Rising Tide Doesn't Lift All Boats

Top Specialty Contractors Face Rocky Economic Waters

by Jason Feldman

The economic news is indeed picking up for much of the nation, and the New York area is finally showing signs of improvement, but specialty contractors are feeling neglected by the rising tide.

"We usually lag the general economy by 18 months, and we are currently at the bottom of the cycle," said Peter E. MacKenna, president and chief executive officer of Underpinning and Foundation Skanska Inc., a foundation contractor in Maspeth, N.Y.

The sentiment was shared by D. Thomas Ruttura, president of Ruttura & Sons Construction in Farmingdale, N.Y. "I think that my prediction has come true," he said. Ruttura predicted last year that a lot of specialty contractors will be forced out of business because of the economic downturn.

"It's a gigantic lack of work, it's going to get tough," he added. "I think most specialty contractors are being hindered by the lack of work. I believe it will be a weeding-out process."

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Frank MacInnis, chairman, president and chief executive officer of EMCOR Group Inc. in Norwalk, Conn., a network of smaller specialty contractors, said the business climate is improving, but slowly.

"The prevailing attitude with respect to private-sector projects is hesitance and caution," he added. "We know there are projects but our customers are very cost-conscious."

Legislative action, or the lack of it, is contributing to the slowdown of work in the electrical industry, MacInnis said. "There remains a significant uncertainty in the deregulation process even prior to the Enron fiasco," he said. "There are numerous regulatory hurdles for new and improved transmission lines as well as rights and privileges that need to be worked out before investment can begin, and I don't see it happening before the next (presidential) election."

Coupled with the lack of work is the old complaint that the subcontractors are not getting paid on time.

Ron Berger, executive director of the Subcontractors Trade Association Inc., said, "It's just everyone is building with someone else's money."

The payment cycle is always slow, added Jeffery Haber, president, W&W Glass Systems Inc. in Nanuet, N.Y. "If they are not questioning your paperwork, they are questioning something else," he added. "It starts with the owners and goes to the contractors." However, with the passage of a prompt-payment bill in New York, delayed payments seem to be somewhat alleviated. The bill, which gives general contractors 12 days to approve or decline a bill and also gives subcontractors the power to walk off the jobsite with 10 days notice, has helped subcontractors. The bill does not affect public work, which has its own set of laws, Berger said.

And then there are the insurance bills.

"Insurance is still a big problem," Berger added. "General liability insurance has gone up 10 times, and in some areas you can't even get it."

Haber said his firm's liability insurance "has gone through the roof" because of Sept. 11.

Berger blamed the problem on the state's "scaffold law," which holds every company to absolute liability for an injured worker. "A company can't even defend itself against the claim, and that is causing the industry a tremendous amount of money," he added.

Berger said his membership does not want to repeal the law, but said that a simple negligence standard can be added to ease the burden. "If a worker was drunk on the job or refused to wear safety equipment, that should be taken into consideration," he said.

Haber said his company maintains a well-educated workforce with safety training, up-to-date equipment and holding workers to a strict hardhat requirement. "These things help keep our exposure to risk low, and the little things help in terms of insurance," he added. "It's an investment in the bottom line."

One other insurance problem that might harm any construction recovery is that terrorist insurance runs out in 2005. "If something does not replace it, there will be major problems," Berger said.

While insurance prices continue to jump, the cost of the basic ingredients of construction, steel and concrete has been driven up as well.

"We are hearing that the prices of raw materials have gotten so expensive that they are deterring new construction," said Mike Feder, sales manager for Infra-Metals, a structural steel service center in Wallingford, Conn. "It's not just steel prices that have gone up in the past five or six months."

Ruttura added that the price of concrete "is going out of sight. Even though 60 percent of the cement the United States uses is produced domestically, a lot of [the manufacturers] are owned by foreign companies, and they are shipping the cement overseas where they can make more money."

Prices of scrap steel have also skyrocketed. "People are blaming the Chinese for buying all of the scrap steel," Feder said.

MacInnis added that the Chinese demand for oil and raw materials, steel in particular, goes hand in hand with the decimation of the U.S. steel industry.

Although prices seem to have hit a plateau, MacKenna said factors other than market forces drove up steel prices. "In the last year we have seen fuel prices go up 22 percent," he added.

And Ruttura said, "I don't see a dollar per gallon of fuel anymore, and for guys like us, who burn a lot of fuel because we have a lot of equipment, it will hurt."

Fuel price increases have not hit EMCOR significantly, MacInnis said. "EMCOR is at an advantage in the current market, in that we are a small contracts company running 3,000 individual contracts at a time. What this means is we can make more frequent assumptions in our cost for estimating."

Most contractors are working through the slowdown and costs increases, and they are cautiously optimistic for the future.

"I see it improving with the development of Lower Manhattan," Berger said. "I'm waiting to see what happens with the school construction, which could be worth $13 billion over the next five years. There also is Jets Stadium and the extension of the No. 7 subway line. I see a lot of good things, but who knows if they are going to happen. There is no guarantee."

MacKenna said all of the proposed projects "involve our specialty, but it is hard to know if they will happen."

Ruttura was more pessimistic. "I think most of these jobs are a couple of years away, and most contractors will self-perform most of the work," he said. "These isolated projects will not help us. They will help a couple of big contractors."

If anything, most specialty contractors seem to agree that if New York City is selected as the host city for the 2012 Olympics, it will be a huge boon for the construction industry. The International Olympics Committee will select the city in July 2005.

"If we get the Olympics, that could be an additional $10 billion to $12 billion in additional work," Berger said.

And MacKenna added, "I am a New York jingoist. I look at the skyline from the river and think that we deserve the Olympics."