanted to work with this company.
MG: How much of that Toyota contract did Gray get?
SG: It was probably 20-25 percent of the original construction investment. It was the plastic shop. It was probably $20 million, $25 million, which was a large contract at that time.
MG: How many full-time employees does Gray have today?
SG: Across the full company, it’s about 700. It’s around 200 here in Lexington. We have field staff of 175 people. Nearly 400 team members are in Kentucky.
MG: What are the functions of those 175 in the field?
SG: Our roots come from a small-town general contractor, where you’re swinging a hammer. When I was working summers that’s what I was doing, too. As we transferred more to a design-builder, we let subcontractors do that kind of work. However, we have an office in Versailles that we call Gray Ohio Valley – they service Kentucky and Indiana and have about 30 ‘self-performance’ people actually doing the work on job sites. The balance is what we call the professional staff. The field staff are the site managers, field engineers, assistant site managers, safety professionals.
What’s difficult in the construction industry is getting those people. The number one person on the site is a site manager. The difficulty these days is finding the talent that can live 70 percent of their life in a hotel and be away from family.
MG: So Gray doesn’t employ construction workers directly? That goes through subcontractors?
SG: Gray employs just the self-performs I mentioned. This is a guy who actually pours concrete. So we, “self” as in Gray, “perform” that labor ourselves. That’s called self-performed labor in the industry.
MG: The self-performs work smaller projects?
SG: Right. Our Versailles office (Gray Ohio Valley) does projects in Kentucky and Southern Indiana, and their typical project size is less than $10 million, where Gray Construction’s project size is $30-50 million.
MG: How many construction management hours do you provide or oversee annually?
SG: If you add up all the labor through the subcontractors on our project sites and throughout the whole company, it’s over 7 million per year. We’re responsible for managing the subcontracts.
MG: Does Gray own or maintain equipment or is this obtained on an outsource basis as needed?
SG: Only our Versailles office has equipment; it’s a minor amount. So Gray is not putting a lot of money into what people refer to as “yellow iron.” For us, we need capital to back the business. A lot of the construction industry is a little different than other industries because the (surety) bonding company wants you to keep a substantial amount of capital in the business. Through the years, that’s been our discipline: to maintain a high amount of liquidity in the business. If we were tied up in equipment, it would be highly illiquid. In the recession, companies were having hard times, and they were dumping D-9 Caterpillars for half the value. We don’t want to get in a position like that.
MG: So your assets are mostly your people?
SG: Yes. Absolutely.
MG: Your website presents projects ranging from individual retail stores to massive manufacturing plants. What is the range of projects that Gray builds? What is the most common size and type?
SG: Manufacturing is our typical project. It’s going to be design-build, going to have some engineering component that is a little bit tricky, and there’s a high chance it’s going to be a foreign company. The average is $30 million, but some projects are over $200 million. Geographically, we’re going to be 70 percent in the Southeast, and that’s because that’s where the manufacturing has been in the last several years. We work all across the U.S.
The full organization is Gray Inc. Maybe 80 percent of that is Gray Construction, what Mom and Dad started and you’re most familiar with, and its major market is manufacturing – and within that: automotive, and food and beverage, and general – this is probably 70 percent. Retail is only probably 5 percent. What we call distribution – warehouses, distribution facilities – that is 25 percent.
Gray Ohio Valley in Versailles and Gray West Coast located in California came by acquisition 10 to 15 years ago. Gray West Coast, they’re kind of flipped: about 60 percent retail, probably 10 percent manufacturing, and then 30 percent entertainment and hospitality, hotels and that type of thing.
MG: When you say engineering challenges, what would be an example for that?
SG: It could be like the project in Franklin, Ky., the Fritz Winter (North America LP) forge. They have very heavy foundations, so that’s a structural foundation, but they’re also a very large electrical user. The electrical engineering and the syncing up between the supply side on the electrical and the equipment has to be pretty snug.
MG: One of your big projects, Champion Petfoods in Auburn, Ky., has cleanliness engineering challenges?
