The Top 600 Specialty Contractors: These Are the Good Old Days

The market for subcontractors and specialty-trade contractors has been slowly improving for the past five years. During the uphill climb, many contractors wondered when things would get back to normal. That day has arrived. Not all markets or conditions are ideal, but the market is strong, and most firms no longer have to worry about the bottom falling out of their business.

The scope of the recovery can be seen in the results of this year’s ENR Top 600 Specialty Contractors list. As a group, the Top 600 cleared revenue of $93.20 bil-lion in 2014, up 5.6%, from $88.13 billion, in 2013. The Top 600 revenue figure from 2014 is a record and well ahead 2008’s mark of $87.07 billion—before the great recession began.

Part of the growth can be attributed to acquisitions by the large firms at the top of the list. For example, Quanta Services, the No. 1 firm on the list, acquired nine firms in 2014, including Canada’s Banister Pipelines, which Quanta anticipates will generate as much as $350 million in revenue in 2015. Another large firm on the acquisition trail was Safway Group. It acquired Canadian insulation contractor Nel-Tekk in 2014 and recently acquired painting giant Mobley Industrial Services, which Safway says is the largest independently owned coatings company in the U.S. “The acquisition of proven performers like Mobley Industrial Services in the Gulf region and Nel-Tekk inOntario has helped to round out Safway’s multiservice expertise and elevate our leadership in the industry,” says Bill Hayes, Safway’s CEO.

It is not just the big firms that are making acquisitions. For example, last December, O’Connell Electric Co. acquired Clifford R. Gray, a union electrical and communications contractor based in Schenectady, N.Y. “O’Connell has been strategically positioning [itself] in the industry to increase [its] overall company sales to a quarter-billion dollars over the next several years,” says Victor Salerno, O’Connell’s CEO.

However, not all firms are in a hurry to grow through acquisition. “We are always looking for good firms that could provide value to us, but we prefer to grow organically,” says Anthony Guzzi, CEO of EMCOR Group. He sees EMCOR growing internally in this market at a solid but single-digit pace.

However, Guzzi warns that contractors should always be prepared for a sudden shift in fortunes. “The market is growing, but with all the turmoil in the world, there could be an abrupt shift. I think we have all learned to live with that possibility,” he says. Still, he does not believe the scale of problems that stemmed from the 2008 economic meltdown will revisit the market. “Who would have thought that we would [experience] a series of crises in the Middle East and the market here would remain unaffected?” he observes.

Many firms believe the market for subcontractors will remain strong for at least another year. Robert V. Barnes III, CEO of Dee Brown Inc., notes that general contractors have been loading up their backlogs for projects as far out as spring and summer 2017, providing an unusually long lead in buyout for the subcontractor. “We

generally experience the time from award to install something more in the four- to six-month lead-time range, but that is now stretching out to 15 to 18 months,” he says.

Still Competitive

Despite the growing availability of work, competition remains intense. Over the past few years, contractors competed vigorously just to maintain their business. But now, “competition remains strong as companies regain their appetite for growth,” says Joel Moryn, president of Parsons Electric.

Some contractors worry that some of their competitors may be overreaching. “There are many firms out there reaching for much higher volumes and larger single project awards that don’t have the past history to support their claims,” says Barnes.

Competition has caused many contractors to be careful about what they will bid on. “We spend a great deal of time talking about our risk-assessment tools and being vigilant from a pricing perspective. We’re proud of the expertise we have and the value it can bring to a project. It has allowed us to remain competitive in the projects we pursue,” says Tim Chadwick, CEO of MMC Corp.

Owners increasingly are embracing the growing trend of alternate project delivery, integrating subcontractors into the contracting team earlier in the building process. This trend indicates that owners “are recognizing the value of bringing specialty contractors on board early, during preconstruction, so that they can maximize the use of lean methods [such as] BIM-enabled prefabrication and modular building components,” says John Cannistraro Jr., president of J.C. Cannistraro LLC.

