There was a time when steel erectors worried about the price of materials, when utility contractors debated the virtues of directional drilling versus cut-and-cover trenching and when demolition contractors complained about the costs and availability of disposal sites. But with a market downturn, economic uncertainty and talk of war, specialty contractors now are sounding like business school grads coming back for a refresher course in the art of management.

For ENR's Top 600 Specialty Contractors, 2001 marked the last gasp of the industry's nine-year bull market. The Top 600 generated revenue of $53.94 billion, down 0.6% from the $54.26 billion reported in 2000. However, the 2001 revenue figure does not take into account the absence of Bracknell Corp., which reported $1.26 billion in revenue in 2000 but whose financial problems resulted in bankruptcy last year. The firm appears no longer to be functioning as a unified entity. "It appears that the rolled-up subsidiaries are being sold back to the original owners or investors," says one competitor. The Top 600 also is missing numbers from RailWorks Corp., which filed for bankruptcy protection in September 2001. The firm emerged from Chapter 11 Sept. 24, with a Baltimore court's approval of its reorganization plan. Ab Rees now is charman and CEO. However, Bracknell and RailWorks both have failed to participate in this year's survey.

The two companies are not the only large specialty contractors experiencing financial problems. Kingsport, Tenn.-based Flour City Architectural Metals, one of the nation's largest curtainwall contractors, was fired from several of its largest projects last year (ENR 9/3/01 p. 15) and does not appear to be bidding on major contracts, according to some major competitors. The stock of Flour City, a publicly held company, last traded on Sept. 12 at one-half cent a share.

Encompass Service Corp., the No. 1 contractor on the Top 600 this year, had its bond rating downgraded Sept. 12 with "negative implications" by Standard & Poor's Ratings Services, a unit of The McGraw-Hill Cos., as is ENR. S&P said Encompass has about $931 million in debt outstanding and warned that the contractor's equity sponsor, Apollo Investment Fund IV L.P., "may not infuse a contractually obligated minimum of $31 million of net cash proceeds from an equity offering into Encompass by Oct. 15." The contract calls for the equity stock purchase to be paid at 55� a share, which is substantially above the current trading price--14� a share on Sept. 27. If Apollo fails to provide equity capital, bank lenders would have the right to call about $470 million in credit, putting Encompass in danger of bankruptcy, said S&P.

Some changes in the Top 600 rankings are more subtle. For example, revenue for seventh-ranked Comfort Systems is down from the previous year because the firm did not include nearly $650 million from 19 subsidiaries sold to EMCOR Group earlier this year (ENR 2/18 p. 12). And numbers from some major steel erectors, such as Schuff International and Midwest Steel, are lower because ENR clarified its requirements that only revenue from self-performed steel erection, not fabrication and manufacturing, can be included.

One company that is close to coming back from a near-death experience is Limbach Facility Services. The firm, a unit of ill-fated Enron Corp., is being bought back by its management along with an equity partner, subject to the final approval of Enron's bankruptcy trustee. A ruling is expected in late October. The identity of the partner and the terms of the deal were not released because the firm is subject to confidentiality agreements until the ruling. "We came through our 100th anniversary at the end of 2001 and things looked bleak then," says Steve Wurzel, Limbach's chairman and CEO. "Now we can see a light at the end of a very dark tunnel."

With the market tight now, there is a general inclination among specialty contractors to hunker down and concentrate on managing. "It seems that we learn how to manage our businesses in the bad times and then forgot those lessons in the good times," says Dan Baker, CEO of Baker Concrete.

Many firms point to the problems of the roll-ups as an example of the problems when companies strive for size at the expense of all else. "One of the first big roll-ups was JWP and it didn't work," says E. Colette Nelson, executive vice president of the American Subcontractors Association, Alexandria, Va. "But the next generation of roll-ups seems to have followed the JWP model of simply accumulating assets. It seems that [JWP's successor and second-ranked specialty contractor] EMCOR is one of the few big firms to learn from JWP's mistakes."

But some roll-ups are working hard to consolidate their operations to make them work together. One firm is Integrated Electrical Services. "There are 85 companies in IES, but IES is one company and that's our focus," says William Reynolds, CFO.

To unify operations, IES has created regional operating groups of 8 to 10 companies. "Compensation is based on regional performance, and insurance and procurement will be done on a regional basis," Reynolds says. He notes that IES has cut about $50 million in operating costs and is using cash flow to pay down debt. "We have completely paid off our revolving debt," he says.