SG: USDA standards now apply to pet food facilities. The facility that we just put together is essentially designed around human (consumption) standards. Their biggest nightmare would be sending out 700 25-pound packages of dog food that’s contaminated. Our responsibility is to design a facility that they can clean easily and that can be kept clean. It’s not our responsibility to clean it, but our job is to bring design details that ease cleaning and eliminate the possibility – if they clean it right – of bugs, of getting either people or pets sick.
MG: Gray ranks highly nationally in multiple construction sectors: third in manufacturing, and in food and beverage plants, fifth in automotive, seventh in distribution plants. Is this by intention or a natural evolution from opportunities?
SG: Until 2008, it would have been non-intentional. After 2008, it’s very intentional. Pre-recession if somebody said, “Hey, there’s a great job over there at (the University of Kentucky),” we would have said, “We’re on it.” We would have focused on the dollar volume and said that sure will be good. Then we went into the recession and thought we could try to switch to hospitals, switch to public institutional work like university projects, do this other stuff. But we don’t have any resume for that kind of stuff. Plus, there are already great companies here that do it. What are you going to do, beat them out of it? That’s unlikely. So essentially we understood after the recession what we do really well and what we can be best at in the world. We decided we’d be best in the world at design-build of manufacturing facilities in the United States.
MG: Which sectors of construction are generating the most business and money now? Is that always changing?
SG: The recession cut the total dollars spent in construction from $1.2 trillion to $800 billion; you lost a third of your work. We’re just about back to that $1.2 trillion annual spending in all of it – housing, commercial, warehousing, manufacturing, utilities, roads, bridges, the whole thing. What markets are strong? It seems like they’re all responding well now.
MG: How has the rise of “advanced manufacturing” affected your business, and what do today’s customers need that’s different than it used to be?
SG: Advanced manufacturing is more automated, has more robotics, things like that. Utility systems have to be designed around and integrated into that. The integration of those advanced manufacturing components into the facilities, and planning for them, has to be considered by the construction industry. Advanced manufacturing is more of an issue after construction because the owners’ riddle is, how do we find a workforce that can run this facility? We currently are doing a lot of work you could consider advanced now. The Champion Petfoods job, clearly advanced manufacturing. They’re just going to be pushing buttons. A pork production facility (we are building) has a lot of hand-worked steel, but there’s a growing, higher level of automation especially with the conveying systems, the cooling systems. For us, where we have to ramp up to meet the needs of advanced manufacturing is on the engineering side. Our engineers have got to be pretty plugged into it.
MG: Regarding the design of modern facilities, how much does the customer instruct you what has to be there, and how much do you advise them what to do?
SG: It depends on the customer. Some really are forthright in asking that we bring ideas to the table. Some know what they want. Some of them pretty proscribed and even have equipment vendors that they mandate. It depends on the customer: how long they’ve been in business, what their product is.
MG: Are most of your customers businesses that have been around for years and know what they want?
SG: For the most part. However, for example, Clemens (Food Group for whom Gray is building a 550,000-s.f. pork processing facility) in Michigan, the facility they’re in now has been there many years, and they’ve added pieces and parts to it. Building a new greenfield facility was totally foreign to them, so even though they know their process, they relied on our team heavily to help them make the flow through the large facility we were designing the best and most efficient it could be. We knew the snap chill design to take the temperature down from, like, 80 degrees to 30, super rapid. They sell meat by the pound, and the longer it stays at a higher temperature, the more moisture is evaporating out because a cold, dry environment is going to suck it right out. If we can get it frozen faster, that impacts however many pounds of meat you get out of 10,000 hogs a day. If we can bring something to the table like that for the customer to save them money in the long run, they are all over that.
MG: How did Gray manage to achieve and maintain its position at the upper end of the construction industry?
SG: Look at our number two company value: being customer-relationship driven. With a focus on customers, and customers in the right markets – in the manufacturing markets for us – there’s a high chance of repeat work. We see that customers in this market are more friendly to building relationships. Another area is focusing on our people, helping them grow, letting them make what I call strategic mistakes, letting them learn from them, giving them a sense of accomplishment and letting them know that, hey, they were part of this growth.
