For ENRs Top 600 Specialty Contractors, 2003 represented a third straight down year. Collectively, the Top 600 generated revenue of $46.87 billion, a 3.1% drop from 2002s mark of $48.39 billion and a 13.6% fall-off from 2000, when listed firm revenue hit nearly $54 billion.
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More Top 600 firms reported higher revenue than declines in 2003, but top line totals are not the only indicator of specialty contractor struggles. This year, 73 of 589 Top 600 firms that provide profit and loss data said they lost money in 2003. Thats up from 46 in 2002an admittedly tough year.
"Theres a whole range of uncertainties facing our members," says E. Colette Nelson, executive vice president of the American Subcontractors Association, Alexandria, Va. "Materials prices, insurance costs and availability, the federal highway bill, the economy and the presidential election are all weighing heavily on subcontractors minds. Those who are used to making decisions based on facts and numbers now are being forced to make decisions about their business based on gut instinct."
|(Photo by Guy Lawrence for ENR)|
Worsening relations with increasingly strapped general contractors havent helped. ASAs new biennial survey of member concerns illustrates the problem. While payment issues top the list, "onerous subcontracts" climbed 18%, to third position. Nearly two-thirds of ASA members now see "additional insured" clauses as a serious problem, up 20%, and 70% complain about the use of "indemnification/hold harmless" clauses. "These are unprecedented increases over a two-year period," says Nelson. "We knew members were increasingly worried about these issues, but we didnt realize how bad things had become."
ASA has been focusing on state legislation as a remedy. On Sept. 30, it released a "report card" on state laws protecting subcontractors, grading each on anti-indemnity/additional insureds, anti-bid-shopping laws, retainage limitation laws and policies regarding mechanics liens, anti-pay-if-paid issues, payment bonds and prompt pay. Only New Mexico received a passing gradea "D."
Nelson says that despite protections on particular issues, she was "surprised at how poorly state laws protected our members across the board. Its like a student who does well in math and science and fails everything else." State legislatures still refuse to take subcontractor problems seriously, Nelson claims. "Legislatures may see the problems, but they expect us to work it out ourselves," she says. "That is hard when there is an imbalance in bargaining power between GCs and subs."
Many specialty contractors see this year as a slow turn for the better. "I believe 2004 is a transition year between a recessionary 2003 and a recovery year in 2005," says Frank MacInnis, chairman and CEO of EMCOR. He sees slow near-term improvements in both market conditions and the business climate. "We are burning off recessionary backlog where margins were lower, and picking up quality jobs," says MacInnis. "The facilities service side has seen solid gains and long-term relationships are the key."
EMCOR is also rethinking the international side of its business. "We are reevaluating our U.K. operations, where earnings have been particularly volatile," MacInnis says. International work always carries risks and uncertainties, "so given the choice between a job in Dubai and one in Denver with equal margins, Id take Denver every time," he says.
The many uncertainties have taken a toll on some of the biggest specialty contractors. Electric utilities have reduced their maintenance and capital spending on distribution systems over the last three years because of excessive debt, says John Colson, chairman and CEO of Quanta Services. Quantas business with electric utilities had fallen 30 to 40% in the past few years. "Its been a difficult time for us. The largest part of our business was drastically reduced," he says.
During these tough times, Quanta reduced its costs and strengthened its balance sheet to prepare for the upturn, says Colson. "The good news is that we are seeing a turnaround in [utilities] credit situations and better balance sheets," he says. "Our second quarter backlog is up 18% over the same quarter in 2003."
Colson also is optimistic about the telecommunications market. "Telecom companies are planning to spend money running fiber-optic cable to premises and nodes," he says. Verizon plans to run fiber optics to 1 million homes this year and SBC Communications will spend $4 billion to $6 billion over five years laying cable to the nodes. Sprint, Verizon and Cingular all plan to upgrade third-generation wireless networks, he says. "We are finally seeing some life," says Jim Mulhern, vice president of corporate sales at Henkels & McCoy.
The firms decision to stay diversified blunted the impact of the telecom dropoff. "A lot of the roll-ups invested heavily in communications and it came back to bite them," he says. Henkels & McCoy stuck with traditional markets in power, gas and pipeline work, as well as communications. "In the 1990s people called us stodgy. Now, they think were geniuses," Mulhern points out. "We just like to be conservative."
Utility Services Inc., the service arm of MDU Services, a Bismarck, N.D., utility, is trying to recover. "Its no secret that we havent done as well as we would have liked," says John Harp, named USI president on Sept. 29. He notes tough competition for inside electrical work. "A lot of people are giving work away to maintain volume," he says. Harp is tightening up operations, improving performance and assessing...eing a specialty contractor is tough work in any circumstances. But the past two years have been especially tough as markets slumped in many sectors. Even where some have begun to recover, new business obstacles emerge. As a result, the current climate for many contractors is uncertain and that uncertainty is taking its toll.