Another roll-up, Quanta Services, also has been working toward more efficient operations. "We've instituted a unified financial reporting system for all our operating units," says John R. Colson, chairman and CEO. But with the downturn in the telecommunications and high-tech markets, Quanta has had to become lean and mean, he says. One positive development for the firm was its fending off of a hostile takeover attempt by its largest shareholder, Aquila Inc., formerly Utilicorp. Aquila and Quanta signed an agreement in June, ending lawsuits and a proxy battle, Colson notes.

Painting and maintenance contractor Kenny Industrial Services is a private consolidation that has concentrated on managing its operations for maximum efficiency, executives say. It consists of Kenny, J.L. Manta, Cannon-Sline, Genessee Painting and Mansfield Coatings. "We deliberately took the last two years off [from acquiring firms], spending the time integrating the companies," says Darryl Schimeck, KIS executive vice president. "Integration is the nonsexy part of consolidation, but it is absolutely necessary," he says. "There have been some pretty spectacular failures by companies that didn't take the time and effort to integrate their companies. When you put a group of contractors together, you can have either a focused operation or an agglomeration."

STICKER SHOCK
The impact of hardening insurance and surety markets on contractors has been well documented. But after the initial sticker shock from the steep premium increases that many specialty contractors have had over the past year, some executives see the issue as a simple market swing, which many of the more experienced hands have experienced before.

Not everyone is optimistic that the swing will be short. "Next year may be worse than this year because there are still some losses in the [construction] industry to be flushed out," says Jeffrey M. Levy, president of EMCOR. He notes that, with the collapse of the reinsurance market, insurers realize that it is their own money at stake, and they will take greater pains to gauge the risk-return ratio. "It's a whole different dynamic at work," Levy says. "Those who think this is just another cycle in the insurance market may be unpleasantly surprised."

One of subcontractors' perennial problems–getting paid–seemed to subside during the bull market while other issues, such as manning jobs, moved to the forefront. But payment now is back on the front burner. "Many of our members are younger and have not been through a major recession before," says ASA's Nelson. "So they are shocked by some of the predatory payment practices." Much of the problem is with owners, "but predatory practices tend to run downhill," she says.

In an ASA survey of member concerns, "the top three vote-getters were payment, payment and payment," Nelson says. She notes that it is ironic that the industry attempts to present a positive image to attract people and then treats them shoddily in paying them once they are here. "It's a real Dr. Jeckyl and Mr. Hyde situation," she says. "Construction integrity should not be an oxymoron."

The market is off for electrical contractors. "We compile data on members' pension contributions nationwide and we have found they are off 8% nationwide for the first five months of the year," says John Grau, executive vice president of the National Electrical Contractors Association, Bethesda, Md. But he points out that this decline is from an all-time high, so the market is generally healthy.

One continuing issue for electrical contractors is the presence of electric utilities in the contracting market. "We still see some regulated utilities acting in unregulated markets in an unregulated manner," says Grau. But he notes that "some of our guys see the trend slowing."

Quanta Services has seen less interest by utilities in the contracting side. "One trend is the increase in outsourcing by electric utilities," says Colson. "The utilities are not as aggressive as they had been in acquiring contracting capability. I think they are finding that going from a regulated environment to the highly competitive construction business is something they weren't prepared for."

MIXED BAG
For mechanical contractors, the market is a mixed bag, depending on location and market sector. In the Pacific Northwest, "the private sector has slowed considerably," says David Allen, executive vice president of McKinstry. "But the public sector is coming along really well." He says that all is not lost in the private sector. "The biotech industry is really taking off up here."

Contractor McKinstry has found new success in facilities management. "The percentage of our revenue from facilities management has grown from 10% to 30% over the last couple years," says Allen. He says that facilities management is a natural extension of a mechanical or electrical contractor's business. "After all, about 65% of total maintenance costs come from mechanical and electrical work," Allen notes, adding that it provides a steady revenue stream.

EMCOR also has a growing stake in the facilities market. "Facilities outsourcing took on a high priority at the start of the economic downturn, but it takes time for such decisions to work their way through the approval process," says Levy. He believes that facilities management will continue to grow, but it is "more than just maintaining a call center, which isn't much more than answering services." EMCOR has computer systems to provide monitoring and benchmarking of building system performance, Levy says.

The market has been tough for Kinetics Group. "We are caught in the high-tech maelstrom," says Kurt Gilson, president. He says telecom continues to be "basically nonexistent, down 90% from previous highs, and the semiconductor market is off about 50% from two years ago." Kinetics' overall numbers are probably off 18 to 19% this year. The firm is finding major relief in the international market. "Our percentage of revenue from international jobs has tripled in the past two years," Gilson says. The trick is "to be ‘ramp ready' for a turnaround."

