The construction market has been growing steadily for the past six years, and, for large specialty contractors, things are looking up. But there are some clouds on the horizon, such as staff shortages in the field and in management and uncertainties about the upcoming presidential election. However, right now, specialty contractors have a lot to be pleased about.
The state of the market can be seen in the results of this year’s ENR Top 600 Specialty Contractors list. As a group, the Top 600’s revenue topped the $100 billion mark for the first time. The Top 600 cleared revenue of $100.43 billion, up 7.8%, in 2015 from $93.20 billion in 2014. Further, many Top 600 leaders believe the recovery still has steam in it.
The 2016 Top 600 Specialty Contractors Chart
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Most firms are continuing the success of 2015 into 2016. “I expect the market to grow 5% to 6% this year and perhaps a little less in 2017,” says Anthony Guzzi, CEO of EMCOR Group. But he says that, despite a six-year recovery, “we are still not to where we were in 2007-08.”
Guzzi says the slow-but-steady recovery has kept the market from overheating. “Unless there is a major macro event, any future downturn in this market should be a soft one,” he says.
Many specialty contractors agree with Guzzi’s assessment. A gradual increase in the market is helping contractors without posing the threat of overheating. “We aren’t seeing activity as robust as before the recession, but there is steady opportunity, which we prefer. Huge booms eventually lead to huge declines,” says Michael Cannon, CEO of KHS&S Contractors, East Coast.
EMCOR, like many large specialty contractors, is not relying solely on the market to boost revenue. On April 15, the company announced that it had completed the acquisition of Ardent Services LLC and Rabalais Instrument and Electrical Constructors. “These acquisitions expose us more to the upstream and midstream oil-and-gas markets,” says Guzzi. He notes that those markets currently are facing challenges, but he says the acquisitions are a good investment for when the petroleum market turns around.
Safway is another firm that has been on the acquisition trail. Acquiring Mobley in 2015, Safway integrated it into a unified brand, MobleySafway Solutions LLC. The acquisition “has allowed us to deliver the deepest bench in multiservices at the lowest cost throughout the Gulf region and beyond,” says Bill Hayes, Safway Group CEO.
Safway also acquired American Platform & Scaffolding, based in Linthicum Heights, Md., effective Aug. 3, and Dalco Services Inc., based in Red Deer, Alberta, effective Aug. 24.
Another firm that made a major move this year is Limbach Facility Services. In July, Limbach went public after being owned by equity investors for the past few years. “Going public gives us the resources to grow not just organically but through acquisition,” says Charlie Bacon, Limbach’s president.
Bacon says the firm is looking not only to expand in its traditional mechanical contracting work but also is seeking acquisitions of electrical contracting capacity. He notes that Limbach already has an in-house team of mechanical-electrical-plumbing (MEP) engineers. “With the growth in design-build and design-assist work and owners’ increasing interest in one-stop shopping for building services work, it makes sense for us to expand into electrical as well as mechanical work,” he says. “We are seeing the rise of the super sub.”
Many firms complain that there is some uncertainty in the market in the run-up to the 2016 presidential election in November. But Guzzi says the regulatory uncertainty that stalls projects is not so much from who may be elected as from the origin of the regulations. “Uncertainty is never good for owners, but when the policy changes are rooted in executive orders, rather than legislation, that raises the level of uncertainty,” Guzzi says. Owners have time to prepare for the consequences of a new law, but not so much with an executive order, he says.
But state and local elections may have a more immediate impact on specialty contractors. “Given all the sound and fury about the 2016 presidential election, Americans could be forgiven for not realizing that there are state and local elections and ballot issues that will have a direct and, perhaps, more immediate impact on their lives,” says E. Colette Nelson, chief advocacy officer for the American Subcontractors Association, Alexandria, Va.
Nelson points out that many regulations that impact construction subcontractors originate at state and local levels, such as licensing, registration, permitting, building codes and employee relations, as well as subcontractor-specific issues such as bidding procedures, mechanics liens, payment timing, retainage and risk allocation.
There are many issues facing subcontractors that are only now beginning to be addressed on a local level. “We are getting a lot of reports of payments being slow, but, surprisingly, many are from the owner side,” Nelson says. The biggest issue is getting paid for change orders. She says owner demands for changes during construction, without resolving payment for the changes until after the change orders are executed, robs general contractors and subcontractors of needed leverage to get payment for the changes.
“I don’t know whether this is the result of inadequate design, management problems with owners or a calculated move to pressure contractors,” says Nelson. She notes that ASA is pushing for legislation to deal with this issue. “In 2016, we got laws passed in California, Maryland and the District of Columbia to require prompt payment for change orders.”
