ENR's Top 600 Contractors: Awaiting a Recovery
The difficulties of the recession are nowhere more evident than among subcontractors and the specialty trade contractors who actually perform, rather than just manage, most of a project's work. For many specialty contractors, calling this market difficult is the understatement of the year. But opportunities exist for larger contractors that know where to find them and how to take advantage of them.
Related Links: Full Report: ENR's Top 600 Specialty Contractors (subscription required)The ENR Top 600 Specialty Contractors list shows both the wrenching effects of a recessionary market and some bright spots amid the gloom. As a group, the Top 600 cleared revenue of $66.26 billion in 2010, down 8.7% from $72.55 billion in 2009. This is better than results for the ENR Top 400 General Contractors reported earlier this year (see ENR 5/16 p. 65).
But the market for many specialty contractors appears to be bottoming out, despite a steady stream of bad news. Of the 515 firms on this year's Top 600 that also sent in surveys last year, 41.6% showed increased revenue between 2009 and 2010, while 57.5% saw revenue declines. In last year's survey, 77.2% of the Top 600 saw revenue declines between 2008 and 2009, and only 21.8% posted increased revenue. Although not a great sign, these figures show the Top 600's revenue is closer to equilibrium than last year's.
The biggest loser in the Top 600? The general buildings sector. The Top 600's revenue from projects in the buildings sector fell to $27.18 billion in 2010 from $35.22 billion in 2009, about a 22% drop. The sector is stuck in a vise-grip between budget shortfalls in the public sector and no financing in the private sector.
The reality is that the conditions leave very little room for profit margins. “We had a very healthy second half of 2010 and a strong first quarter this year,” says Charlie Bacon, CEO of Limbach Facility Services. However, he says, there has been a drop-off in the past two quarters. He says he will sacrifice revenue to maintain profits. “We have a leadership development program that teaches people to just say no to bad deals. There is no room for error in this market.”
Many firms are not optimistic about the sector recovering any time soon. “I see a significant and long-term decline in the general building market over the next 10 years,” says Bill Dean, CEO of M.C. Dean. Compared to the call for new and upgraded infrastructure, new buildings are not in demand in this economy, he says. Thus, the firm is increasing its focus on the wastewater and power markets, particularly on the nuclear side, Dean says.
“Our research shows it could be a minimum of three to five years before we see any substantial improvement,” says Dean Gwin, president of Gate Construction Materials Group. Wayne J. Griffin, CEO of Wayne J. Griffin Electric Inc., agrees with the three- to-five-year figure. “Contractors need to be flexible and responsive to be successful in this market.”
Other contractors, while not optimistic about an immediate turnaround, are finding opportunities. For example, Steve Little, president of KPost, sees the renovation market picking up in some sectors but has caveats. “We see this as an opportunity only if changes in [the proposed 2012 International Green Construction Code] or tax code do not negatively impact the owners' ability to renovate,” Little says.
Other firms see the rehabilitation market doing more than just picking up. “Our maintenance and retrofit market is up 40% in the past year,” says Limbach's Bacon. After three years of bottled-up demand, he says, the renovation market is now breaking loose.
Changing To Succeed
Not all revenue drops are due to the recession. For instance, MMC Corp underwent a major restructuring this year, which accounts for its slide in the rankings to No. 85 from No. 23. The firm consolidated and rebranded its operations, then split into two operating units—one for its mechanical contracting group, operating under the name MMC Construction, and one for its general contracting operations, under the name MW Builders. Only the mechanical operating unit reported revenue on the Top 600 survey.
“We had four different mechanical subsidiaries attacking the market independently, with no coordination,” says Bill McDermott, MMC Corp's CEO. For example, clients were being given different business cards by staff at different MMC locations, which caused confusion. “We underwent a rebranding with the goal to better position ourselves for growth.”
McDermott says that, surprisingly, the consolidation went smoothly. The firm is sharing technology and best practices and now conducts weekly conference calls to share knowledge, expertise and leadership skills. Meanwhile, McDermott says, having purchased two small firms in the Omaha area, the company is still in an acquisition mode. “We are positioning ourselves to be a national brand, leveraging our ability to travel and [our] financial strength to expand.”