The slowing economy and falling stock market has had another, indirect, impact on Kinetics. The firm planned to spin off, in an initial public offering, its unit that provides facilities and equipment support for high-tech equipment manufacturers. The unit, called Celerity, filed papers and planned to go public in August, but "we held off" because of stock market conditions, says Gilson. The registration papers are still valid, so Kinetics is ready for an IPO if the climate turns around, he says.

BRICKWORK
While some markets sag, many prime sectors for masonry contractors, such as schools and healthcare facilities, are thriving. "There's still decent activity on large projects, although there is a slight fall-off in smaller jobs," says Mark H. Guetzko, president of Seedorff Masonry.

But Guetzko finds his company in a curious position because delays in materials haven't been a problem. "A couple years ago, lead times for brick were up to eight to 10 months," says Guetzko. "Now, it's six to eight weeks." He says the only significant delays are for cast stone, but adds that many projects are having scheduling problems because of material delays for other contractors. "Despite a big backlog, we have had trouble keeping all our people busy," says Guetzko.

For many concrete contractors, the market is suffering. "One office after another is reporting downturns," says Baker of Baker Concrete. "Some of our offices are down as much as 10 to 15%." The firm is concentrating on maximizing profitability. "We've shut down a couple offices, downsized others and rightsized across the board," he says. "It is not easy, because you lose some good people, but it's not enough just to keep your head down and work."

Concrete contractors are being hurt by the falloff in the stadium and arena market, Baker says. He notes a few jobs still around, such as projects for the Arizona Cardinals, the San Francisco 49ers and possibly for the St. Louis Cardinals. "But we really are on the back end of the bell curve in that market," says Baker.

One of the few hot concrete construction markets is in Alabama, where foreign auto plants are springing up. Baker notes that Mercedes and Honda have built in the state and Hyundai is planning a facility there as well.

Other contractors also are crediting location. S&F Concrete Contractors is benefiting from a building boom in Boston, one of the few vibrant markets for specialty firms. S&F's 2001 revenue was up 76% over the previous year, and the market does not look like it is ready to abate, says Peter J. Moskos, executive vice president. "We didn't set out to grow the business that quickly," he says. "We just won a series of large projects."

S&F is working on the Boston Convention Center, a new hockey arena for Boston University, a new building for Massachusetts General Hospital and the $300-million Ray and Maria Stata Computer Center at MIT in Cambridge, the single biggest job in the firm's history.

The change in ENR's ranking of steel erection companies has altered this year's list of Top 20 firms. As a result, some companies that in the past included fabrication in their revenue, now show much lower "pure" erection numbers this year.

But that doesn't mean that erectors enjoyed a great year in 2001. Schuff International's overall corporate revenue was off 18.8% in 2001 to $234.1 million, from $278.1 million in 2000. And the market is still struggling. "I see 30 to 40% less work out there, and we don't see it coming back for at least a year," says CEO Scott Schuff. Schuff International is reacting to the down market by tightening up its operation. "We just finished looking at all our companies to justify every job down to the individual employee level," says Schuff. One result was that the firm eliminated two layers of management, he says.

Part of the problem for steel erectors is the drop-off in the commercial building market. "There is a ripple effect. Commercial work is off," says Robert Abramson, CEO of Interstate Iron Works. "Many projects have been placed on hold to be redesigned in the wake of 9/11. But I think you are going to see some of the projects start shaking loose in the next six months or so."

Abramson's big concern about the impact of the World Trade Center disaster is the possible misconceptions about building materials. "People now are looking at concrete as more solid, but I believe that reinforced steel buildings are just as effective," he says.

DIGGING OUT
Excavation contractors are not immune to the market downturn. "We've seen certain market segments scaling back," says Seth Pearlman, vice president of Nicholson Construction Co. He says the power market is off, "but there still is great potential in that market, particularly in the upgrades of existing coal-fired plants."

Pearlman says that a soft market is no excuse to hunker down and wait it out. "Many contractors see themselves as victims of the economy, but I don't see that," he says. Nicholson is expanding geographically, setting up a new office in Albany, N.Y., and also in Nashville, to service some of the difficult soil conditions in North Carolina, Tennessee and Kentucky. "We are trying to make sure that we have access to markets where there is potential for our products to be applied," he says.

If there is a long-term gripe among some in the excavating community, it is industry resistance to taking advantage of new methods and techniques. "In specifying, many engineers are not familiar enough with some of the new techniques, such as minipiles and jet grouting," says Pearlman. "But gaining acceptance by the U.S. engineering community is a slow process."

