Specialty contractors, along with the rest of the construction industry, had enjoyed a nearly unprecedented boom market for the last eight years. Then, at the beginning of the year, the market started showing signs of softening. Specialty contractors began assessing their positions and preparing for a flattening of the market. The terror attacks on the World Trade Center and the Pentagon and the economic upheaval that followed threw all of these carefully crafted plans and assessments into confusion. It still is unclear where the industry goes from here.
|(Illustration by Guy Lawrence for ENR)|
Just how big a boom the market enjoyed at its peak can be seen by the 2000 revenue figures for ENR's Top 600 Specialty Contractors. The Top 600 posted revenue of $54.26 billion in 2000, a 24.2% jump over 1999's previous record of $43.68 billion. While much of this increase can be attributed to big jumps in revenue from acquisitions by the largest firms, the overall numbers speak of the widespread prosperity enjoyed by the industry
But many firms are concerned about the impact of the Sept. 11 bombings and the subsequent economic uncertainty in the construction market. Some companies have seen that impact up close. "Out of nine commercial and hotel projects we were tracking, seven have been put on hold," says Matt Hutchison, business development director at Oregon Electric. But he sees continuing strength in the power market.
Some large contractors haven't seen significant changes in the wake of the terror bombing. "We have vigorously in the last week gone out to operating utilities and contractor units to determine that," says William F. Murdy, CEO of Comfort Systems USA. So far, there haven't been any signs that things are going to change radically. "Maybe it is too early to know." But Murdy says he would "bet that airport work will change." The firm has one $2-million-to-$3-million airport systems control project in Houston that is "on hold."
On the other hand, "all of the good things going on in the company have not been able to over-come the uncertainty in the economy," says Joe Ivey, president and CEO of Encompass Service. "The visibility is the worst I have seen it in 20-plus years in the industry." This uncertainty led Encompass on Sept. 25 to withdraw previous announcements on the firm's projected earnings.
"Business fixed investment, including construction spending, continues to be under tremendous pressure and we believe our third and fourth-quarter results will be significantly below our previous expectations," says Ivey. In particular, entertainment and airline customers have been canceling or delaying projects.
One firm that is already reacting to the tragedy of Sept. 11 is glazing and curtain wall contractor MTH/Glass America. "We had an acquisition planned in the East but mutually agreed to put it on hold until the spring," says Lyle Hill, president. But the firm is going ahead with another planned acquisition, says Hill. In addition, it will continue with the construction of a new facility to upgrade and modernize its operation.
But Jeffrey M. Levy, president of EMCOR, says there is no need to panic. "We haven't seen any delays or concerns on projects where money had already been committed," he says. There may be temporary delays in cases where not much money has been committed. "But we believe that in another few months, people are going to reassess." Levy thinks that the F.W. Dodge forecast is correct that any fall-off in work will be moderate (ENR 10/1 p. 12).
As for concerns about airports and other big-ticket projects, Levy remains confident. "The big airport projects you see out there are not public works projects. They are being built because they are desperately needed," he says. "You might be able to put off some of this work, but that won't cure the underlying need."
In specialty contracting, electric utilities continue to acquire contracting capacity. Exelon Infrastructure Services is a prime example. Over the past few years, it has acquired electrical contractors Fischbach & Moore, M.J. Electric, Syracuse Merit Electric, Western Utility Services and Dashiell/Dacon Corp. Parent company Exelon Corp., formed as the result of a merger between PECO Energy Co., Philadelphia, and Unicom, the parent of ComEd, Chicago, "saw a future for an integrated services firm," says Dennis Mueller, president of EIS Operations. EIS was put together "more from an investment standpoint than from a ‘come-do-our-work' standpoint," he says. Mueller estimates that EIS does only about 10% of its work for the parent company.
EIS has three areas of focus: underground utility work, electrical contracting and managed services. "Underground utility work looks really ugly right now," Mueller says. That is offset by a strong electrical market, particularly in powerplants. "Distribution work will come around when all the regulatory problems are worked out, although that may take some time. We also believe that there will be a major wave of powerplant outsourcing to come." Mueller believes that utilities will soon begin outsourcing operations and maintenance of entire powerplants.
One strategy behind Exelon's acquisitions was the belief that the nature of electrical contracting is changing, says John Daley, president of the newly formed Exelon Infrastructure Services electrical business unit. "It's a different mind-set than it was years ago. Customers are looking for more long-term relationships," he says. Much of this change was spurred by the electrical contractor roll-ups. "Now, electrical contractors are really big," he notes. At an estimated $900 million in revenue for 2001, Exelon can compete with the really large contractors, Daley says. "Plus, we can provide an integrated package of services," Mueller adds. "We prefer to provide integrated services, because that provides a chance for higher margins."
