How to Prepare for the Upturn in Construction

How to Prepare for the Upturn in Construction

The worst may be over for the construction industry, so some electrical firms are getting ready to take advantage of future growth “The national and regional economic data seems to be very favorable right now,” says John Conroy, president of Xcelecom, a Hamden, Conn.-based electrical contractor that ranked ninth on EC&M’s Top 50 contractors listing. “We hope that the general economic trends start

The worst may be over for the construction industry, so some electrical firms are getting ready to take advantage of future growth

“The national and regional economic data seems to be very favorable right now,” says John Conroy, president of Xcelecom, a Hamden, Conn.-based electrical contractor that ranked ninth on EC&M’s Top 50 contractors listing. “We hope that the general economic trends start to take hold in our markets that we operate in.”

Xcelecom owns 10 electrical contracting firms along the Eastern Seaboard. While the firm’s operating companies in the Southeast anticipate a 10% to 15% increase in 2004 sales, their northeastern counterparts predict a 20% drop in sales next year.

“Our firms have different degrees of optimism and pessimism. We hope to see some improvement in our northeastern market as soon as next summer. In the Southeast, I think we’re seeing it already, and hopefully that trend will continue,” Conroy says.

In preparation for the upswing, electrical construction firms are developing strategies to position themselves for future growth. They opened up and shared the following strategies with EC&M.

Train your project managers. To survive the economic cycles so prevalent in the electrical industry, Xcelecom’s subsidiaries cut back their workforce, reduced overhead costs, and found ways to increase productivity while operating on slimmer margins. The down cycle provides a good opportunity for firms to invest back in their companies and train their personnel, Conroy says.

“We’re honing our overall skills as a company and getting ready so when the upturn does come, we can take advantage of it and have a highly skilled workforce to go out there and be productive,” Conroy says.

About a year ago, Xcelecom formed a peer group that consists of project managers and senior executives from each of its 10 operating companies. The team met periodically over the course of a few months to create a set of best practices and devise a training program for its employees. The internal task force then partnered with FMI, a national teaching organization for the construction industry, to train more than 100 project managers with the same standardized approach. Xcelecom employees can now obtain employee-specific documents, procedures, subcontracts, training materials, and a best practices checklist on the company intranet. The project managers at Xcelecom’s Florida subsidiary have also made valuable contacts with their peers in Connecticut, New Jersey, and Pennsylvania.

“They can share experiences directly because now they know the players in all these other markets,” he says. “I think it’s worked very well and built a lot of camaraderie amongst the various operating companies.”

Bill Reynolds, executive vice president and chief financial officer for Integrated Electrical Services (IES), says his company also partnered with FMI to develop a training class for its project managers and estimators. In addition, the company offers on-site training, which enables its employees to earn their journeyman’s electrical license or BICSI certification.

Take advantage of new technology. Many electrical contracting firms discovered creative ways to do more work with fewer resources. EMCOR, the second largest electrical contracting firm with 2002 electrical sales of $1.2 billion, achieved this goal by investing in new technology. The company improved its accounting systems, computerized its project scheduling systems, and has begun to share more information and drawings electronically. While Jeff Levy, president of EMCOR, says his company’s investment in computers and technology is fairly routine, it’s been a critical way to compete in a tough market environment.

“It’s easy to buy software, but it’s much more demanding to make sure that your best people know how to use it,” Levy says. “We’re investing in training regardless of how the market is because we’re here for the long term. You have to invest in your people, or you’re encouraging them to go elsewhere.”

IES, another one of the nation’s largest contractors, has only operated for six years as a publicly traded company, but each of its 140 subsidiaries have undergone decades of technology training. The company is now in the process of rolling out a software program that will allow its subsidiary companies to handle project management and accounting with one tool. The company has partnered with a software manufacturer to customize and upgrade its product to meet its own operating divisions’ needs.

