To forge a future in this business, you must know your history, determine who you are, and decide what direction you should head. Knowing how you fit into the landscape of electrical construction is equally important to laying the framework for what is on the horizon. The 2006 Profile of the Electrical Contractor is a detailed examination of the electrical construction industry based on data collected from you, the contractors out on the job site. By talking to contractors, we can better understand what makes you tick and what makes your businesses work.
ELECTRICAL CONTRACTOR has taken a mammoth amount of information gleaned from subscribers and synthesized it to explain:
Dating back more than 50 years, ELECTRICAL CONTRACTOR biannually sends out a survey to subscribers to discern what an electrical contracting firm is and how it functions within the highly competitive construction industry. By tapping into the collective brainpower of a solid sampling of readers, we are confident that the tremendous amount of data collected renders an accurate and comprehensive picture of who our readers are, how they conduct business and how they fit into the industry. This profile will also help electrical contractors gauge their place in the industry against their peers.
For simplicity purposes, contractors with fewer than 10 employees are considered “small,” while firms with 10 to 19 employees are considered “mid-size.” “Large” companies have 20 to 99 employees and “very large” or the “largest” companies employ 100-plus.
By breaking the data down by company size, you will see the differences and similarities that surface during the examination of the survey results. Now that the stage has been set, let’s peel back the layers of information and reveal what exactly the 2006 Profile of the Electrical Contractor tells us.
The vast majority of respondents to the survey represent relatively small companies, in terms of size and number of employees. According to the data, 63 percent of the firms carry fewer than 10 employees. Sixty-eight percent have annual revenues of less than $1 million.
This information should not surprise anyone because electrical construction is no different from most other industries in that its smaller firms, while larger in numbers, typically have lower revenue numbers, and the largest firms, while small in number, produce the largest revenues.
One notable difference between the 2004 and 2006 profiles indicates a smaller percentage of firms now with 100-plus employees (8 percent) versus the 11 percent reported in the 2004. This difference might indicate some consolidation in the industry through acquisition or attrition. Three percent is substantial enough to be a red flag that should be monitored moving forward.
Some of that attrition and acquisition might be a byproduct of an aging baby boomer population in the electrical construction arena. National demographics and the data extracted from this survey suggest the industry’s leaders are getting older and, therefore, are speeding toward retirement in large numbers. A closer look at the data tells the story.
Regardless of company size in terms of the number of employees, survey respondents tend to be at least middle aged. Almost 60 percent are between the ages of 35 and 54, while 84 percent are between the ages of 35 and 64. As noted in 2004, younger contractors do not appear to be filling the leadership pipeline, evidenced by a high proportion of survey respondents that are older than 35.
Electrical construction does not own the franchise on the aging baby boomer curve. As electrical contractors prepare to trade in their desks and gang boxes for sandy beaches and cruises, the rest of America’s work force is experiencing the same phenomenon. As leaders get closer to retirement, issues such as generational succession and deciding whether to sell the business outright emerge as major business factors.
While there are no significant changes between the 2004 and 2006 surveys in terms of the percentage of respondents falling into each of the age groups, Figure 3 clearly shows directional evidence of an aging trend between studies.
The mean age of survey respondents in the 2006 profile is 50, compared with 48.6 two years ago, which marks a significant increase. The next 10 to 15 years, therefore, are critical for transitioning leadership to the next generation or considering exit strategies.
Training and education could be the key when it comes to succession planning. Who will take over the business when you walk away?
A majority of respondents have some college education, regardless of company size. About 3 in 10 respondents earned their formal training through an apprenticeship program or at a trade or vocational school. Compared to two years ago, the proportion with strictly a high school education declined, while the proportion with apprenticeship and vocational training increased.
According to the survey, training is taking on greater importance. While 57 percent of electrical contractors said they or an employee took training in the past 12 months, 62 percent said that they, or an employee, plan to take training in the next 12 months. Interestingly, the change in training emphasis lies in two main areas:
In contrast, fewer respondents say they, or an employee of their company, will take grounding/bonding or safety training (electrical/personal/on-site/job site) in the coming year, compared to the percent of firms taking this type of training in the past year. This piece of information does not necessarily suggest that there is less of an emphasis on safety. However, by shifting the training focus in new or emerging business areas, firms are showing they can prepare for new opportunities by getting their people ready when the chance comes. If you want to know where a company is heading, examine where it spends its training dollars.
