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