This trend is no longer limited to a few key specialties. “The mechanical and curtain-wall trades have been part of the coordination process for a long time, but that is now happening in the drywall and ceiling trades,” says Chris McPherson, COO of Central Ceilings Inc. He says being at the table together earlier in the process strengthens project teams and relationships, dramatically improving the end product.

This cooperation is an abrupt shift from earlier in the recession, when price was king and contractors scrambled to save money any way they could. “The days of long, drawn-out bidding and re-pricing multiple times—both to the customer and from your vendors—are behind us for now,” says Jeffrey Haber, managing partner at W&W Glass LLC. In this new collaborative world, “there is no time to play the old-style games that we were all subject to during the downturn four to six years ago,” Haber says.

Specialty contractors also are pleased to see that alternate project delivery and early subcontractor involvement are being used in public-works projects. “In the water-wastewater market, we see a positive trend toward acceptance of alternative procurement methods, rather than the traditional design-bid-build approach,” says Gary McNiel, senior vice president at Prime Controls.

The Subcontractor as Designer

The trend toward early contractor involvement has put pressure on subcontractors to fortify their design team to provide effective design-assist capabilities. For example, Limbach Facility Services LLC is making a concerted effort to beef up its engineering staff. “We have dramatically increased the number of engineers hired, so we can do design-assist in-house,” says Charles A. Bacon III, CEO. He says the firm increased the number of engineers on staff 28% last year and is planning to increase it another 35% this year. “Now, our own engineers can answer owners about the most efficient systems for their project,” he says.

Bacon also notes that owners are becoming more proactive in contacting mechanical and electrical contractors directly for consultations on energy efficiency. “We have started getting inquiries directly from owners to partner up on systems reviews,” he says.

Owner interest in energy-efficient building systems and system rehabilitation has provided new opportunities for many mechanical and electrical contractors. The National Electrical Contractors Association, Bethesda, Md., has developed resources to assist its members in selling to owners. “Many of our members are more used to bidding on projects and are not always comfortable marketing directly to owners, so we are trying to give them the tools they need to succeed in this new market,” says John Grau, NECA’s CEO. Southland Industries has embraced the move toward providing design services. The company on Oct. 1 announced it was forming a new design subsidiary that would market directly to owners.

“Consulting was always a subset of our engineering and service business, so we decided to create a new subsidiary, Envise, to market consulting directly to owners,” says Ted Lynch, Southland’s CEO. He says Envise will assist the contracting group but will develop its own customer base, focusing on analytics, building management systems and equipment life-cycle management to optimize building performance for customers’ facilities.

Not Quite Out of Gas

The oil-and-gas market is one cause for concern. The sudden drop in oil prices, which started in December 2014, has caused a slowdown in the upstream petroleum market. “We have seen a pullback in both our refinery business and fracking opportunities with the drop in oil and gas prices. Just one year ago, we were making plans to participate in several multibillion-dollar projects. While some may still go forward, this has left a void in one of our target markets for 2015,” says Clayton M. Scharff, CEO of Sachs Electric.

However, many specialty contractors say the midstream and downstream petroleum markets have not been hit so hard. For example, Prime Controls works in the midstream market, “which means that we have not been dramatically affected by the decline in commodity pricing to date,” says McNeil. But he says there could be a potential negative impact on midstream customers if the price of oil remains low.

Petrochemical plant expansions are beginning to move forward after longer-than-expected front-end engineering and planning periods. Many contractors in that market expect a surge in work in the near term. For example, The Brock Group is expecting steep increases in demand for both labor and materials within a short period of time, according to Bob Pragada, Brock’s CEO. Further, he says powerplant combined-cycle conversions are occurring at a faster pace than expected, especially in the northeastern U.S. “We alsosee deferred planned maintenance outages and turnarounds leading to a significant demand and scheduling challenges in 2016 and 2017,” he says.