The two projects, the pork production facility and the pet food facility, those were teams of probably 25-30 people on each one of them. Everybody on those teams realizes they were a big part of the success of those projects. One thing we get away from is individual success stories. The team is the thing that succeeded. There’s a big focus on that. We’re trying to build a culture where success belongs to the team.
Also, say these two jobs that are unusual, highly complex and complicated are what we want to do in the future. We know we have a short shelf life after these jobs are over to follow up and sell other similar jobs. These stories are only good for so long. You’ve got to tell that story while it’s fresh.
MG: It’s a chain of continuous job acquisition and you maintain your expertise?
SG: Yes. And the jobs are similar to your people. They’re going to grow just like the people. That room we were in a minute ago, a lot of those people are very early in their careers. This is a great start for them. If you’re a 27-year-old out of college three or four years, and you get sent to Auburn, Ky., to work on that job, that’s a blessing. That’s a great thing. You’re not married, you don’t have kids, this is a great spot for you to grow.
MG: A focus on safety is Gray’s number one core value. How did that develop?
SG: To go back to the beginning, my mom’s dad was a country doctor; and anytime we would do something at home, Mom would tell a story that her dad had worked on somebody who got injured doing that. So the family’s kind of paranoid about all this stuff anyway. My brother Howard in the mid-’80s started focusing on it. We were one of the first general contractors that required our steel subcontractors to be tied off (with a safety harness) when they were erecting steel.
The big transition you’ve got to make is that it’s more than just the occasional glance at it from my level. It has to be an absolute focus of my job, and that means getting into the details on it. If we have an incident on a job, depending on the severity of it, we’ll have a conference call that afternoon with the site team, our project management team and the subcontractor involved. I sit in on about half of those. I want to understand it. Most of the time it boils down to somebody not making a good decision. What we’re trying to do is interrupt that decision process and get people to think. Over a period of five years, we got to this deal called the “Gray Safety Six.” Everybody who’s an employee at Gray goes through an orientation. It’s a full day with the business. They get an hour with me and the vice president of safety, and we spend time on the Gray Safety Six. There’s a story behind every single one of those: Planning; Go Fever; Blink Of An Eye; Communication; Stop; and Accountability. If we can get people to think about those things, then fatalities are not going to happen on our jobs.
Nationally, the numbers are somewhere between 600 to 800 per year, depending on how much work was going on. Every single one of these is preventable. There are 3,000, 4,000 people out there every day for us on 100 job sites.
MG: What factors affect the economic results in the construction industry? Is it material costs, labor, the overall level of the economy? Trade policy?
SG: Number one is the supply of work out there, and that has to do with the economy. General contractors are pretty resilient. Especially if you’ve been in business a long time, you know how to stay in business. Profit-wise, if you look at all the industries in the U.S., construction is in the bottom 5 percent of end-of-the-year profits on revenue. What does that mean? If you’re maintaining a profitable company in this competitive of an industry, I like to say we have the best managers of all industries out there, because they’re able to operate profitably with a lot of pressures.
MG: Do project managers work out of the office here or on site?
SG: Out of the office. Sometimes, depending on the size of the job, they will reside at the site. If it’s a project of $200 million and the customer is stationed there as well, we’ll probably have a project manager stationed there.
MG: You said U.S. construction activity is finally back up at the pre-recession level; what does that suggest, if anything, for the broader economy?
SG: That’s a good sign. The indications we’re seeing in our market are strong for the next three years we believe. Construction also can be an early indicator of negative trends, because construction projects in their early stages are easy to cancel. If customers haven’t committed the money, they’re very early in the contract, it’s easy to say they’re going to delay this thing for six months. And we saw that a lot in 2008, 2009.
MG: Gray clearly understands the key to winning a large-facility construction contract? What is it?
