Subcontractors Feel the Brunt of the Recession, But Optimism Persists
Specialty contractors, whether steel or electrical or masonry, struggled through another year of steep revenue declines in the Southwest. The top 80 firms saw the value of work performed in Arizona, Nevada and New Mexico drop 28% to $2.5 billion in 2010, compared with $3.4 billion in the previous year. And that was just the firms that were willing to report revenue—many chose not to, leading to the lowest participation for this survey in more than a decade.
Arizona subcontractor revenue tumbled 28% to $1.4 billion in 2010, but it was Nevada that took the biggest blow, dropping below $1 billion in revenue for the first time since 2002.
“The current state of affairs is unlike any that most of us have ever experienced in our professional careers,” says Michael Stanfield, senior vice president with the Chandler, Ariz., office of Comfort Systems USA Southwest (formerly Tri-City Mechanical). “I believe that the current state of the economy will be the catalyst to propel us into a new way of doing business. As margins continue to stay low, we will have to embrace and invest in the methods and technology that will allow us to do more with less.”
Despite a drop in revenue for 2010, Comfort Systems moved up four spots to the 10th position overall on the strength of such projects as the Salt River Fields at Talking Stick in Scottsdale, Ariz., for which the firm performed $15.5 million of work.
Many firms used the slowdown as an opportunity to make improvements. “We knew that margins would get tighter, so our estimators upped their already high level of accuracy to look at every bolt, every foot of conduit,” says Scott Muller, vice president with Tempe, Ariz.-based D.P. Electric, ranked ninth among electrical contractors. This new level of detail will position the company for success once the economy improves, he adds.
Other electrical contractors are finding work in new sectors. The Las Vegas office of Helix Electric, ranked fourth in Nevada among all types of subcontractors, has seen growth in the renewable energy, infrastructure and high voltage sectors.
“We have learned to identify niche markets that further diversify our experience and strengthen the talents of our personnel,” says James Gunther, vice president of preconstruction and design/build services. He adds that “anyone operating with a business-as-usual attitude will surely be left behind.”
The top-ranked electrical firm, Tempe-based Rosendin Electric, is also seeing opportunities in solar, along with significant growth in Arizona's semiconductor construction market well into 2013, according to Michael Greenawalt, vice president, Southwest operations. But the region needs a dramatic increase in private funding and investment to truly see a turnaround in the building sectors, he says. “Federally funded projects have done a good job keeping the construction market on life support, but the billions of dollars in private money sitting on the sidelines needs to be put in play,” Greenawalt adds.
Energy projects—from transmission lines to gas pipelines—have lifted Coral Gables, Fla.-based MasTec Inc. to the top spot in the overall Southwest ranking in the firm's first year of participating in the survey; the company reported nearly $236 million in regional revenue in 2010. Formerly specializing as a communications contractor, MasTec began diversifying in 2007 into energy, high voltage transmission and gas pipeline infrastructure, says Ben Gilbert, vice president of business development. After a “spectacular” year as a result of a massive gas pipeline project built for El Paso Gas in Nevada, Gilbert says the firm is still seeing modest growth in the Southwest region for the coming year.
Henderson, Nev.-based SME Steel, the second-largest steel contractor in this year's ranking, also expects market conditions to improve, seeing potential in the industrial, medical, educational and commercial sectors in addition to bridge work, says Wayne Searle, company president. “We are pursuing work in excess of $100 million,” he adds.
One potential snag in the recovery echoed by many subcontractors is the reduction in available public money coupled with the frozen private investment market.
“The reduction of government funding is going to be a huge hit,” says Kevin Yearout, president and CEO of Albuquerque-based Yearout Mechanical, which ranked second among all New Mexico firms. Dan Coppinger, vice president and division leader of Southland Industries, a mechanical contractor based in Las Vegas, agrees, adding: “We are still hearing about many projects being postponed or canceled due to the owner's inability to acquire financing.”
The state of New Mexico is also currently wrestling with how stringent its energy codes should be, which could impact subcontractors in the coming year. “Green building codes are tough to overcome because the lenders do not recognize them as adding value, so added first costs with no ability to finance them is an issue,” Yearout says.
Despite a 25% decline in revenue reported by New Mexico subcontractors between 2009 and 2010, Jack B. Henderson Construction Co., Albuquerque, saw revenue increase by more than 5% over the same period. The mechanical contractor “invested in building a robust program that meets the needs of highly demanding customers, and we've found that it's paying off as this narrows the field of competition,” says Maria Guy, vice president, operations support. “We foresee more stringent quality requirements from our customers and feel we are prepared to exceed their expectations.”
J.B. Henderson's success in 2010 earned it a spot as a finalist for ENR Southwest's Specialty Contractor of the Year award. Another finalist, Phoenix-based Midstate Mechanical, saw revenue increase 19% in 2010 by expanding into the energy and building technology/automation sectors. The firm also benefited from federally funded projects, such as the $184-million Mariposa Land Port of Entry Expansion in Nogalas, Ariz.
Paving contractor Ace Asphalt of Phoenix chose to expand into New Mexico for the first time in 2010, focusing in the education and public works sectors. “We recently secured a cooperative procurement agreement offering the lowest per-unit prices we have ever offered in order to serve our customers in these sectors in their time of budgetary need,” says Jon Baggett, director of marketing. The firm's largest project start in 2010 was a $19.5-million contract at the Volkswagen Proving Grounds in Maricopa, Ariz.
Baggett also sees potential in advances in pavement preservation techniques and technologies, especially products that could meet environmental guidelines for future green road certification programs.