In 2005, electrical contractors were most likely to have worked on traditional power/lighting projects (cited by more than 95 percent of electrical contracting firms) and least likely to work on alternative energy (cited by a mere 15 percent).
Traditional electrical work is clearly your bread and butter. With few exceptions, larger companies—typically those with 20 or more employees—are more likely to report having worked on each of the various project types on the survey, compared with firms of less than 10 employees. In other words, the larger the firm, the more diversified the project types.
Mid-size electrical contracting companies, however, are more likely to work on geothermal projects and on whole house automation.
Survey participants received a list of 20 project types and were asked which types of work their firms performed in 2005. (Note that this list was revised from the study conducted two years ago.)
As shown on the accompanying chart (Figure 5), the project types form a number of tiers: the top tier is clearly the traditional power/lighting business, as mentioned most frequently (95 percent). Alternative energy would fall into the lowest tier, as mentioned by only 15 percent. Alternative energy might make a nice niche in a time of energy conservation and out-of-control energy prices.
The types of work in between those two tiers include the following:
Some of the differences shown in Figure 5 might be due to the inclusion of a larger amount of project types within a different category. For example, the alternative energy category now includes “geothermal.”
We believe, however, that the increase from 33 percent to 62 percent—almost twice as much as in the 2004 survey—in the case of the residential automation/controls systems is a true increase because this category arguably covered the same project types during the 2004 profile.
In that earlier study, the category was listed as a combination of “home automation, security and theaters.” In the 2006 survey, the specific project types were broken out separately as “whole house automation,” “security and life safety (including fire alarms and smoke detectors),” and “home theater/sound.” (The three listings were “netted” so that each respondent is only counted once.)
The higher percentage of electrical contractors that worked on power quality projects in 2004 compared to 2006 may have been due in part to the after-effects of the major blackout that occurred in the summer of 2003. Perhaps disaster relief in hurricane-ravaged areas or the energy crunch affected this survey, but that is difficult to quantify through this data.
Company size also affects the types of projects a firm is most likely to participate in, as evidenced in the examples below (each of the project types is listed only once).
Very large electrical contracting companies are more likely than smaller firms to work on the following project types:
Electrical contracting firms with 20 or more employees are more likely than smaller firms to work on the following project types:
Small firms are more likely than any other size of firm to work on two of the tested project types: home theater/sound and residential security/life safety. In fact, small firms are less likely than larger firms to work in 13 of the 20 project types, but more than half (54 percent) of companies with fewer than 10 employees work on eight or more of the 20 project types.
Almost 90 percent of the largest electrical contracting companies indicated that they worked in eight or more project types compared to 54 percent of the smallest companies.
Overall, more than 90 percent of the respondents said they had worked in four or more of the 20 project types. Now that we know in which types of projects electrical contractors participate, let’s examine where they work.
Regardless of company size, electrical/power distribution jobs account for the largest percent of company sales, by a wide margin. Relatively few significant differences emerge by company size with these few exceptions: security and life safety and power quality each account for a significantly greater percentage of revenue among firms with 100-plus employees than among smaller firms (not shown).
Although some of the types of work areas changed between the 2004 and 2006 studies, there are no significant differences between the two studies on the areas that were asked in both studies.
One other interesting tidbit garnered from the study indicates that a third of all firms perform work in multiple states, which suggests that there may be issues of licensing and certification, not to mention resources and work force. Working in multiple states is far more common among larger firms than among smaller firms, because they have the wherewithal to set up multiple offices in a variety of jurisdictions.
The largest companies are also much more likely to go through the necessary paperwork to obtain licensing to work in different states. It stands to reason that smaller contracting companies might work in different states more in situations where they specialize in a niche; then, they are called in to knock out something specific.
Across the total sample, more of contractors’ revenue stream derives from new construction (40 percent) than from modernization/retrofit or maintenance/service/repair, each of which accounts for about 30 percent. New construction accounts for a larger percentage of revenue for large firms than it does for small ones. These findings closely resemble the data taken from the 2004 survey—nothing new there.