The roofing market, while not immune to downturns, may not be suffering to the same extent as other markets. "Our customers are looking at roofs as an asset, rather than taking them for granted," says John Larimer, president of generalRoofing. As a result, the firm is increasing its emphasis on reroofing. He says it made up only 15% of revenue a couple years ago. "It is now 40%, and we are shooting for a 50:50 split."

For Centimark, the nation's largest reroofer, business is steady, but not strong. "During a recession, we don't suffer like contractors doing new construction do," says Edward Dunlap, CEO. But he notes that the character of the job can change. "Sometimes clients downsize jobs from a new roof to just a patch," he says.

Dunlap's biggest concern is that less qualified roofers are scrambling into the market. "You have a lot of contractors bidding just to pay wages and keep the lights on," he says. And in a shaky economic atmosphere, some owners are buying cheap work. "I hear them say, ‘why should I bother with a 20-year guarantee when I might not be in business next year,'" Dunlap says. "I'll be glad when the bulls start running on Wall Street again."

Among sheet metal contractors, the market definitely is down, with regional exceptions. "We track members' manhours, and national manhours are down about 10% over last year," says John Sroka, executive vice president of the Sheet Metal and Air-Conditioning Contractors National Association, Chantilly, Va.

But in some areas, the news is worse. "In the [San Francisco] Bay area, the numbers are probably down over 20% and it's almost that bad in areas in the Midwest," Sroka says. But he notes that in the Northeast, things are still going strong. "The market looks like it's up in Philadelphia, New York, New Jersey and Boston," Sroka says. But he points out that any downturn is part of the cyclical nature of the industry: "Our members have had nine boom years in a row, so no one should be surprised that the market has turned."

SMACNA is working hard to ensure that its members maintain, or increase, market share. Last year, the group surveyed its most successful chapters to determine how they increased union market share. The study found that frequent communication between union locals and contractors was key to success, Sroka says. "You can't limit your meetings to contract negotiating sessions," he adds. SMACNA now is surveying chapters with shrinking market share to determine how to reverse that trend.

GLAZED OVER
One of the biggest developments in the glazing and curtainwall market is the virtual disappearance of Flour City Architectural Metals. "It's a shame. They were one of the four or five original giants of the industry," says Thomas W. Kretschmer, vice president of sales for Enclos Corp., a major competitor. "It appears that they paid too much attention to the European and Asian markets at the expense of the robust U.S. market."

Another development is Enclos Corp.'s own name change, from Harmon Ltd. "Our focus is on the semi-custom and custom enclosure portion of the market, but people kept confusing us with Harmon Inc.," says Kretschmer. That firm is a curtainwall contractor that was Enclos's former sister company.

Kretschmer says there is an increase in curtainwall security. "We got into blast-proofing a few years ago with the federal courthouse project in Las Vegas, the first major courthouse job in the wake of Oklahoma City," he says. But Kretschmer notes that much of the work now is geared to preventing flying glass rather than bomb-proofing curtainwalls.

Utility contractors have taken their share of hits with the crash of the telecommunications market. "Telecom is a very difficult market right now, and I don't anticipate any improvement. There may even be further deterioration," says Colson of Quanta Services.

But not everyone is so pessimistic. "The telecom market has been everybody's whipping boy," says Jim Mulhern, director of sales and marketing for Henkels & McCoy Inc. "The industry is simply going through a cycle. We are seeing some signs of relief in the fiber market."

On the industrial maintenance side, "the economy is still shaky," says Kenny's Schimeck. "Things got pretty soft in the second quarter. It is probably a blip from 9/11." Projects under way that day continued, but those scheduled to start after were delayed. "The market went into a cocoon for a few months," he says. But it should rebound in the fourth quarter, Schimeck says. "That's the beauty of this market–you can delay maintenance, but you can't cancel it," he adds.

Wall and ceiling contractors have had a lot on their minds recently, in addition to market concerns. For KHS&S, business is down, but there are signs of improvement. "We are probably down 7 to 8% over 2001," says CEO Dave Stowell. "But a lot of that is in projects that were put off after 9/11."

According to Stowell, some of those now are coming on line. "We are working on projects now that probably we would have been working on seven or eight months ago, but for 9/11," he says.

MOLDY
Mold is an issue for specialty contractors, interiors firms most of all. "In this business, when it comes to mold, if you aren't paranoid, you've got to be crazy," says Stowell. He notes that the gypsum industry is working on developing new, mold-resistant or moisture-resistant gypsum and drywall products, but he doesn't see them coming out any time soon. "You can't begin installing interior finishing systems without enclosing the building, but sometimes you have to work carefully with the general contractor on scheduling to make this happen," says Stowell.