Team up with other construction firms. With less work to do in certain markets, Xcelecom has branched out into some regions outside its normal footprint for joint venture opportunities. The contractor recently worked on a casino near Niagara Falls and has looked at jobs as far away as St. Louis and Denver. The company takes this approach when it feels it can leverage its expertise in a certain area or work on a similar type project .

“We’re spreading our wings to try to pick up opportunities where we may have a particular expertise,” Conroy says. “Some projects are just not happening in our own geography right now. We can go into a particular market and team up with a friend or an ally. Then we can put the right mix of our management and prior experience with the local labor force.”

Expand your business. Many of the construction markets will remain soft next year. Therefore, it’s crucial that electrical contractors consider branching out into new market segments. Gary Demmel, CFO for Lincoln, Neb.-based Commonwealth Electric, says his company has gotten more involved in the datacom side of the construction business.

“A lot of times we’re out doing an electrical project, and the customer asks us if we can also do the low-voltage work,” Demmel says. “It makes them feel more comfortable if one entity is able to do both sides.”

The company started cross-training its electricians to perform both electrical and datacom work a few years ago. Commonwealth then made a full commitment to datacom by launching a new division called Commonwealth Communications in 2001. Rather than hiring union electricians for the low-voltage jobs, Commonwealth recruits low-voltage technicians from the union halls. The contractor then trains the technicians in-house or through the IBEW and vendor-sponsored training courses.

Control operating costs. Reynolds says IES has reduced its business costs over the past two years to survive the downturn. While McGraw-Hill Construction Dodge forecasts that construction starts will increase slightly next year, Reynolds says the economists forecasted an increase in spending in 2003, when in fact, it was an actual decrease.

“Our view is to be flexible for either a possible increase or a continued flat or even a potential decline,” Reynolds says. “We have held the line on operating costs and pushed back initiatives that we had planned for growth.”

While IES was growing, the company created divisions focused on quality, communications, and strategic planning. When the economy went sour, all of these non-essential groups were eliminated. IES was also able to reduce its operating costs in the field by merging its subsidiaries and taking the cost out of its the local offices.

“We are the result of a consolidation of 85 companies,” Reynolds says. “We are now one company with some 50 subsidiaries. By combining, merging, and taking cost out of our local offices, we’ve been able to reduce our operating costs in the field.”

Adapt to changing conditions. Over the course of the last few years, the pendulum swung from the private sector to the public sector. Now the construction industry has a healthy mix of both public and private work, Levy says. EMCOR is seeing more plan and spec work than design-build work, which changes the way projects are managed, Levy says. His firm is finding that unless a project is absolutely necessary, owners are choosing to avoid it.

“We have much less fast-track work and smaller projects,” Levy says. “Rather than building a new conference room, people are all saying, ‘Meet in someone’s office and pull in an extra chair.’”

Levy says he’s been working in the electrical industry long enough to see many different types of economic recessions.

“The first thing you have to do is to survive to be in the upturn,” he says. “We’ve tightened our belt in some places, and in some cases, we’ve reduced staff. We’ve just been focusing very carefully on the projects we select.”

Demmel of Commonwealth says his company is trying to continue to build its client base and keep everyone in place so they’re ready to handle the eventual upturn in the economy.

“I think everyone is trying to figure out which direction the economy is going,” Demmel says. “I think that the economy will come back slower than some people think but will gradually get stronger as 2004 goes along. I think on the construction side, you’ll still have a lot of customers kind of waiting to make sure that they’re making the right decision before they release a lot of projects.”

IES is more optimistic this year than it was a year ago in terms of growth, Reynolds says. While a lot of the construction projects have not yet been bid for 2004, Reynolds says he has seen a lot of construction activity in several of the markets.

“Typically, construction is the first one to experience the downturn and the last one to turn around,” he says. “Typically for us, the average length of our projects is six months, so I think that we would agree with the economists’ view that there is a lag for the spending to turn around.”

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