Regardless of company size, electrical/power distribution dominates company sales. Again, this is not surprising when you consider the continued comfort level and profitability of traditional power work.
Contractors get more of their business from commercial, industrial, institutional and public places (CII) than from residential projects. Nonbuilding projects (transportation/lighting and utility) account for only about 6 percent of the contractor business.
However, there are dramatic differences in types of work performed by larger versus smaller contracting companies. For example, residential construction accounts for a much greater proportion of work among small electrical contractors while CII accounts for more of the work of larger electrical contracting firms.
In addition, large contractors dominate nonbuilding work. Maintenance/repair work is more prominent among small firms. New construction plays a proportionally greater role as firm size—in terms of the number of employees—increases. Repair work accounts for a smaller proportion of total revenue for large firms (11 percent) compared to small firms (19 percent).
Although the greatest slice of electrical contractors’ revenue comes from CII work, single-family housing accounts for the single largest source of revenue. Within the housing category, a higher percentage of revenue comes from multifamily housing with one to five stories, compared with taller residential buildings.
While single-family projects account for a high percentage of revenue across the total sample of electrical contractors, this type of work is most critical to the smallest electrical contracting firms. On average, these small contractors derive almost half of their revenue from single-family home projects (not shown).
Within the broad CII category, a greater percentage of electrical contractors’ revenue is from commercial construction than from industrial or institutional projects. Electrical contracting firms with 10 to 99 employees derive the greatest percentage of their revenue from commercial projects.
Companies with 100-plus employees gain a disproportionate amount of their revenue from industrial and institutional projects and from nonbuilding work. Simply put, the largest firms have the work force and infrastructure to bid on larger-scale industrial and institutional jobs, allowing their smaller counterparts to dominate the residential market.
Overall, 43 percent of electrical contractors’ revenue was derived from design/build or design/assist work. According to the survey, though, the vast majority was done as design/build as opposed to design/assist.
About 50 percent of electrical contractors’ revenue comes from traditional bid/build projects while only about 7 percent comes from “other” methods of bidding. Design/build or design/assist work is particularly important to firms with fewer than 10 employees.
Analyzing the information about how electrical contractors work tells us how important the contractor has become in the overall construction picture. It tells us that builders, developers, architects and engineers are more trusting of electrical contractors’ design expertise and ability to make other critical decisions. (Perhaps after making mistakes trying it their way over the years helped change their minds about the value of a knowledgeable electrical contractor on the planning team.)
Depending on the type of construction involved—residential or CII—20 to 30 percent of electrical contractors say the plans and specifications they receive are “less” complete compared with five years ago, suggesting an increased role for electrical contractors in product selection. (This is the first time we asked this survey question.)
Slightly more than half of the respondents say there is “no difference” with regard to residential work, while about 40 percent say that there is “no difference” in the CII plans and specs that they now receive. About 20 percent say the plans and specs are “more complete.”
On average, a “single” brand is specified only about 20 percent of the time. In all other cases, “multiple brands,” “equal to,” or “performance specified,” come into play.
Respondents were asked how much discretion they have in making a brand substitution. Overall, contractors are able to substitute brands successfully about 70 percent of the time. These findings are consistent with the 2004 profile and reinforce the notion that electrical contractors are trusted partners in the construction process and can choose what works for them.
For many electrical contractors, brand loyalty runs as deep as their loyalty to the local professional football team. Their reputations are riding on the products they install and the way they install them. Therefore, when it comes to deciding which brand to buy, contractors take the decision very seriously.
Fifty-five percent of those questioned said they try to stay within a single brand or a single manufacturer when working on or designing systems where a “multiple, or equal, or performance” specification is indicated. This piece of information might also have something to do with proprietary components within systems coupled with brand loyalty and other determining factors.
When deciding about whether to stick with one brand or manufacturer—regardless of company size—45 percent of electrical contractors say, “it depends on the situation.” For the remaining 55 percent, size matters: smaller firms are significantly more likely than larger firms to “try to stay within a single brand,” while firms with 10 or more employees are more likely than their smaller counterparts to say they “try to stay within a single manufacturer.”
