Mark Bonner: 00:08

Alright. Welcome to First Draft Live. It's Friday, August 15. I'm Mark Bonner, BizNell's editor in chief coming to you live for New York. Thanks to everyone for tuning in.

Mark Bonner: 00:20

But before we get started, I am proud to say for the first time that this episode of First Draft Live is presented by Agora. Whether you're managing deals, raising capital, or growing your portfolio, Agora is your trusted platform for seamless real estate investment management. Visit agorareal.com to learn more. That's Agora, real.com. Okay, today we're going to get into the construction danger zone and what it means when every bid, every contract, and every hire has to survive a cost environment we've never seen before.

Mark Bonner: 00:59

Non residential construction input prices are up 2.5% year over year, and that's before the August tariffs fully ripple through the supply chain. Copper products are already up 40% year to date. Steel and aluminum imports from The EU, Japan, South Korea, and now India carry surcharges of upwards of 50%. Fixed price bids are a scary place right now. Escalation clauses and shared risk models are back, and some owners are freezing start dates just to avoid getting caught in the next spike.

Mark Bonner: 01:35

And labor, it's tightening fast. 88% of contractors say they can't find skilled positions and immigration crackdowns in states like Texas and Florida are pulling crew crews off of job sites. That national shortfall could hit 400,000 workers by year's end. Higher ed is shifting too. Tighter visa rules are hitting enrollment forecasts, shrinking tuition driven capital budgets, and pushing universities towards renovations over new builds.

Mark Bonner: 02:05

Our guest today, Les Hisco, CEO of Shawmut Construction. He runs a 1 and a half billion dollar construction management firm known for their high profile work in higher ed, life sciences, and cultural landmarks nationwide. Please send your questions in the chat and we'll get to as many of them as possible. Les, welcome to the show. Thanks for being here.

Les Hiscoe: 02:27

Thanks for having me, Mark. It's great to see you this morning.

Mark Bonner: 02:30

So, Les, that's a lot that I just got through. Where do we begin? What does it feel like to be you right now? What is your greatest challenge in this environment?

Les Hiscoe: 02:41

Yeah, it's there are many, but it is, you know, it's a volatile, even use the word chaotic environment, and I think, you know, when things aren't known, you know, and you can't really plan on them in our industry, it's much harder to give our clients, you know, price predictability, schedule predictability, supply chain predictability, things like that. So we're just more on top of the supply chain and price and trying to get a year out in front of it than we ever ever ever have been, or have had to been, I should say. So it's, yeah, it's a it's a it's a bit of an uncertain time.

Mark Bonner: 03:25

Yeah, these tariffs have been a shock to the system, in particular for construction, as you well know, Les. I mean, how does this affect Sharmat's procurement and bid strategies at this time?

Les Hiscoe: 03:34

Yeah, so we've always done a high percentage of our work in what I would call a more kind of negotiated or kind of early pre construction way. It just calls the need for even more and more and more of that. So, you know, getting closer to our trade partners to understand exactly what the impacts on them are as far as price, being able to then accurately reflect that to our clients, but to do that in a collaborative way really early in the project, a year, two years before. I mean we've been in an escalating price environment for the last three years, and any client who is going to plan a project, the owners kind of create a budget two years ago, three years ago when they get their project approved for their company or for themselves, and three years of escalation on top of that, budgets never pencil on the first time we give them a number in today's current environment. So we're constantly fighting this kind of escalation environment, Tariffs just add another layer of complexity and they're kind of unknown or unpredictability.

Les Hiscoe: 04:39

They've gone up, they've gone down, they change every day. Just makes everyone more tentative, makes it harder to kind of give that predictability to our clients.

Mark Bonner: 04:49

I'm sure you're battling the headlines too. You know, every single day or every week, something new comes out of the White House as it pertains to tariffs. It's up, it's down, there's an extension. How do you how do you battle the headlines, when you look at the the spreadsheets that are in front of you? And then how do you communicate to clients?

Mark Bonner: 05:07

Two years out, that might have been a good playbook pre Trump and another administration that might have had a little bit more stability in terms of its decision making. This administration and, again, this is not a judgment on the policy. Things change rapidly by the hour, by the day. Are you communicating with clients when these things happen?