For some large specialty contractors such as Quanta Services, their core markets are looking up: electric power transmission, power distribution, pipelines and telecommunications. “For the first time since 2008, all four of our main markets are strong,” says James F. O'Neil, CEO. In April, O'Neil replaced former CEO John Colson, who is now executive chairman.
Federal energy legislation is a driver in the energy transmission market, says O'Neil. A large stimulus package to provide networking services to under-served markets is spurring opportunities in the telecom market. However, the big prize for firms is the Keystone XL project, a proposed 1,700-mile pipeline transporting crude oil to Texas from Canada.
“If this project goes forward, it could draw most of the industry's pipeline capacity for the next two years,” he says.
Quanta is well positioned to bid on the Keystone XL package, having acquired transmission-pipeline giant Price Gregory in October 2009. Quanta also acquired Edmonton, Ont.-based Valard Construction, one of Canada's largest electric-power-line contractors, in October 2010. “Canada is upgrading its electric grid and will need new lines to service its growing mining market,” says O'Neil.
Another firm that has made changes is NCM. After Nuprecon LP acquired CST Environmental and MARCOR Remediation, it decided to rebrand itself. In July, it renamed itself NCM to reflect its three major brands.
NCM also is refocusing its marketing on large clients. “We are realigning our efforts to help our existing Fortune 100 clients recapitalize their assets through decommissioning,” says Sage Khara, CEO. He says this is a perfect time for large industrial clients to take down their underperforming or idle facilities for the scrap value. Given the strong commodity markets, “it won't cost them much money, or they may even see some money returned,” he says.
Showing a Heartbeat
Some areas are seeing signs of life. For example, Southland Industries is having a record year by being in the right markets. “A year ago, we were unsure about 2011, but we are doing a lot of federal work in our mid-Atlantic operations, the health-care and high-tech markets in northern California are booming, and Southern California is showing surprising strength in a variety of markets,” says Ted Lynch, president. But location is still all in construction markets; the firm's Las Vegas unit still is down.
LVI Services also is seeing an uptick in activity. “Demand for our core deconstruction and abatement expertise has grown dramatically for us this year, with revenue currently up over 30%,” says Scott State, LVI's president. He says LVI has succeeded by targeting large projects among heavy-industrial clients, power companies and firms in the natural-resources sector.
KHS&S has seen some improvement in bidding and major project starts during 2011. “Although the market isn't nearly where we would like it to be, we are seeing increased activity in the medical sector as well as in gaming and entertainment,” says Michael Cannon, president, KHS&S Contractors, East Coast. However, he doesn't expect any major market changes for the next 12 months. “The world economy is still too fragile to expect major momentum changes.”
Foreign firms are finding new markets to develop in the U.S. “The banks are not lending for new projects, so more companies are looking into the market from overseas,” says Joe Vitale, president of Concrete Strategies. One example is Chinese heavy-equipment manufacturer SANY America, which is building an assembly plant in Georgia. “We are tracking overseas-funded projects and can travel to any project [because] we work across the country,” he says.
For some experts, the story behind the headlines is that the market is not as bad as many believe. “If you read the headlines, you would think the sky is falling,” says Mike Taylor, executive director of the National Demolition Association, Doylestown, Pa. Many of his larger members are finding steady work, particularly in the Pacific Northwest and in the Midwest.
Extreme partisanship in Congress certainly doesn't help build market optimism. “It is just a question of confidence in the economy, which we had at the beginning of the year. The debt-ceiling fight put an ice pick in that balloon of confidence,” says Taylor. While he does not see signs of a recovery in the short term, “I am cautiously optimistic that things are beginning slowly to get better.”
Bob Mann, CEO of E-J Electric, is another executive who sees how fear in the markets is chipping away at any kind of recovery. “With all the bad economic news coming out of Wall Street and Europe, developers and the government are afraid to spend,” he says. He hopes lawmakers can stop their partisan fighting over spending and fund needed infrastructure.