Exelon isn't the only utility making changes. Montana Dakota Utilities–MDU Resources Group Inc., Bismarck, N.D.– recently has been acquiring contracting capacity, including Wagner-Smith Cos., Dayton, Ohio; Capital Electric, Kansas City, Mo.; and Oregon Electric, Portland. "MDU is focused on providing integrated, turnkey electric services," says Hutchison of Oregon Electric.
Hutchison sees the emergence of the roll-ups in the electrical contracting sector as changing the nature of electrical contracting. "When you get huge companies like Quanta and Encompass, you have to be big and provide a wide array of services to compete," he says. Now, Oregon Electric can provide everything from low-voltage services to high-voltage line work and everything in between in a single package. "It's getting tough to be an independent electrical contractor. Everyone has to have a partner now," he says.
While roll-ups may be changing specialty contracting, not all roll-ups have enjoyed success. Railworks, the integrated rail contractor and supplier, had enjoyed great success in winning contracts and building backlog. But it was not as successful in building its bottom line. It filed for bankruptcy reorganization under Chapter 11 on Sept. 21.
"Our board and creditors came together and decided that the best way to handle the substantial debt was through reorganization," says Stephanie Cohen Glass, a Railworks spokeswoman. She concedes that much of the debt was related to the firm's acquisitions. In the second quarter, Railworks reported a loss of about $39 million, including $33.7 million in charges relating to change order disputes, doubtful accounts, and disposal of assets. On Aug. 20, John G. Larkin resigned as chairman and Michael R. Azarela resigned as president and chief operating officer.
Glass points out that Railworks' creditors have extended a term loan facility of $35 million, revolving credit of up to $30 million and a surety bonding facility of up to $100 million to allow the firm to pursue new business, all subject to bankruptcy court approval. Norman Carlson, former managing director of consultant Arthur Anderson's transportation industry practice, has been named non-executive chairman.
One concern that cuts across all specialties is the tightening of the insurance and surety markets. "Insurance rates had been going up right along, but [Sept. 11] will only accelerate that trend," says E. Colette Nelson, executive vice president of the American Subcontractors Association, Alexandria, Va. "So contractors that aren't already prepared to deal with risks and risk transfers are going to find themselves in trouble."
Many contractors are complaining about insurance costs. "Workers' compensation and even general liability costs have been inching up for the past year, and we expect them to go out of sight now," says Bob Swanson, president of painting contractor Swanson & Youngdale Inc.
Insurance company losses from Sept. 11 may have an even wider impact, says David A. Stowell, CEO of KHS&S Contractors. He says that the big question now is how this will affect owner-supplied insurance programs such as wrap-up insurance. "With the huge hits the insurance and reinsurance industry took on Sept. 11, I expect the costs of wrap-up insurance may rise to the point where it scares off many owners," he says.
Many specialty contractors say that the personnel crunch has eased, but has not disappeared. One company that has taken a proactive approach to personnel training and retention is the Structural Group. "We have a project engineer program that has had a lot of success," says Brian Gallagher, director of business development. The program takes newly hired civil engineering graduates and rotates them through the firm's different divisions, exposing them to the design side through detailing work, project management and manufacturing, plus work on business development and estimating. "It's like getting an MBA in specialty contracting," Gallagher says.
The destruction of the World Trade Center was a shock for everyone, but it was especially acute for E-J Electric. The firm recently had completed the installation of one of the most sophisticated electronic security systems in the world in the WTC. "We did all that work and look what good it did," laments Robert Mann, president of E-J.
Mann says that, in the long term, there will be a significant increase in commercial building in the New York City area. "You can't lose 30 million sq ft of space without something happening," he says. "But it may take developers another year or two to get any projects off the ground." In the interim, there may be a scramble to rewire existing space for new tenants.
One area of opportunity for electrical contractors is urban distribution upgrades. "The electrical infrastructure in many of our cities is aging and will need upgrades," says Daley of Exelon. He says that electrical utilities increasingly will look to form alliances with electrical contractors that can provide a wide range of services rather than bidding out numerous separate contracts.
Many contractors are concerned about the telecommunications market. On Sept. 25, Encompass Services announced that it was ceasing operations of Encompass Global Technologies Group. "Given the outlook for capital spending on collocation facilities, telecom hotels and Web hosting centers, maintaining a business group that provides construction management services to mission-critical technology facilities is no longer a wise use of our resources," says Ivey.