Many contractors, especially those running heavy equipment or service fleets, say the drop in oil prices has created savings that go right to the bottom line or offset rising prices in other areas of their business. “Yes, we are seeing some savings in lower fuel prices, but all it takes is the cancellation of one major petroleum project to turn lower oil prices into a net negative for us,” says Guzzi.

Unpredictable Cost Issues

Generally, materials and equipment prices have risen at acceptable levels, given the increase in demand. But some contractors are facing unpredictable cost escalations. “We are experiencing double-digit increases in cement. Other equipment and materials are increasing in the high single digits, and tower cranes are becoming very difficult to source and obtain,” says Don Dreier, executive vice president of Donley’s Inc.

D. Thomas Ruttura, president of Ruttura & Sons Construction, says the recent consolidation of the ready-mix industry may be part of the reason for increased concrete prices. He cites as an example Euless, Texas-based U.S. Concrete Inc.’s acquisition of New York City-based Ferrara Bros. Building Materials Corp. U.S. Concrete has acquired seven local materials companies so far this year. Ruttura says this type of consolidation will increase prices and decrease service. When a conglomerate buys a local business, that business’ profits will no longer be spent in the local economy, he observes.

The other side of the coin is the impact of a faltering Chinese economy on commodity prices. Many firms say that a drop in demand from Chinese industry for raw materials has helped ease inflationary pressures. “China has changed the game on materials. No longer is copper priced like gold,” says James F. Reiss, CEO, Westside Mechanical Group.

But this drop in Chinese demand for materials has hurt demolition contractors, as the price of scrap has fallen. “Over the past year, the salvage market has gone down about 60% to date. This downturn is due to the strong dollar … and other economic uneasiness overseas,” says Chris Berardi, president of JDC Demolition Co. “Hands down, the biggest challenges we’re going to face in the coming months are related to the sudden and dramatic drop in the commodities market,” adds David Griffin Jr., president of D.H. Griffin Wrecking Co.

For asbestos-abatement contractors, another trend has meant a surge in their business: The conversion of older buildings to residential. “Asbestos has been used in building materials for hundreds of years, but [it was] banned 35 years ago, so there’s a lot of abatement to be completed. Also, a strong economy generates redevelopment, which, in turn, creates high demand for asbestos abatement,” says Ron Daniel, CEO of ARC Abatement.

Staff Shortages Starting To Appear

The one issue that has most specialty contractors on edge is the prospect of shortages in the field and in the office. Many firms say they have not yet been hit with staffing shortages but think it is only a matter of time.

The scale of the problem is not yet known, but many firms already are taking action. For example, Safway Group Holding expects the Gulf Coast market to begin ramping up again. So, it is seeking all levels of personnel in scaffolding, insulation, fireproofing and coatings and, in the coming months, is looking to hire between 3,000 and 7,000 people in the Gulf region alone. “Recently, we opened a new state-of-the-art-hiring center in Houston to help us achieve our objectives,” says Hayes of Safway. “By offering top pay, training and benefits, we hope to attract and maintain the best customer-centric team in the market.”

The field-worker shortages already have had an impact on many firms. “Our pursuit of new project opportunities has been altered by these shortages, and, in some cases, we have decided not to pursue a project due to concerns we may not be able to provide sufficient field labor,” says Chadwick of MMC Corp.

Potential worker shortages and wage escalation have many contractors worried about how to price a job. For example, John Boncher, CEO of Cupertino Electric, notes that the hot California construction market is nearing full employment. “A booming market means that the electrical projects being bid today will be built with electricians transplanted from other locations,” he says. “Some competitor bids that we’re seeing have surprisingly tight numbers, which is risky, considering the future labor pool is unknown. We are actively pursuing new projects but are focused on making sure that we are properly factoring risk into our bids for future work.”

Many contractors worry that a severe skills shortage will result in contractors raiding each other’s workforces. “There will always be people who will be ready to move to another firm for an extra 20%, but, more often than not, they end up regretting it,” says Guzzi of EMCOR. “There is always a home at EMCOR for great people. You have to treat people well in the bad times as well as the good times, and that is how we operate,” he says.