Mann says New York state has seen a positive political development as lawmakers work together to loosen policies on increased power capacity. “We have been campaigning for years about the need for more powerplants, but now Gov. [Andrew] Cuomo [D] has gotten behind the push for new capacity.” E-J is working on power projects in the New York City area.
The Direct Approach
Meanwhile, owners are mulling more green construction as an energy and money saver but are demanding that contractors stand behind their claims. “Energy performance is regularly modeled but rarely validated,” says Dean. He says more owners are including the costs of utility bills as part of the contractor's bid. As the contractors will now be responsible for the client's energy bill, they will be forced to stand behind their models, he says.
The growing market for energy-efficient facilities, especially in the retrofit market, presents a more practical problem to subcontractors: how to market directly to owners. “We are back in the energy services market and are adept at energy modeling and design,” says Lynch. However, he concedes it is a different ball game to market the firm's expertise. “It is a lot different trying to sell to an owner's chief financial officer than to work up a bid for a GC,” Lynch says.
The National Electrical Contractors Association, Bethesda, Md., is trying to address this problem for its members. “We have hired a staff person to help our members in their marketing, and some of our local chapters have, as well,” says John Grau, NECA's CEO. He says NECA's new program is not to self-promote, but to show its members how to sell themselves directly to owners. “Promoting yourself to an owner is not in many of our members' traditional business expertise, and we need to help them do this,” he says.
Many of the larger specialty contractors are facing somewhat increased competition, but not like the problems faced by smaller and midsize firms. “On bigger projects, owners are bringing in contractors and subs in earlier to take advantage of [building information modeling] efficiencies,” says Lynch. He says many of these projects are negotiated or fee-based. “But on the smaller plan-and-spec projects, competition is brutal, usually with 10 or more bidders on each job.”
Concrete Strategies' Vitale agrees, saying, “If you have several bidders on a job, there is a good chance that one of them might make a mistake and bid too low.” Vitale says low margins also are forcing contractors to become more careful. “Now, one mistake and you could lose your entire profit on the job.”
Cupertino Electric has seen an uptick in work from owners and GCs burned by subs that failed to perform after bidding too low. “Our increase in business has resulted from customers fleeing other contractors because of the poor service they have received. Customers might date the bad boy, but they're going to marry the good guy,” says John Curcio, Cupertino's chief commercial officer.
Hayward Baker has seen a slight improvement in its margins thanks to its clients recognizing the need for a reputable contractor that understands risk control, says John Rubright, Hayward Baker's president. “Many of these clients have experienced the false economy of working with contractors who price the work at desperately low levels, stumble while performing and then seek to recover their losses through claims.”
While most major specialty contractors say there have been few major contractor failures, some say there have been bankruptcies among smaller contractors. “The one group that is doing well in this market are the equipment auctioneers. You go to an auction lot, and it is wall-to-wall equipment,” says Vitale. He says his firm has been able to pick up top-notch equipment at bargain-basement prices.
Another ominous trend is that schedules are shortening. “We do a lot of prefabrication and modular assemblies, but when you are hired today to start work tomorrow, it is really hard to squeeze the inefficiencies out of the process,” says Lynch.
Clint W. Ramsey, CEO at Mission Bell Manufacturing, also is feeling the trend. “In the past, we would have several weeks to bid a project and 12- to 18-week construction schedules.” He says the firm now often has less than a week to bid a project from architectural plans that may be only 60% complete and then has to complete shop drawings, manufacturing, delivery and installation in eight to 10 weeks. “This trend is having a negative impact on the industry overall—from architectural design, materials delivery, manufacturing and construction,” he says.
Most major firms are finding ways to cut costs. They are examining their processes to squeeze out inefficiencies and finding that new technologies are helping answer the need for a more streamlined approach to the construction process. That can make technology adoption, with its promise of improved efficiencies, an easier sell.
Tech Savvy
For many, building information modeling is a key means of cutting the waste out of the construction process. “If you are not fully proficient in [BIM], you are way behind,” says Dean. He says the first phase was to show that BIM actually worked in the construction process. The industry is now in a second phase, in which practical improvements are being implemented on a regular basis. “It's not just a clash-detection tool anymore,” Dean says.