But Levy of EMCOR says the low-voltage market remains healthy. "With the increasing demand for bandwidth, there is a lot of work," he says. "The market has gone from a big sizzle to a hum of steady business."
Levy also says that the operations and maintenance market continues to grow. "Outsourcing has picked up and once you are an O&M provider, it opens up new markets for other work," he says.
Mechanical contracting giant Comfort Systems expects a flat market. "I don't think we are planning on any major growth in 2002. On the other hand, we don't have a disaster coming," says Murdy. The company is focusing on the bottom line. "We had two quarters of reportable profit and very strong cash flow," and Murdy expects the trend to continue. The firm has emphasized things like job selectivity and is sailing closer to the wind. "We try not to spend a dollar we don't need to," says Gary Hess, Comfort Systems president.
Comfort Systems now has 119 units in 80 reporting locations and has been consolidating back office operations and assessing the entrepreneurial activity of individuals, mostly former owners. "We are not treating some of them as gently as before," says Hess. "It is not confrontational, but it can be and has been in a few instances."
Concrete contractors saw a slowdown early this year. "Even before Sept. 11, we saw a softening in the light industrial and light commercial markets," says Dan Baker, CEO of Baker Concrete. But Baker is less worried about the bigger public and private sector jobs where money has been committed. He is concerned about airport jobs. "We have a big job for American Airlines in Miami and another at Dallas-Fort Worth. But they need passengers to generate gate fees," he says.
Baker isn't the only one concerned. "I am not worried about [airport] jobs where money is committed, but what about those that haven't started?" says Ron Schuster, CEO of Ceco Concrete. For example, he cites concerns about a Minneapolis Airport parking garage that has just been bid and the huge Atlanta-Hartsfield expansion plan. The industry is "going to take some hits" as a result of the Sept. 11 bombings, he says.
While many believe entertainment projects will take a major hit as long as people remain reluctant to fly, Baker still feels confident about stadium jobs. "Stadiums have been a major driver for Baker Concrete and, while the market may be on the downslope, there still are a lot of projects out there," he says. He points to such projects as the renovation of the Green Bay Packers' Lambeau Field and proposed jobs for the San Francisco 49ers' field and Chicago's Soldier Field renovation. "There is talk of a stadium for the Minnesota Vikings, and I can't believe that we won't see a pro football team in Los Angeles within the new few years," Baker says.
There are many specialty contractors who believe there may be added work related to reinforcing structures in the wake of the hits on the World Trade Center and the Pentagon. "No amount of renovation will stop a plane," says Schuster. "But we have seen buildings, particularly banks and government offices, beefed up since the Oklahoma City bombing."
The Structural Group has been working for several years on structural strengthening and upgrades. "We've been using a carbon-fiber composite strengthening system, developed in conjunction with Master Builders," says Gallagher (ENR 3/10/97 p. 17). He believes that building owners increasingly will look into structural strengthening.
The Western Group has been working in a similar vein. "We've been using fiber-reinforced composites in strengthening load-bearing structures for things like computer centers," says Dennis Ahrenhoersterbaeumer, Western's director of business development. But not many owners have been looking at these composites from a security standpoint. "Maybe [the bombings] will cause this market to break loose," he says.
Another group that may benefit from the need for enhanced security is steel erectors. "It is an extremely tragic way to increase business," says Frank E. Williams III, president of Williams Group. He notes that his firm worked on the structural reinforcement of the renovated portion of the Pentagon that held up well.
Williams is more enthusiastic about the overall increase in infrastructure funding over the past few years. "It's been a big boon to us and it should continue," he says. "We have come to the realization that we have let our infrastructure go too long. There are bridges out there that no longer are structurally sound." Williams' one worry is that budget politics may put a crimp in the market down the road, especially if there is a prolonged economic recession.
For Schuff International, the big worry is what will happen to the entertainment market. "Everybody has got to get by the fear factor," says CEO Scott Schuff. He notes that in the first week after Sept. 11, Las Vegas was a ghost town. "It picked up rapidly in the second week, and we hope things will return to normal soon." But Schuff sees no big revival of the casino market in the near term.
One major development at Schuff International is the creation of a new division to broker steel work on small jobs. "We started out years ago just as brokers, and now we have outgrown the small jobs where the steel contract is under $2 million," Schuff says. So its new On-Time Steel Management subsidiary has filled the void, he says.
SMI-Owen Steel does a lot of work in the New York City area, and expects commercial work in the city to take on a new urgency. "I do expect projects under contract in New York City to come under a lot of pressure to complete on-time or early," says Karl Schoenleber, general manager of SMI-Owen. The firm is doing the steel work for a new FBI building in Newark, N.J., a commercial building in Brooklyn, and the huge new Bronx County Courthouse complex.