“We can’t treat [staffing] issues like a zero-sum game,” says Jeff VanderLaan, CEO at Kent Cos. “The labor wars used to be about pay rates, benefits and recruiting from competitors across the street. Today, it’s about building the next generation of talent.”

Some firms have tried interesting recruiting methods. For example, Long Painting Co. hired a former Army captain to head up its recruiting effort, targeting veterans. “With the military reduction, we have found a source of higher-caliber individuals that are disciplined, motivated and eager to learn a new trade,” says Jeff Engle, Long’s business development manager.

The increase in demand for craft workers has had an effect on wages. “Labor cost is increasing—and rightfully so. All of our crews have worked hard since the recession, and they deserve the increases they have received. Fortunately, the market is allowing us to increase our billing rates accordingly,” says Christopher Jordan, president of Johnson and Jordan.

On the labor side, unions are expecting good contracts for their members after years of concessions, and many contractors say unions are being reasonable. “Union wages are going up, but the increases are not exorbitant. Unions understand there is pressure on union contractors to be competitive,” says Grau of NECA. He says NECA and the International Brotherhood of Electrical Workers have a joint arbitration-mediation panel to help resolve contract negotiation disputes. “This year, the panel has seen the fewest disputes in 50 years,” Grau says.

Grau notes that the workforce shortage has shrunk the disparity in wages between union and non-union workers, taking away much of owners’ incentives to favor non-union contractors. A recent wage survey showed non-union wages in the crafts increased 6.4% since mid-2014.

Despite the shrinking divide between the costs of union and non-union workers, many union contractors are annoyed about the perceptions among some owners that going non-union will save them money. For example, many of the developer-driven projects in New York City, traditionally a union stronghold, now are going to nonunion firms.

But this trend is not limited to New York. In Washington state, “we are seeing non-union subcontractors on larger tower projects that were predominately handled by union subcontractors in the past. Price has been the driving factor for general contractors making this shift,” says Engle of Long Painting. Rutturo says this trend may not make long-term economic sense. He says developers want non-union contractors, not realizing that the people who will be able to afford to shop in their malls or live in their apartment buildings are middle class. “Union people are America’s middle class.” Developers will defeat their own purpose by trying to go with non-union contractors, he says.

Technology No Longer a Separator

Technology, such as the use of building-information-modeling software, used to be a differentiator. Now, tech know-how is a necessity for subcontractors, and its use is beginning to pay off. “We are finally starting to see where efficiency gains, schedule gains and productivity gains promised by the use of BIM are finally being realized through prefabrication and modular construction. This may be the first real increase in productivity in our industry in several decades,” says Dan Briscoe, vice president, Apollo Mechanical. The growing use of BIM has allowed specialty contractors to develop products that may not have been possible in the pre-BIM days. For example, Finfrock Industries spent the past 10 years developing its DualDeck Building System, which incorporates MEP and fire-protection subsystems into the precast- and prestressed-concrete product during manufacturing. “Computer-aided manufacturing, driven by 3D modeling, ensures dimensional accuracy in the product and exceptional speed during on-site installation,” says Allen Finfrock, CEO.

However, advancing technology does have its price. “It is getting harder to fix mechanical equipment due to [its] complexity. A service technician can no longer go to a jobsite without a laptop. Training is imperative, and the company must shoulder 100% of this training as the trades are unable to keep up with the fast pace of technological advances,” says Reiss of Westside Mechanical Group. Also, some contractors worry that the sheer volume of information and time pressures for quick turnarounds may take its toll. While technology has drastically increased the volume of information available, people still have to understand the project the way they used to “back in the blueprint-sepia- pager-courier days,” says Michael Perle, owner of Perlectric. He worries that trying to keep up with the demands of new technology will create psychological pressures and interfere with employee job satisfaction.