ASA also is looking at federal procurement regs to improve timely payments for change orders. ASA recently conducted a survey on the impact of change orders on federal subcontractors. It found that over 81% of subcontractors on federal projects had to wait more than 90 days for payment for added work from change orders. Further, almost 23% said they actually lost money as the result of change orders.
Another area of local legislation is greater transparency on payment issues for public projects. “The city of San Antonio now has a website that shows every disbursement by the city to all contractors, not just in the construction industry,” Nelson says. Now, every sub working on city projects knows exactly when the GC has been paid and can request payment immediately. The District of Columbia’s new payment law has a similar transparency requirement, but there still needs to be implementing regulations and a website to give it effect, Nelson says.
Considering that it is an active market, some firms are wondering why margins are not rising faster. “We are concerned that, despite the large amount of work, margins remain low, given the growing risk profile. Working with trusted suppliers and clients helps us balance that risk,” says Jeff Heymann, director of sales and marketing for Benson Industries.
However, many specialty contractors say margins are back to reasonable levels now that work is plentiful. “Currently, it is a seller’s market for subcontractors, and this is rare. Due to the amount of work that is out there, capacity is constrained,” says Rob Strobel, CEO of Lithko Contracting. “Margins are improving as owners are looking for more quality and collaboration from their construction teams, rather than just focusing on price,” adds Ted Lynch, CEO of Southland Industries.
The aging of contractor owners is another factor affecting competition and margins. There are thousands of owner-operators in the construction industry who, approaching retirement age, are not as interested in vigorously competing for work as much as setting their firms up for sale. “Due to this, many of our competitors are not interested in growing but interested in harvesting equity and succession planning,” says Strobel.
Many firms are sticking to what they know best to ensure they maintain profitability. “In growth markets, it is easy to outrun your resources,” says Ken Harbour, CFO of Cleveland Group Inc. He says Cleveland uses a managed growth approach, focusing on good customers and “making sure we have the resources to remain viable.”
Another firm that is not jumping on the new construction bandwagon is CentiMark Corp. “Many contractors have shifted their focus from retrofit to new construction. CentiMark’s forte is and will continue to be reroofing and related services such as leak repair, preventative maintenance and emergency weather services,” says Timothy M. Dunlap, president.
Risk-shifting continues to be an issue among specialty contractors. “We have had to spend considerably more time reviewing and negotiating the terms and conditions of contracts to protect ourselves against that risk than we did a few years ago,” says Stephen Leis, president of Dorvin D. Leis Co.
Many GCs still are asking subcontractors to bid on documents, plans and specifications that are incomplete and nebulous, exposing the subs to unknown risk. Only a “minority of the GCs that we work with understand the value and importance of having a subcontractor that has the right information in order to properly execute the work,” says James A. Graham, executive vice president of Winter Environmental.
Partnering Early On
The growing use and flexibility of platforms for building information modeling are changing specialty contractors’ roles in the construction process. It also is forcing them to adapt to BIM platforms. “Design-assist is taking off,” says Bacon. “The real value we can contribute is in the engineering phase.” He says about 65% of Limbach’s work now is in teams where it is invited early to assist in the design process.
The increasing use of design-assist and early entry of contractors in the construction process is being driven by owner demand for a more efficient, collaborative construction process. “Most owners of large projects are no longer accepting the project delivery process of the 1990s and early 2000s. They want collaborative teams that work from Day One to minimize waste and unpredictability,” says Cannon of KHS&S.
This owner demand for a collaborative work atmosphere has required contractors to adapt to a BIM environment and forced software developers to meet this demand. “It is pretty clear that owners have been the driving force behind the development of BIM and project collaboration, forcing firms and software companies to adapt,” says Lynch.
The increasing reliance on specialty contractors to contribute early in the construction process has many firms beefing up their in-house design capabilities. For example, Southland Industries has its own engineering staff. “The ability to do MEP engineering in-house allows us to get involved earlier in the process,” says Lynch. He says it is logical to bring in the mechanical and electrical contractors early in the process to get the best results. But unlike Limbach, Lynch says Southland is not looking to expand into electrical contracting. “We have enough good partners among the electrical contracting community, so we are not looking to get into the electrical side,” Lynch says.