These findings highlight the important role that brand/manufacturer plays. In other words, if a company delivers a product that contractors love and trust, that brand or manufacturer is likely to get the nod the next time. Loyalty is not reserved for manufacturers and brands, it also bleeds into the decision about where to get materials.
When it comes to making purchasing decisions about brand and brand substitution, price and availability are the dominant factors. Price and availability were chosen by about 70 percent of electrical contractors as either their first, second or third reason for initially selecting a brand. Availability is more important to contractors than price when it comes to the brand substitution decision. They need what they need when they need it. Distributors work hard to meet those needs every day.
Ease of installation, prior experience, durability and manufacturer reputation comprise the second tier of reasons for substituting a brand; each was chosen by about 40 percent or more as a top reason for initial brand selection.
While availability and price are more important as reasons for substituting a brand, when it comes to the original specification, ease of installation, prior experience, durability and manufacturer reputation assume greater importance when time considerations are in play.
Not surprisingly, traditional electrical distributors account for the lion’s share of installation dollars. Although warehouse home centers were the second most popular supplier for electrical contractors, they account for a relatively small percentage of spending among firms with 10 or more employees. As in earlier profiles from 2002 and 2004, warehouse home centers account for a significantly larger percentage of spending by the smallest firms, compared to their larger counterparts.
Firms with more than 10 employees spend a significantly higher percentage of their purchase dollars at traditional electrical distributors, compared to firms with less than 10 employees.
Firms with 10 or more employees spend a significantly higher percentage of their purchase dollars buying direct from the manufacturer, compared with smaller electrical contracting firms. Electrical contractors with 20-plus employees spend a significantly higher percentage of their purchase dollars at specialized low-voltage distributors, compared with smaller firms.
With the exception of firms with 10 to 19 employees, the number of distribution channels used increases with the size of the firm. For example, firms with fewer than 10 employees are more likely than average to use two outlets, while firms with 20 to 99 or 100-plus employees are more likely than average to use all four of the channels included in this survey.
This may be because larger companies are both located in more places—more likely to work in multiple states and jurisdictions—and are involved in a wider variety of types of work.
We have tried to profile in greatest detail available who the electrical contractor is. We now know much more about the habits, inclinations and strategies of companies in this industry. To determine where you are going, you need to know where you have been and where you are. Understanding today helps decide tomorrow. After crunching numbers and providing details about industry participants, we see some trends taking shape, leading into the coming years, and perhaps into retirement.
First, speaking of retirement, the aging population situation should conjure up a sense of greater urgency about generational succession planning. If you haven’t formulated a sound succession plan or exit strategy, you need to get rolling.
It is never too early to plan your company’s future. With succession planning comes training and education. One of the smartest electrical contractors I ever knew was wise to cross-train his son in all facets of the business over time to get him ready for his turn as the company leader. That son now runs the company successfully and Dad is enjoying retirement.
Second, while we see traditional power and lighting dominating the breadth of work, we encourage you to pay close attention to those emerging markets. Residential automation/controls nearly doubled from 2004.
That demonstrates an ability to take advantage of an emerging opportunity. Maybe alternative energy solutions or specialized installations of photovoltaic roofing panels might take off in 2007 and beyond. Do not ignore work on the fringes of the industry. Diversity among project types is working for large firms. Think about where it can take your business.
Third, and most importantly, we see a paradigm shift in which the electrical contractor is no longer “just the installer.” Instead, you are being asked to specify brands and have a seat at the planning/design table.
Upfront input from electrical contractors will be of increasing importance as the various systems in a building merge together—cabling, automation controls, electric and HVAC. In the construction projects of the future, all systems will interact with each other and the contractor who knows the most about all those various systems and how they communicated with each other becomes increasingly integral to a project’s success. Those project successes will lead to your success.
According to all the data collected from you through this profile, it’s crystal clear that electrical contractors have more leverage and power today than ever before.
No longer considered just a subcontractor that installs electrical products, you are trusted partners in every project. You now have an important seat at the planning table and you specify products and brands and manufacturers. You also control where you go in the future. Think about what’s next for your business. EC
Kelly, former editor or Electrical Contractor, is a Baltimore, Md.-based freelance writer. Reach him at email@example.com.
Figures referred to in article are available upon request.