Demolition contractors had a good year in 2001, says Mike Taylor, executive director of the National Demolition Contractors Association, Doylestown, Pa. "But right after the first quarter [of 2002], we saw a slowdown. Everyone has work, but the margins are beginning to get tighter."

Bill Moore, vice president of Brandenburg Industrial Service, says "the problem is that we are usually the first to feel an economic downturn." He notes that demolition work usually precedes new construction or renovation, so when the economy sours, so does this prep work. But Moore is not too worried. There still is work from high-end clients, and Brandenburg has managed to maintain a 4% worker turnover rate. "In this industry, that is nearly unheard off," he says.

If there is an upside to the downturn, it is a chance for everyone to take a much-needed breather. "In 1997, there was so much work, people were exhausted," NADC's Taylor points out. "You just could not sustain that level of work." He believes that the demolition market should begin to claw its way out of its funk in another six months to a year.

Many demolition and remediation contractors had high hopes for the brownfields market, with the approval of federal seed money. But some say the market has yet to take off. "The money hasn't come through yet," says Taylor. "But here in Pennsylvania, the state is planning to come up with $50 million in matching funds." While Taylor believes brownfields won't be a big market in the short term, "$200 million from the feds is a significant kick-start for the market."

As for the asbestos market, "clearly there's still a lot to be alleviated," says Burton T. Fried, CEO of LVI Services Inc. "Even in this market, the demand is still there although we are seeing some delays," he says. "We have several large public projects that are taking longer to get the go-ahead. I don't know if it's administrative, budgetary, or what, but the projects are taking longer to get through the pipeline."

Mold abatement is stimulating a major new market. "As a remediation contractor, we've found a lot more activity in mold than before," says Fried. "And this trend is present across the country, without regard to geography."

Fried says there are two factors that are spurring the mold cleanup market– greater public awareness of the issue and exposure regulation. "These are the same elements that inspired the asbestos abatement market in the 1980s," he says.

Fried believes mold abatement could develop into an even bigger market. "Asbestos is limited to certain types of facilities and exists only in structures built before the early 1970s," he says. "But mold isn't something that you introduce into a building, and it isn't something that you can remove once and then it's gone for good."

Fried's biggest concern about the current mold remediation market is contractor qualification. "You really need standards and qualifications for remediation contractors if you want to get rid of the unscrupulous and the untrained," he says. Until qualification standards are established for mold-abatement contractors, "you will continue to have contractors out there causing more damage than anyone realizes," Fried claims. "They probably don't even realize it, themselves."

THE 2002 TOP 600 AT A GLANCE
VOLUME
	1999	2000	%
	$ MIL.	$ MIL.	CHANGE
REVENUE	54,263.6	53,939.8	-0.6
NEW CONTRACTS	50,873.4	49,898.6	-1.9
SPECIALTIES
	REVENUE	% OF
	$ MIL.	TOTAL
ASBESTOS ABATEMENT	434.5	0.8
CONCRETE	2,810.1	5.2
DEMOLITION/WRECKING	711.6	1.3
ELECTRICAL	17,157.2	31.8
EXCAVATION/FOUNDATION	1,935.5	3.6
GLAZING/CURTAIN WALL	932.4	1.7
MASONRY	727.4	1.3
MECHANICAL	14,103.6	26.1
OTHER	5,594.5	10.4
PAINTING	633.2	1.2
ROOFING	1,266.8	2.3
SHEET METAL	1,067.1	2.0
STEEL ERECTION	898.6	1.7
UTILITY	3,172.0	5.9
WALL	2,495.2	4.6
MARKET ANALYSIS
	REVENUE	% OF
TYPE OF WORK	$ MIL.	TOTAL
BUILDING	27,318.2	50.6
HAZARDOUS WASTE	456.9	0.8
INDUSTRIAL	3,739.8	6.9
MANUFACTURING	5,795.1	10.7
OTHER	1,310.0	2.4
PETROLEUM	1,409.7	2.6
POWER	4,678.3	8.7
SEWER/WASTE	1,756.4	3.3
TELECOMMUNICATIONS	3,696.2	6.9
TRANSPORTATION	3,298.9	6.1
WATER	480.3	0.9
PROFITABILITY
	FIRMS REPORTING NET OPERATING		AVERAGE % MARGINS OF
	PROFIT	LOSS	PROFIT	LOSS
FIRMS REPORTING	540	27	6.3	3.1
Ranked according to revenue from specialty, prime or subcontracting obtained in 2001.