Les Hiscoe: 05:29

Just as kind of frequently and as in short a period of time as we can. You know, when we historically would get subcontractor pricing, they'd hold their pricing for ninety days because, you know, the contracting proposition is, you know, clients want to protect their cost risk by hiring us, and we then want to protect risk down through the supply chain by, you know, containing that risk with our trade partners, and then they contain it with manufacturers, etc. For the first time in a long time, you know, even manufacturers can't protect their costs, trade partners can't protect their costs, and therefore we can't. So we're in this open, in some way the headlines actually help us. It's so unpredictable that the headlines help us with the clients to say, you know what we're dealing with, and so we have to kind of face this together.

Les Hiscoe: 06:23

I often say to the clients, may pay a little more for this particular building at this moment in time, but you will have you know a long term asset that will work itself out. For us, it's a short term price risk that we can't absorb fully through the traditional contracting method.

Mark Bonner: 06:42

So to that end, I mean, are clients more open to escalation clauses and that shared risk model that you referenced?

Les Hiscoe: 06:51

For sure they're more open today. It's been, you know, I would tell you six months ago when this started happening, they were less open, and prior to the kind of headlines, we were in an escalating time through really 2022, 2023, 2024, clients were less receptive to escalation clauses, and we started doing this work back then, and we've gotten better at it, you know, as normal escalation, I'm going call it, just normal price escalation, with varying types of escalation causes tied to an index on a material, certain percentage limits with caps. The thing with the tariffs has been, you know, one day it's 10%, then it's 25%, then it's 50%. There's just no way for, you know, we'll just tell the clients, listen, we have to put some contingency in your project with that contingency that we very well may use. We'll use it together, we'll collaborate, and does your project pencil with that contingency amount of money in there?

Mark Bonner: 07:57

Yeah. Are contingency budgets, you know, in the pro formas ballooning? I mean, I know it probably was one thing a year ago. Do you have to make that wider to capture the unpredictability of what is happening with these trade negotiations worldwide?

Les Hiscoe: 08:13

Yeah, to an extent, I'd say yes. And you know, I think of the impact of tariffs alone on budget, and you know, I like to use the example of $100,000,000 construction project, 60% labor, 40% materials, so 40,000,000 in materials. Let's say 25% of that is imported. So 20 so $10,000,000 imported, apply, use round math, a 25% tariff to that material broadly, and it doesn't quite work with that, it's probably a little bit less, but that's $2,500,000. $2,500,000 on $100,000,000 projects, 2,500,000.0.

Les Hiscoe: 08:55

That's not going to make or break most projects of that size. However, you do have normal escalation if it's in the commercial real estate or developer space, you have the cost of capital, which has been, which really had things on the sidelines for a couple of years now as well. It's another additive factor that may cause something to stall. It certainly gives clients pause, launches us into a better pre planning process to find alternatives. And so we're constantly doing value design these days and value engineering to try to get clients budgets to work for them.

Mark Bonner: 09:29

There's been a lot of reporting that's come out of the business owners room over the last six months that some owners are delaying start dates to avoid these tariff driven cost spikes. Are you seeing that on your end, Les?

Les Hiscoe: 09:41

Not not delay specific because of tariff. We have seen it. We have had clients say we have projects on the shelves because of interest rates. One developer in particular has said, until I see a quarter, another quarter point drop, we're not going to pull things off the shelf. We've had another large real estate developer, we need a point drop to make our numbers pencil.

Les Hiscoe: 10:05

So not tariffs specifically, and the weighting to me, the effect of tariffs has already caused some price increase. And so one solution is to go domestic with all of your procurement. Well, that's going to create a demand issue domestically, and those prices are going to go up. So I think waiting is a mistake, and that's what we're advising our clients. Waiting is a mistake.

Les Hiscoe: 10:33

It's never it's not going to get lower than it is right now.

Mark Bonner: 10:37

Labor is also causing pressure nationwide on construction sites. You know, we've got this statistic here from the Associated General Contractors of America that says 88% of firms can't fill skilled roles this year. Trump has stepped up immigration enforcement, especially in places like Texas and Florida as we discussed. He's trying to pull both undocumented and legally authorized workers off of job sites, tightening an already short labor pool that's a generation in the making. That national shortfall could hit 400,000 individuals by the end of the year.

Mark Bonner: 11:09

Plus, when you look at that on top of everything else, what's your perspective? Is this affecting your world?