E-J Electric Installation also has developed a substantial engineering group. “Our biggest advantage is that we have over 30 engineers on staff that we can bring in early to assist in designing the project,” says J. Robert Mann, chairman. He notes that E-J is one of seven subcontractors, along with GC Turner Construction and the architect and lead engineer, which signed an integrated project delivery contract on the ongoing capital program at Mount Sinai St. Luke’s Hospital. “It’s the first true [integrated project delivery] contract in New York City, and it is going great,” Mann says.
Several large specialty contractors are especially enthusiastic about in integrated project delivery (IPD). “We are seeing greater levels of collaboration and less risk in true IPD projects,” says Lynch. He says some owners try to emulate the benefits of IPD without the risk-reward provisions in the contract. “There is a big difference between true IPD projects and ‘IPD-ish’ projects. I don’t think owners get the full benefits without a true IPD contract,” he says.
BIM also is facilitating the use of prefabrication. “Being able to effectively build an entire project in 3D and 4D special design, compare installation details with other skilled trades on the job, then send your design to your fabrication shop for precise modular fabrication is changing the way projects get built,” says Harbour of Cleveland Group. He says such jobs are done faster and, in the end, less costly than traditional plan-and-spec work.
Many specialty contractors have been using prefabrication for years, but the more effective and widespread use of BIM has accelerated this trend. “Though we’ve be prefabricating piping assemblies for many years, we’re now working together more, co-locating and building complex building systems differently,” says John Cannistraro, president of J.C. Cannistraro LLC. For example, on one IPD project, the firm prefabricated, pre-assembled and tested hospital headwall assemblies in tandem with the electrical contractor right from within Cannistraro’s shop, he says.
The overriding concern among Top 600 firms is the looming shortage of people in staff and trade positions. As part of the Top 600 survey, ENR for many years has been asking participants whether they have experienced shortages in the trades. This year, 60.6% of survey participants said they had experienced shortages, up from 57.4% last year and only 26.7% in 2012. These numbers will only increase if the current level of work available continues.
Further, increasing shortages are being found across the trades. Thirty-seven firms saw shortages of electricians in 2012; this year, 112 firms said electricians were in short supply. Over the past five years, the number of firms experiencing shortages of plumbers and pipefitters rose to 68 from 34, shortages in ironworkers rose to 41 from 19, carpenters to 59 from 17, equipment operators rose to 70 from 32, and laborers rose to 88 firms from 28.
This shortage has caused specialty contractors in a wide variety of trades to scramble to attract and retain people. “One economist, speaking to a group of construction professionals said it best. He said if someone is available, they are likely unhirable,” says Steven Crawford, vice president of Superior Gunite. He is seeing shortages in both the trades and professional staff, and the firm is seeking people from other professions and then training them.
Large contractors say they have an advantage in recruiting and retaining people. Jeff Long, CEO of Penhall Co., says, “Penhall works as hard to win the war for talent as it does the scramble for jobs. Scale affords us a number of advantages. Penhall can run better training and safety programs. We can offer superior benefits. Our employees get exposed to the newest equipment and techniques in the most diverse range of applications.”
Many union specialty contractors say the unions are working hard to keep union-hall benches stocked. “We are seeing some shortage of electricians in specific geographic locations, but, in general, the International Brotherhood of Electrical Workers is doing a good job of recruiting and training electricians for the industry,” says Clayton M. Scharff, CEO of Sachs Electric.
Staff shortages also are putting pressure on labor costs. “We do believe that there has been and will continue to be pressure on both labor and related burden rates,” says Dunlap of CentiMark. The cost for quality workmanship and skilled roofing labor likely will continue to rise, and his firm is investing in production-related efficiencies to offset this increase in costs.
However, some union contractors say current collective bargaining agreements have provided some protection against anticipated skyrocketing labor costs. “Our labor cost will increase approximately 3% annually under the current five- to seven-year union agreements already in place,” says Leis.
Many executives are fighting to connect with young people. “As a country, we press hard to have every person graduate from high school and go to college, as if there is no other path. We need to get much better as an industry in making the construction business attractive and letting young people know it is a great career to have,” says Dan Briscoe, executive vice president of Apollo Mechanical Contractors.
“There is a significant misperception in our society that every young person must go to college to have a successful, rewarding career. We are making a concerted effort to encourage interest in the trades and offer in-house training and advancement,” echoes Terrence Kerner, president of Atlantic Constructors Inc.
The business of being a specialty contractor has been changing rapidly over the past few years, and there is no sign these changes will slow down. “There is a quote that I read recently that states, ‘If you don’t like change, you’re going to like irrelevance even less,’” says James Hatch, vice president of procurement for Kovach Building Enclosures. Specialty contractors are going to have to adapt to this changing environment, or face a bleak future.