Because BIM is becoming the price of entry on many projects, more firms are getting into the game. “BIM has been a real differentiator for us, but we are seeing more firms develop expertise, and that is leveling the playing field,” says Lynch.
However, BIM is not a cure-all. “The biggest challenge is knowing where and when to apply BIM to make sure that the maximum benefit from the technology is derived relative to the cost of implementation,” says John Boncher, CEO of Cupertino Electric.
BIM does contribute benefits, including more detailed and flexible designs that can be used in prefabricated and modular construction. “Prefabrication is clearly the future of construction,” Cannon. “Nearly every hospital project we're working on today has prefabricated headwalls, corridor racks and bathrooms,” says Cannon of KHS&S. The firm also has invested in the lean manufacturing of prefabricated bathroom pods from Eggrock Modular Solutions, he says.
Many contractors believe prefabrication is a natural outgrowth of improved design and project delivery technology. “BIM and lean construction principles are forcing us to think more about smarter processes,” says Bacon of Limbach. The firm recently launched an off-site assembling and racking process and is building chiller plants and boilers off-site. “This recession has been the tipping point for wide-scale implementation of processes we have been developing for the past 10 years,” he says.
Mobile technology also is making a significant impact on jobsites looking for better margins and an edge. “It is common for our superintendents and project managers to use tablet computers on the jobsites,” says Cannon. “We've found mobile technology has been a great way to increase efficiency in the field.”
Dean says the new tablet technology is fine for what it is. “It is like a clipboard containing any kind of information you need. But in the end, it is still a clipboard.” $ather than trying to read drawings on a 9-in. x 9-in. screen, it would be better to integrate tablet technology with 48-in. plasma-screen Smart Boards for use in any trailer, he says.
Labor Pains
Many union firms are worried about increasing inroads by non-union firms in this price-driven market. “It's no secret that some recent labor agreements have pushed personnel costs higher, resulting in increased overall project costs,” says State of LVI. “With recessionary fiscal pressures, it certainly makes it more difficult for clients to meet project expectations within budget constraints.”
E-J Electric's Mann worries about the fate of union contractors in New York. He sees union contractors losing jobs to non-union firms in New York. While most are not projects that require high levels of expertise, some are large-scale jobs. “We bid on work on the new Chelsea Piers project in Stamford, Conn., but lost to a non-union company. The unions have to work with us to continue to stay competitive to win work for their members,” he says.
However, many contractors say the unions have been accommodating the needs of union contractors. “The unions in St. Louis have been very good, not just on wages but on work rules,” says Vitale. “They want us to succeed as much as we want to.”
Looking Afar for New Work
Some larger specialty contractors and those with special expertise are looking at the international market for new work. For example, Zahner is looking at doing more work abroad. “ In the near term, we see the local market [drying] up. We see our national market [tightening]. We see the international market expanding,” says L. William Zahner, CEO.
“I see a lot more subcontractors kicking the tires of the international market,” says Dean. He says that top-tier subs are beginning to believe they can't depend solely on the U.S. market. His firm does about $75 million to $100 million in international work, mostly for the U.S. State Dept. and the Dept. of Defense. He says, “This gives us a stepping-off point to expand our international work for other clients abroad.”
Another firm beginning to make its mark in the international market is Pike Electric. In September 2010, it announced its first international power-line project. “We are currently working in Tanzania on 2,000 miles of engineering and 500 miles of electric-distribution construction worth an estimated $18 million,” says Frank Milano, vice president of investor relations. Completion is expected in December 2012.
With the market down over the past three years, specialty contractors and subcontractors are feeling the pinch. However, the revenue figures for the Top 600 are about what they were in 2006, which was considered a good year for construction.
Dan Thomas, president of F.D. Thomas Inc., puts the market in perspective, noting, “Even with a slowdown of work that we see today, there is still a very large volume of work to bid.”
Firms that invest in estimating and management skills find new ways to bid successfully, he says. “[A subcontractor that] understands the cost to put work in place combined with the markup needed to meet overhead, all the while being competitive, survives,” says Thomas.