Les Hiscoe: 11:16

So a large, you know, about half our business, half the company is in the Northeast from New York up through New England. The other half is the rest of the country, Miami, Los Angeles, Texas. So for half the company, it's not really affecting us, the labor shortage up in the Northeast. We're not really seeing it. Now we've been dealing with this labor shortage for quite a few years.

Les Hiscoe: 11:40

This is not a new issue, this is a decade in the making at least. So again, it's to get upfront a year in advance of a project, deal with trade partners that have frankly more investment in their company for their people, their people tend to stay with them, better workforce predictability, really better businesses. Now with those types of companies, we're able to predict when they have gaps in their labor force, when they don't, so we haven't we've been managing it well and haven't been all that affected in some of the more Southern and Western states. The immigration issue, we haven't really had an effect yet. It's just it's a scary issue, and so everyone's nervous about it.

Les Hiscoe: 12:26

It hasn't affected us directly yet, but again, in the types of trade partners that we use, we haven't had the issues we're able to get some labor predictability. The bigger issue is how do we get new entrants into the trade space and the construction management space. We're doing a ton on that front, as are many of our large peers getting into the high schools, getting kids interested. We're big proponents and sponsors of ACE nationwide and in our locales. We sponsor direct scholarship programs to construction management schools to have folks that get into the construction management trade, we scholarship them all the way through so that they will join the industry, things like that, things like Posse.

Les Hiscoe: 13:13

So we're in probably five or six different organizations and initiatives to try to get folks more interested in coming into the construction field and into the trades, maybe at times versus, you know, going into college.

Mark Bonner: 13:28

Yeah, I mean look and that's been a broader effort over the last ten or fifteen years. Is it working? I mean I see the wages increasing, that's obviously affecting budgeting. There's time and effort and dollars that it takes to do the cross training to build that new recruitment pipeline. I mean, do you see it making a difference, Les?

Mark Bonner: 13:48

And and if you do, I mean, when is the payoff going to come? Because the construction labor crisis has been with us for quite a while and it just doesn't seem like to the average observer that much progress has been made.

Les Hiscoe: 14:01

Yeah. I think it's all helping, and I think it needs more. I frankly think our entire industry needs to kind of do more on that front. I think we're all, you know, I sit on the construction roundtable board nationally, and every one of the large contractors in The U. S.

Les Hiscoe: 14:22

Is facing this issue, dealing with this issue, and making some impact on the issue. It doesn't feel like there's this watershed moment. It feels like it's incremental. Keep at it. Keep getting more folks kind of into it.

Les Hiscoe: 14:39

And I think we're doing okay. I think we can do we're gonna need to do more for our industries to be okay.

Mark Bonner: 14:47

If you're just tuning in, this episode of First Draft Live is presented by Agora. We're here with Las Hisco, CEO of Chamot Design and Construction. Les, I know Chaumet has a big footprint when it comes to higher ed and we've talked about some of the policy that's come out of the White House regarding we call it just call it there the attacks on some of the Ivy Leagues. That has had a demonstrable impact on a number of fronts, but in particular on your world. What's going on here, right?

Mark Bonner: 15:17

Like why is this happening and what are you doing about it?

Les Hiscoe: 15:22

It's, yeah, for our, so education is our biggest business at Chamot, and we work in higher ed across both K-twelve and higher ed, but primarily higher ed across the country, and significantly with the Ivy League institutions, we work for almost all of them. There is a tough time right now for them, I mean it's almost, you know, I use the term triple whammy, but now it's quadruple whammy, and now it's kind of even more. You know, the cutting of research funding has direct effect to them, and so it's going to have to change their operating model, right? So they're planning for that. When they have to plan for something different, they pause projects.

Les Hiscoe: 16:07

You know, less enrollment from foreign students based on, you know, immigration issues and policy. Foreign students tend to pay fuller priced tuitions, that's just another financial impact on these universities. The talk about taxing endowments has them spooked for sure, and it's sometimes cutting out funding altogether to an institution negotiation, right? It's kind of cut first, negotiate second, seems to be the tactic. So it's got our institutions all contingency planning, and so the bigger ones that we have spoken with directly, every department within those institutions has a plan B and a plan C.