Schoenleber is one of many specialty contractors worried about airport work. "We don't do an awful lot of airport work, but we are finishing up a job for Continental at Newark Airport," he says. "But you can't expect to see an industry that has just laid off 100,000 people and not expect it to impact the companies that serve that industry."
THE 2001 TOP 600 AT A GLANCE*
1999 ($ MIL.)
2000 ($ MIL)
|NEW CONTRACTS||42,385.80|| |
REVENUE ($ MIL)
% OF TOTAL
|ASBESTOS ABATEMENT|| |
|GLAZING/CURTAIN WALL|| |
|SHEET METAL|| |
|STEEL ERECTION|| |
TYPE OF WORK
% OF TOTAL
|HAZARDOUS WASTE|| |
FIRMS REPORTING NET OPERATING
AVERAGE % MARGINS OF
*Ranked according to revenue from speciality, prime or subcontracting obtained in 2000
Another firm keeping its eye on airport work is Hayward Baker. "In our business, we are widely spread among public work and private work," says Robert Rubright, president. "But I understand that Baltimore-Washington International already has about $1.5 billion of $1.8 billion committed." He expects BWI work will benefit if the status of Reagan-National Airport remains up in the air.
Rubright is optimistic that, even if there is a recession, infrastructure work will remain strong. "The good news is that we are starting this whole mess with the federal government in a strong fiscal position, with no fiscal deficit," he says. So the government is better positioned to pump money into the infrastructure as an economic stimulus than it was a few years ago when deficits were high.
Hayward Baker made a couple of significant moves in the past year to expand its reach. It acquired TCDI, a Chicago-based contractor specializing in grouting and mini piles, and Foundation Services, a Greensboro, N.C.-based excavation and piling contractor. "Both companies provided good bases on operations and we are working to expand the range of services they offer," Rubright says.
One company that has slowed its expansion is roofing giant Centimark Corp. "We opened up new offices in Las Vegas, Salt Lake City and in Alberta, Canada," says Edward Dunlap, CEO. "But we decided not to go the way of the roll-ups. We felt it was too risky."
Dunlap says the overall economic slowdown of the past year has had an impact on the re-roofing business. "Before, where a client would ask for a new roof, they are now asking for a patch. Clients are being very cautious about their spending right now," he says. "Our revenue is continuing to grow, but I don't think we will see double-digit growth for another couple years."
Sheet metal contractors have enjoyed the boom of the past eight years as much as anyone. "Last year was the best I've seen in my 15 years with SMACNA based on hours worked," says John Sroka, executive vice president of the Sheet Metal and Air-Conditioning Contractors' National Association. "And this year, we are 6% ahead of last year." But Sroka notes that the last two months have been trending down from 2000.
To maintain its members' competitive edge, SMACNA has partnered with consultant FMI Corp., Raleigh, N.C., to identify geographical areas where SMACNA members' work exceeds market expectations and develop a set of best practices used by those members. "We don't know whether this will identify any magic recipe for success, but we would like to see what kind of factors go into the expansion of market share," Sroka says.
Hill of MTH/Glass America admits that people are worried about the impact on the economy and the market. "We've been getting calls from the unions asking about whether any jobs have been put on hold or killed," he says. Hill also says that there are rumors about projects that may be deferred, including the renovation of Soldier Field and a large office tower planned for Chicago.
Hill has another concern. "After Oklahoma City, we saw more emphasis on blast-resistant curtain wall and bulletproof glass from government offices and banks. But that can get expensive. So we are concerned that we will start seeing less glass and more masonry or stone."
But more expensive materials are a fact of life that clients are accepting, says John Frye, president of Harmon Inc. "We are seeing more specialty glass for hurricane protection and security glass," he says. So instead of paying 25 to 50% more, curtain wall may cost 200 to 400% more than in the past. As for clients totally changing their approach to design, "I don't see people giving up on windows," says Lou Podbelski, Harmon Inc.'s vice president of marketing. "People are not about to start hunkering down and begin building bunkers."
Harmon now is working with its parent company, Apogee Enterprises, to develop a cost-effective photovoltaic cell system integrated into the curtain wall. "Right now, these kinds of systems are being used as pilot programs with large subsidies from the utilities or ‘green' organizations," says Frye. "But we hope to be able to produce something that is cost competitive in the next few years."
For utility contractors, the market has fallen off. "Telecom is down and should be flat or down a little next year," says Mueller of Exelon. "The cable tv folks continue to spend, but not much more than last year." And Mueller says that spending on gas transmission lines should continue at about last year's levels, "but that is not high-margin work. There's an awful lot of competition."
