EC&M’s Top 50 electrical contracting firms experience
flat sales and a slow construction market in 2003
Many electrical construction firms are hanging on by their fingernails while waiting for the market to turn around, says Peter Corogin, president of Westlake, Ohio-based Lake Erie Electric. The number of bidders on individual projects has doubled, and some contractors appear to be bidding at cost to keep their electricians busy.
“There is not enough work out there for all the competitors, resulting in too many contractors going after the same projects,” Corogin says. “A lot of companies are disrupting the market and weakening the industry by bidding to stay in business rather than to make a profit.”
Electrical contractors hoped for a strong economic recovery in 2003, but due to the continued softness of the construction market, sales dropped for half of the firms on EC&M's fifth annual listing of the Top 50 Electrical Contractors. Overall, however, the companies managed to post a 1.4% average gain in sales from 2002 to 2003 compared to an 8% drop from 2001 to 2002.
Limited capital spending, uncertain regulatory progress, and extreme competition led to a 6% drop in overall sales and a 1% increase in electrical and datacom sales for Houston-based Quanta Services. John Colson, chairman and CEO, says to survive the flat economy, it's critical to regulate the size of your company to meet the size of the market. With fewer projects on the horizon, Quanta has focused on decreasing its costs, reducing its overhead, and downsizing its company.
“Our customers' spending has declined due to their financial capabilities,” Colson says. “There's now an oversupply of the services needed to complete those projects, and the prices have declined.”
This article will discuss the top challenges for the nation's largest electrical contracting firms, explore hot and cool markets, and offer a forecast of what's ahead for 2005. For a 2004 listing of the Top 50 contractors, flip to page 62 to see a Table that ranks the nation's largest electrical contracting firms by 2003 revenues. Capsule summaries, which include each company's headquarters location, number of employees, forecast for 2004 sales, and areas of expertise, begin on page 63.
Top challenges for electrical contracting firms. Electrical contractors had more work than they could handle a few years ago, but today, construction jobs are scarce in many regions. For that reason, almost half of the respondents to EC&M's Top 50 survey named the stagnant economy as their top challenge for 2005, followed by the skilled labor shortage. The U.S. Department of Labor estimates that 550,000 new construction jobs will be created through 2008, and 240,000 workers will leave the industry every year due to retirement and other reasons. Compounding the problem, the average age of the construction worker is 49, according to the Construction Education Foundation of Georgia. As these Baby Boomers plan for retirement, the construction industry will need to train the workforce of tomorrow. In the meantime, however, electrical contracting firms are facing a severe labor crunch.
About a quarter of the respondents expect to face a shortage of qualified electricians next year, and Los Angeles-based Bergelectric is no exception. The firm experienced a 20% increase in 2003 sales and expects sales to increase another 15% this year. While several other states witnessed a dropoff in construction, the majority of the firms in the Golden State had too much work and not enough workers.
“If there were enough qualified people, you wouldn't have to spend as much time and effort training new employees,” says Don Briscoe, president of Bergelectric. “When you need more manpower, there is more pressure to get the work done. The skilled labor shortage hasn't held us back, but we've had to manage our business a bit differently.”
Because of the shortage of qualified electricians in southern California, the firm had trouble recruiting enough workers for a large-scale, fast-track project. Rather than spending weeks training new electricians to perform all of the electrical tasks on the jobsite, Bergelectric divided the 30 apprentices up into different groups. Five journeymen then trained each group to perform a particular function like hanging pipe or distributing fixtures. In the end, the company completed the job on time and within the budget and even won an industry award for its efforts.
Florida electrical contracting firms also discovered a creative solution to the skilled labor shortage. Mike Cornelius, district vice president for Altamonte Springs, Fla.-based Tri-City Electrical Contractors, helped found the Academy of Construction Technologies (ACT) 12 years ago in response to the robust market and demand for electricians.
Rather than trying to recruit high school graduates to enroll in an electrical apprenticeship program, the ACT program targets young people while they're still in school. The electrical contracting companies interview students in the three major central Florida counties, and the ACT program selects the top candidates. Those students then work with one of the 15 participating firms during their junior year, over the summer, and again during their senior year. The students learn about basic electrical theory and construction terminology in the classroom and how to run conduit and work with branch circuitry in the field. By the time they graduate from the program, they've earned 1,000 hours of ACT credit, which they can apply toward an apprenticeship program or a college degree.