SG: It’s different for various markets. Our market starts with a heavy focus on the relationship and building trust. In the publicly-bid market, which is different, you assemble your number, you send it in, and the number’s opened up at a public bid. Ours is different because we’re having a lot of interaction with the customer before we submit a proposal; that’s where we’re building trust and building relationships. We want the customer to choose us to do the work long before we ever submit what the work will cost. We want them months ahead of time to say, “I know Gray. I trust Gray. They spent the time with me. They’ve clearly communicated their competencies. They’ve built my trust over time.” So that by the time the customer submits the RFP to a shortlist of those who will propose, he already is thinking that, “I want this thing to turn out for Gray.” And that is only because of the trust we’ve built up, long before the proposal comes out. Ideally they don’t even issue an RFP – we’re rewarded it and it’s negotiated. That doesn’t happen a whole lot.
MG: How do you establish new relationships with potential clients to start that trust building?
SG: It starts in (Vice President of Communication and Marketing) Jill (Wilson)’s world. She’s introducing the market to our business. If you think of it like a funnel, it narrows down to our business development teams. Through their networks, they will learn of companies that are planning for expansion. Then we make contact with them. Sometimes it can be years before the project ever comes out.
MG: What resources does Gray devote to pursuing future work, and how many projects you pursue versus the ones you win?
SG: We have about a 40 percent win ratio. If the Gray Construction will win 30 projects a year, that means we’re going to propose on 80 or something like that. Jill’s team, the (seven-member) marketing team, and (Executive Vice President) Jeff Bischoff’s (12-member) business development team, that’s all front end, setting the stage. On the average-sized job of $30 million, you’ll have 10 to 15 people touch a job in the proposal phase.
Jill has processes. But after that, then you have the operations side of the business that takes the proposal, and they’re going to generate ideas, drawings, estimates, schedules. But business development still stays heavily involved in that proposal, because they’ve helped build that relationship with the customer on the front end. They’ll stay in and help manage the process.
MG: How many projects are active at any one time typically?
SG: Under contract is 100, and so to get to 100 you probably have active in proposal stage it may be about 100, too, in all different stages. A job may stay at the proposal stage for eight months. It just depends on how fast the customer’s moving.
MG: Can you share recent revenue and profitability figures?
SG: The top line number for the last three years has been around $1 billion, $1.2 billion. And we’re maintaining profitability, and so we’re satisfied with where we are now. We’re expecting to continue to grow that top line number, but not a crazy growth, probably about 5 percent a year. It’s also dependent on what the market’s going to give us. If the market’s giving us two or three really big, meaty jobs, we might grow that a little bit more.
MG: Do you use much modular, prefab construction?
SG: Sometimes. You see that more in, like, the healthcare sector. In manufacturing, you’re not seeing it much. The biggest ways you see that is in the precast concrete. You see it some in mechanical and electrical where they’re able to assemble systems offsite. If they can assemble large, electrical banks and bring them in that’s a good thing, rather than doing it all down in a ditch.
MG: What are the most important or influential trends, broadly, in the construction sector nowadays?
SG: A big deal is labor in all forms – labor in management, labor in design, labor in the crafts, labor in field management. It is a tight world right now, and if you have any skills and talents at all, and you’re not employed in this industry, something’s wrong.
MG: Gray Construction describes itself as an “engineering, architecture and construction firm.” This joining of functionality is a broad trend across the industry. Why have construction companies moved from being the builder to the designers and engineers as well?
SG: We’re a bit unusual. There are a lot of firms that do design-build, but there are not a lot of firms that do design-build and carry the overhead (integrated design-build). On the first floor and part of the second floor all those people are all designers, architects and engineers. There’s only, in the United States, about four or five companies that will make that commitment to keep these people on staff. Most of the time in design-build, a general contractor will team up with a design firm or will hire the design-builder as a subcontractor.
MG: All right. Anything that we haven’t touched on that you’d like to mention, or do you have a closing statement?
SG: I will say one big area that we’re focused on is the development of leadership in our people. That’s a trend that is emerging. Traditionally in this industry, we’ve taught people to figure out, how do you calculate a cubic yard. Right? Companies are starting to spend significant dollars on individual training and programs to build people up in their decision-making process, and how they think about leadership, and how they behave. So this is the soft side of the business. ■
Mark Green is executive editor of The Lane Report. He can be reached at [email protected]