Les Hiscoe: 16:55

If we lose this much, do we you know not spend here? Do we do this? Do we do that? And we're seeing a little, we've had a few of our projects put on hold and canceled. The things that are underway all seem to be continuing and going underway.

Les Hiscoe: 17:09

We've not had anything stopped, but I think until deals are made, and I do think you know there were a few deals being made with liability institutions now that will at least make the unknown known, settle those folks down, they'll know how to plan for the future. For us, it gives us a gap, though. If there's a pause now, that'll affect us eighteen to twenty four months from now. So we have to plan for that in 2027 for our business if things get paused now.

Mark Bonner: 17:37

I was just going ask you, I mean, you know, assuming this policy is here to stay and it's not going away, how do you pivot?

Les Hiscoe: 17:44

So we're, yeah, we're kind of strategically planning if our education business comes down, what else do we fill it in with? Technology, tough tech, data centers are all things that we're getting more interested in. Infrastructure, public spending are things we do a little bit of, but are making a more concerted effort to then go do more of those things, and so we run with kind of diversification mentality. The more diversified our business is, both in size of project, type of project, and geography of project, the better we are to weather regional and national storms.

Mark Bonner: 18:22

Let's go to a question from the audience here. Les, are you implementing robotics in your projects? Can that make a real difference in your need for labor?

Les Hiscoe: 18:34

We've dabbled in robotics. We're not I would not say I wouldn't go so far as to say we're implementing robotics, you know, directly on project sites. Certainly some robotics are getting used in the manufacturing of goods that do make it to our projects. But I don't see robotics affecting our labor force anytime in the foreseeable future for us. Just don't.

Mark Bonner: 19:04

Tech adoption is speeding up though, right? I I know Shalman uses AI in terms of estimating. There's some advanced project management that can cut delays and boost accuracy. Tell us about that. Like how does that transform your business, and what do you think the future of that is?

Les Hiscoe: 19:23

We're fully embracing AI in our business and adopting wherever we can and how I'm seeing it at the moment, and so very different than robotics. It's in it's we're integrating into a lot of our processes, and it's really all to drive kind of efficiency, and if you think of AI and it's really the use of data to kind of get quicker analyzation and a quicker set of desired outcomes and options, we're able to use it to get more accuracy in some of our estimating processes and procedures. We're using it in safety to get from reactive to predictive to prevent injury, and so we've done that via video capture, via predictability, you know, of data input into our safety apps. We've created a custom safety app. So love it there, and we're using it in marketing, we're using it in contract review, so we have a lot of little place.

Les Hiscoe: 20:20

So it's plugging into all these little process pieces, and that's helping us be efficient not to reduce our construction management side labor, to actually let our construction management side labor be more effective on the process side of things and efficient and actually spend more of their time problem solving for our clients, meeting with our clients, and driving more value on that side is really what we're trying to do.

Mark Bonner: 20:44

I mean, when you look out two or three years, where do you think this is leading towards? Right? Some people have said, I think, hyperbolically that this could help solve the labor crisis. And I'd love your thoughts on that. But in terms of streamlining your business, getting things done faster and more intelligently, like, where do you think this is going to be in two or three years with implementation of AI and other things like that?

Les Hiscoe: 21:07

It will again, don't see a dramatic shift in how and what we do. I think it'll be better and better and better. I got this amazing presentation from this AI consultant that had a really cool graph, it was like peak hype, trough of disillusionment, and then kind of plateau of enlightenment, like were these three terms,

Mark Bonner: 21:34

and it was really pretty cool.

Les Hiscoe: 21:35

And I think we're gonna, we're probably a little bit in the trough of disillusionment still and on our way to the plateau of enlightenment, but I think it's getting better and better, and I think the more, I think we're, our people aren't using it every single day in everything they do yet. So it's more the company is trying. We're figuring out where to use it. I think in three years when every single person, it's just part of their day is when you really will see a huge efficiency gain.

Mark Bonner: 22:04

Just really quickly as a follow-up, mean when you say using it, like are you talking about ChatGPT, are you talking about Gemini or Azure, or are you talking about something that is more custom built for your world?

Les Hiscoe: 22:19

So definitely ChatGPT, Gemini, obviously data concerns and where our data goes with those things, and so we're creating our own kind of custom AI apps that really use only our company data, confine it to that, create, you know, an internal ChatGPT like interface that our folks can find anything they want about our process, our data, our old pricing data, our old project data, lightning fast versus what now takes quite a bit of time.