Cornelius says educating the high school students about career opportunities in the construction field is the key to solving the labor shortage.
“Our biggest pool of talent is in our high schools,” Cornelius says. “We have to show the guidance counselors, parents, and students that entering the trades is a rewarding career.”
Hot and cool markets. One of the ways in which the Top 50 players have survived the stagnant economy is by expanding their operations into strong geographic regions and venturing into the overseas market. About 21% of the 2004 survey respondents perform electrical construction work abroad. For example, Boston-based Mass. Electric Construction Co., which ranked eighth on the 2004 listing with 2003 sales of $371 million, recently completed contracts in Puerto Rico and Venezuela. Over the past three years, the volume of overseas work accounted for about 5% of the firm's total revenues. Houston-based Fisk Electric performs 30% of its work overseas and has branch offices throughout the United Kingdom and Australia.
Due to the weakening of the U.S. electric utility market, Quanta Services also opened up a branch office outside of the United States in Burnaby, British Columbia, Canada. Colson says many of the Canadian utilities are government-owned and are starting to outsource the services necessary to construct and maintain their transmission and distribution grid. In the United States, however, the electrical utility market continues to face difficult times. The possible enhancement of the nation's transmission grid, however, is offering some hope for the future.
“The U.S. electric transmission grid was built after World War II, hasn't been properly maintained, and is overloaded at this time,” Colson says. “It requires a major rebuild if we're going to continue to have cheap, reliable electricity in this country.”
Another industry that can't seem to get back on track is the commercial office market, especially in the Chicago area. In the late '90s, the Windy City embraced the dot-com companies and emulated Silicon Valley in terms of bringing high-tech firms into the city, says Brad Weir, executive vice president and chief operating officer of Rolling Meadows, Ill.-based Kelso-Burnett. These dot-com companies invested significant amounts of money to build 100,000-square-foot to 200,000-square-foot central office facilities for Web hosting.
“We couldn't build them fast enough because there were so many dot-coms that needed space,” he says. “As a result, the contractors were doing quite well and we were hiring workers rapidly to meet the demand. And then it all collapsed.”
After coming off of record years in terms of revenues and profits, Kelso-Burnett watched as companies' stocks dropped like a rock and eventually went out of business. Because the contracting firm had hired and trained so many new workers to meet the demand, the company was reluctant to lay off staff when the construction market slowed down in Chicago.
“The tendency was to try to hang on to the people that you bring into the company and sit back to see what happens,” Weir says. “In the meantime, you start taking work at lower margins than you should be just to keep them working. Then you begin to realize that the whole dot-com boom is gone and is not going to return.”
The automotive market has also showed signs of weakness over the past year. Corogin says a larger automotive customer recently announced a plant closing due to overcapacity, and many of the automotive companies are building their new plants in the South rather than the Midwest. The automotive industry is also experimenting with online bidding as it gets more comfortable with e-commerce, which is frustrating for electrical contracting firms, Corogin says. He estimates that about 10% of all the projects his company bids on are done through this method. In his experience, the subcontractors submit their price and then keep revising their bids until they decide they're not going to lower their bids anymore. Owners are supposed to close the auction at a specific time, but they sometimes leave it open for another half hour beyond the specified deadline, Corogin says.
“It's the worst type of auction and is very frustrating,” he says. “You have to determine what your price is for the job and be prepared to walk away at your number. The guys who chase the market often get into trouble.”
While the Top 50 contractors faced many challenging market segments in 2003, some firms' sales increased due to hot markets like health-care, education, residential, retail, government, and transportation. Surges in population have increased the need for new homes, schools, and retail stores. The aging of the nation's population has also boosted the demand for health-care facilities. For example, City of Industry, Calif.-based Morrow-Meadows Corp. reported a 22% increase in 2003 sales due to a robust health-care market and a California construction boom.
What's ahead for the electrical construction market. Wayne J. Griffin Electric, a Holliston, Mass.-based electrical contracting firm, experienced a 13% increase in sales in 2003, but only expects a modest increase in 2004 sales due to the limited availability of public funding for capital improvement projects. For 2005, the company expects the market to perform similar to 2004 with gains in demand for construction offset by pressures caused by rising interest rates.
Lake Erie Electric also expects a slight increase in sales, but Corogin says the economy is taking two steps forward and one step back.
“I see some signs of optimism where some projects are continuing to break loose, but the market still remains somewhat tight,” Corogin says. “Owners are still holding back.”
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