Specialty Interest

Region’s Subcontractors Enjoy Good Times But Still Express Caution

by Jim Parsons

At first glance, the New York region’s construction boom translates into good business for specialty contractors, who are reporting busy schedules and bulging backlogs.

But there are also concerns, some resulting from the experience and occasional hard lessons of past booms and others reflecting the unique characteristics of the 2007 construction environment. Though times are good, there is an air of uncertainty due, in part, to the continued upward spiral of materials costs, says Yvette Wilmot, CFO for Sarracco Mechanical Services in Naugatuck, Conn.

“Our backlog is very full for the next eight months, and we’re getting more inquires than we can handle,” she says. “[But materials cost] increases will affect owners’ decision-making.”

Cost increases may have less impact than in the past, however, says Charlie Weir, owner of Weir Welding in Carlstadt, N.J., and treasurer of the American Subcontractors Association’s New Jersey chapter.

“Steel has gone up, obviously, but the market seems to be accepting higher prices for materials and labor as a fact of life,” he adds.

For now, owners are probably more worried about the “price” of money in terms of financing, says Tony Guzzi, president and COO of EMCOR, a conglomerate of mechanical and electrical contracting companies based in Norwalk, Conn.

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Costs Are a Prime Consideration 

General contractors are routinely complaining that the cost of hiring subcontractors is rising at a fast clip and making 

their jobs difficult. But Wilmot says any suggestion that specialty contractors are profiting unfairly from higher materials costs is nonsense.

“You’ll never get rich in this business,” she adds. “Along with what we have to pay for materials, we also have to deal with the cost of doing business – fuel for our vehicles, health insurance, paying employees. That leaves little opportunity for price flexibility.”

Specialty contractors are actively trying to keep costs under control at a time when most contracts do not have price-escalation clauses, says Ron Banach, sprinkler division manager for Allied Fire & Safety Equipment in Neptune, N.J.

“We’re trying to bid smart and take into account expected percentage increases over the life of the project,” he adds.

Specialty contractors are also adopting a more selective business development strategy, Banach says.

“We’re not bidding on everything that’s out there, like we once did, but we are more aggressive on the ones we do want,” he adds. “If a project isn’t worth it to us, we’ll pass and look for better work.”

More selective subcontractors not only reflect a robust construction market but also the maturity of the industry, says John Farnham, executive director of the Connecticut Construction Industries Association, which has general contractor and subcontractor firms as members.

“Subcontractors learned some hard lessons during past booms,” he adds. “It’s been a tough learning curve, but specialty contractors are reaping the benefits of having more clout.”

Farnham says that along with that clout has come more responsibility and risk, particularly with more projects using the construction manager approach.

“They’re taking on many of the administrative tasks that general contractors used to do,” he says. “Not all specialty contractors have embraced that model, but those who take advantage of the opportunity and develop the needed expertise are the ones who will flourish.” 

Among the tasks that subcontractors are fielding is oversight of minority worker hiring requirements and even supervisory roles in the field, Farnham says.

Specialty contractors are trying to be more discerning about their workloads, but “that’s not always under our control,” Weir says. “Often, jobs that don’t start on schedule will slide [into other project schedules] and cause an overload, requiring us to get help from other contractors. But the capacity among the specialty contractors seems to be out there.”

Weir says during a recent busy spot, when he needed help to handle excess steel orders, he was surprised to find that several other structural steel fabricators were available to take on the extra work.

One limiting factor for the specialty market is that it tends to self-select subcontractor firms that can handle specified work tasks or large jobs, such as stadiums, high-rise-residential, transit, and other big-scale, fast-track projects that are in the New York market today, Weir says.

“Not all specialty contractors are positioned to take on these kinds of projects,” he adds.

Guzzi says that most general contractors on major projects will take the wiser approach of breaking up project packages and not bank on a single subcontractor.

“We wouldn’t want to do the entire package,” he says. “But the number of firms capable of doing big projects is smaller than it used to be. It works out, though, because if you have a big, complex job, you want the right people working on it.

Workforce Worries Spread to Subs       

 Finding enough people to handle the sustained workload is also an active topic for the specialty contractor market.

“Labor is not a constraint yet,” Guzzi says. “I think the peak demand will be in 2009.”

Indeed, in 2009, construction activity should be in full swing on several large developments, such as the World Trade Center in Manhattan and the $4 billion Atlantic Yards complex in Brooklyn, as well as major infrastructure projects such as the $3.8 billion Second Avenue Subway in Manhattan and New Jersey Transit’s $7.3 billion passenger rail tunnel under the Hudson River.

Competition is making it tougher to hire even in the New Jersey market, says Ron Barber, president of Matco Electric of Vestal, N.Y.

“It’s sometimes tight getting people, even though we don’t have the same pressures as the New York City area,” he says. “Still, it’s obvious that fewer people are entering the trade. We see it bit by bit every year.”

The labor challenge will likely be greater for highly specialized contractors such as Trojan Energy Systems, a Troy, N.Y., firm that provides combustion and power equipment for commercial and industrial clients. Glenn Godell, the firm’s owner and president, says that while high energy costs have made for an extremely busy 2007, “We have a small labor pool to draw from. As one of only a few companies that do this kind of work, labor may become a problem as we go forward.”

Another potential problem lies in the quality of design documents and specifications, which Banach says has degraded, especially in recent years. 

“I’m not sure if [architects and engineers] are understaffed or they’re being pressured to get work out the door, but we continually deal with design questions and requests for information,” he says. “You can’t build buildings when you’re trying to resolve problems.”

But despite the sore points, subcontractors in the region are in a good spot.

“We’re very bullish on the market,” Barber says. “We’re costing a lot of projects in preparation for making bids, and are already making plans for 2008.”

Weir says this year is safe to finish strong.

“The rest of 2007 should be very good,” he adds. “With the demand and supply of this market, companies should be able to make a profit.”

Still, Wilmot says it’s never too early to prepare for the inevitable downside of the construction cycle.

“We had a lot of problems with receipts when we last experienced a slowdown 10 years ago,” she adds. “We don’t want the same thing to happen again. When it’s time for general contractors to pay the bills, we will do everything we can to make sure we’re the squeaky wheel that gets paid first.”