Mark Bonner: 22:55

Let's go to one more question from the audience. How are lead times with electrical gear less? Any concerns with the mass amount of power needs for data centers and grids already strained?

Les Hiscoe: 23:08

It's, yeah, concerns, absolutely, is my quick and easy answer. Lead times for electrical gear can be out a year when the types of kind of heavier and bigger gear that, you know, data centers are using aren't necessarily going into our commercial buildings, but I met with a data center client a couple weeks ago that they're in, you know, they're actually, the whole roles are reversed. The client has to essentially woo the electrical subcontractor and the electrical manufacturers to get in their assembly line two years early to make sure they have predictability. So, we're having to get way, way, way out in front of it.

Mark Bonner: 23:52

Now let's just look ahead here. You know, as we discussed, you know, this is a pretty remarkable moment in time where you've got all of the shifting plates with tariffs and everything else. What early economic or policy signals, Les, would you like to see that would give you confidence that you could be making more stable, predictable decisions that are going to play out down the line?

Les Hiscoe: 24:22

One, I think kind of rate reduction really has to happen, and I think when it does in a meaningful way, you'll see a lot more commercial development activity, and that's going to be good for all of us. Two, and I don't know that that's possible with this particular administration, but, you know, get deals settled, have tariffs not change anymore, have, you know, know, all the, know, trade deals done, policy changes kind of done, and you know, when you once those things settle, people will, you know, will be able to kind of say, okay, I now know what new normal is, let's plan and let's go. So we're just staying as abreast of it as we can and communicating that to our clients every single day. They're dying for the same information we are, you know.

Mark Bonner: 25:14

If you would ask me a week ago if interest rates are gonna come down in September, I would have said likely yes. Then earlier this week, the inflation data comes out that throws cold water all over again on the central bank's ability to lower rates. It's now a highly politicized issue as we all know. The market has been screaming for 25, fifty, seventy five basis point reduction by the end of the year. Looking less likely.

Mark Bonner: 25:39

I mean, so just assuming for a second less that we continue to go deeper into the year in this whole steady pattern with interest rates. Like, what shoes drop for you in your in your business if you don't get that?

Les Hiscoe: 25:55

Yeah. If specific to us, we're not, you know, one of the sectors, you know, really heavily affected by the census rate is multifamily development, and that's not a huge sector for us. So for us, a shoe doesn't really drop. We're getting more and more into that sector. I think, you know, the industry and it's been happening over the last couple of years, finding better ways to do a better mix of units that, you know, do pencil, attracting different types of capital that are willing to take a little bit of less return, longer term view, you know, and again, back to the preconstruction piece, value engineering is ever more critical to get these building costs down.

Les Hiscoe: 26:40

So and I was with a group of bankers yesterday, and the discussion was exactly as you laid out. Some said, yeah, we'll definitely get a quarter point. You know, Monday I would, you know, people were saying, we might get three quarters of a point. Yesterday, it was a quarter point, if anything, right? So who knows?

Les Hiscoe: 26:57

We're just going to have to wait, and we're going to continue to just get as far out ahead of us as we can. That's how we're running the business now.

Mark Bonner: 27:06

Okay, final question. What do you think then what is the inflection point that you're waiting for next where you know you'll be able to make a turn towards predictability? Is it that interest rate decision, or is it a combination of things, or is it something policy related?

Les Hiscoe: 27:20

I think it's it's probably the three things you just mentioned. It's interest rates. One one move in a direction is gonna be a huge signal. Two, a few more trade deals getting done is gonna settle things down. And there's a point in this cycle where this administration is going to start looking toward, you know, toward reelection, you know, not the president specifically, but the, you know, other party, and that will actually settle down, I think, the onslaught of this policy change in the first, you know, year and a half here.

Mark Bonner: 27:57

Les,

Les Hiscoe: 27:57

My thank you so much for being here pleasure. Really my pleasure. Thanks, Mark.

Mark Bonner: 28:02

And a big thank you to Agora for presenting this episode of First Draft Live. We'll be back with another episode of First Draft Live next week, so don't miss out. You can sign up now on our event page. You can also find today's episode and all of our past conversations on your favorite podcast app. This is First Draft Live.

Mark Bonner: 28:19

Have a great weekend, y'all.