One of the main priorities for the National Utility Contractors Association, Arlington, Va., is the reauthorization of the Clean Water State Revolving Fund, says Bill Hillman, NUCA's executive vice president. "We support the current proposal of $3 billion a year for the next five years. There are some who say this isn't enough but we think a $15-billion package is realistic and doable," he says.
In addition, NUCA is taking part in the "Common Ground Alliance," a group of organizations working together to better map underground utilities. "This is like the next generation of first-call requirement," Hillman says. NUCA also has co-sponsored the development of horizontal directional drilling good practices guidelines. "A lot of guys used to open cut work now are buying machines, and we want to make sure they understand how to use them," Hillman says.
In the painting sector, there is concern about the commercial market. "The office market was hot for a while, but it looks like it has maxed out," says Swanson of Swanson & Youngdale. "I had anticipated a little fall-off in that sector due to saturation, but the events of Sept. 11 have put that up in the air," he says. "The one redeeming grace is the power market, which should be good for at least the next three years."
Kenny Industrial Services is one painting contractor whose strategy seems to be paying dividends. KIS is a consolidation of Kenny, J.L. Manta, Cannon-Sline, Genessee Painting and Mansfield Coatings, which was designed to provide the full array of painting and industrial prep service. "In a shaky market, we've done very well," says Darryl Schimeck, KIS executive vice president. "We've shown there is a real market for a multifaceted, multilocation contractor."
Schimeck says that some markets, like automotive and steel, are down. "However, there's a tremendous amount of power work–a lot of cogeneration plants that are asking us not just to do coatings and cleaning but fireproofing work, as well," he says.
One finishing contractor that is prepared for a downturn is KHS&S Contractors. "We are aware of projects that have been put off until after the first of the year," says CEO David A. Stowell. "But I've talked with owners in the entertainment business and they say they don't plan to cancel anything." So Stowell doesn't expect a long-term downturn.
"It would be a mistake to attribute a downturn to the tragedy," Stowell says. He says that the market had been softening since the beginning of the year. But he says that the nation's economic fundamentals remain sound. "It's extremely important that we train our vision on the long term," he says.
Probably no specialty has gotten more visibility, if not the publicity, from the aftermath of the World Trade Center disaster than demolition. "Now, the public will see that there is more to demolition than implosions," says Grace Mazzocchi, whose firm, Mazzocchi Wrecking was one of the first firms on the WTC site and whose equipment continues to be seen on tv film clips of the cleanup site.
The overall demolition market "hasn't felt the impact of the overall economic downturn," says Mike Taylor, executive director of the National Demolition Contractors Association, Doylestown, Pa. He says that reports from large NADC members around the country indicate that the market remains strong. "Overall, this year may be a little slower than last year, but it seems to be doing all right. After all, at our upcoming convention, all the major manufacturers will be there. That must indicate that our members are still spending money," he says.
Leonard Cherry, vice president of Cherry Demolition and this year's president of NADC, agrees. "We are usually the first trade in at a site so we usually feel the problems first," he says. But so far, the market is holding up.
Cherry Demolition experienced one setback as the direct result of the Sept. 11 bombings. "We had set up a building implosion at Dallas-Fort Worth Airport," says Cherry. "We had the building fully prepped and wrapped and ready to go on Sept. 12. But the project is now on hold. Nobody wanted to let a truckload of explosives into an airport so soon after what happened," he says.
For asbestos abatement, the market has been trending down. "It was softening because of the overall economic slowdown and that has been compounded by the tragedy," says Burton T. Fried, president of LVI Services Inc. "Things were being deferred. But there is work going on," he says.
LVI now is doing about the same volume of work as in 2000, and is looking in new areas for growth. "We have always done government work, but now we are putting more focus on that market," says Fried. LVI also is doing more work as a sub for general contractors that are doing renovations or brownfields work, rather than as a prime contractor.
But one market where LVI has been doing work for years that recently has taken on more emphasis by clients is mold remediation. "Now, when building owners discover they have mold, they are more sensitive to the problem," Fried says. LVI increasingly is adding mold remediation to its package of emergency response services.
Specialty contractors were expecting a leveling off or even a downturn before Sept. 11. But after the tragedy and resulting economic disruptions, many are uncertain where the market is headed. But despite an uncertain future, many would agree with Ahrenhoersterbaeumer of the Western Group: "Volume may go down, but there is still money to be made in this industry." Or, as Hill of MTH/Glass America says: "There are no bad times for those who are prepared for them."