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Benjamin Franklin said, “In this world nothing can be said to be certain, except death and taxes.” Hey, Ben, add changes to the marketplace to that list.
Some are predictable. Others are not. Some are caused by natural occurrences, others by economic conditions and political decisions. The response of an electrical contractor to market forces, especially unforeseen ones, can have a dramatic effect on profit margin, not just for contractors, but also for the client.
Storms are expected in many parts of the country.
“Every year, our local utility opens its storm center after checking the weather,” said Guy Niedorkorn, division manager, utility group, Aldridge Electric Inc., Libertyville, Ill. “And they put all the approved vendors and contractors on alert. We send our crew out to restore power lines and get all the customers back in service when a storm hits.”
That’s the drill in an area that experiences a predictable storm season. In June, however, the Midwest struggled with results of unforeseen floods. Electrical contractors dealt with, and are no doubt still dealing with, damage to electrical systems on a case-by-case basis. But some might take a tip from the response of HMT Inc., Cicero, N.Y.
In 2006, the company was called after heavy rains caused a local river to rise and floodwaters full of mud, raw sewage and oil. Though only 6 to 7 feet deep, the waters broke through lower-level windows and flooded the 40-foot deep basement of a 60-year-old 130 MVA power plant. Floodwaters enveloped equipment and rose to within 5 feet of the turbine deck.
HMT’s first task was to restore lighting power through diesel generators, so the area could be cleaned and decontaminated. That was no small task, since, due to the contaminated water, all personnel were required to get tetanus shots.
“We were asked to assess the submerged equipment and then come up with a plan,” said William Dussing, senior electrical engineer, HMT. “The big ticket item that was affected was the main Unit 8 2,300-volt switchgear lineup that supported the plant’s Unit 8 generator. The 1953 vintage 23-breaker GE MagneBlast switchgear lineup contained complicated protection and control schemes that were revised through the years and were only partially documented. Coming up with an exact replacement for the obsolete equipment required a great deal of investigation, especially in the field,” he said.
Yet, within 48 hours, HMT had located and procured the majority of the replacement equipment and was mobilized for action. The plant was back in service in three months instead of a projected six to 12 months of downtime.
HMT employees took an educated approach based on their knowledge of engineering and relationships with vendors. It secured replacement 2,300V switchgear in the form of unused surplus Siemens vacuum switchgear retrofitted with Schweitzer (SEL) relays to take the place of the 1953 vintage GE MagneBlast. The vendor rewired and reconfigured the replacement switchgear, according to HMT designs, to match the flooded switchgear as closely as possible. Once it was on-site, HMT’s team, led by senior technician Allan Shenefiel, married the existing protection and control schemes into the replacements and tested them for functionality.
Mortgaging the future
Another unforeseen market force is the mortgage crisis.
“Since property values in our area have dropped almost 40 percent in the last year, many of the general contractors and subcontractors that used to do residential work are entering the heavy commercial and industrial markets. Bid lists that used to have two to three contractors on them now have 12 to 15. Companies that are used to getting work no longer are,” said Jeffrey Withers, Stockton branch manager, Collins Electrical Co. Inc., a company with five California branches. “And some of those companies are bidding the projects much lower than expected, sometimes up to 30 percent. Low bid doesn’t always mean responsible bid. Some of the generals have failed to complete projects due to financial difficulties, and that has snowballed into delays and nonpayment of subcontractors,” he said.
Collins Electrical is resisting the temptation to underbid.
“We are bypassing bidding projects that lean towards that scenario, and also working only with general contractors that are professional enough to understand the marketplace and their subcontractors,” Withers said.
Yet Collins Electrical has also discovered an upside to the situation. Since so many trained personnel can no longer find work in the residential market, the level of competency of the people who have responded to the company’s recent advertisements has been much higher than in the past.
“We recently advertised for a project coordinator, an administrative position that pays $30k a year, and we’ve received resumes from people who had been making $100k plus in the residential market. Also, during apprenticeship interviews, we are seeing electricians with 4,000 and 5,000 hours in residential entering our JATC program for commercial/industrial training,” Withers said. “It’s a benefit to us [to] bring in those with experience.”
Costs of doing business
Another current unforeseen market force relates to the cost of materials. Who could have predicted the jump in copper prices two or even five years ago? And no one is anticipating a downturn in prices. In a May 2008 Reuters article, Catherine Virga, a senior base metals analyst with New York-based CPM Group, said she believed the price outlook for copper will remain volatile for the next couple of years as myriad macro- and microeconomic trends create a “tug of war” within the investment community.
“In the past, because of the expense of copper, we wanted to wait until we knew the exact length of the wire we would need after measuring the length of the conduit,” Withers said. “The purchase of the main copper feeders was a big expense, and to minimize the expense, we waited until we knew exactly how many feet of wire we needed. And then we bought it out. Market price with wire would only fluctuate 3 to 5 percent. Now wire can jump up 25 to 50 percent, so we estimate the lengths needed, and currently, we are buying out and taking early deliveries. That means we may handle the wire a bit more, but we have protected our costs,” he said.
Other contractors are taking a similar approach.
“We make our best estimate at bid time as to what the future market will be like and try to do mass buyouts on a monthly or quarterly basis, taking into account the copper commodity that our company has as a whole,” said Adam Spillane, project manager, Cupertino Electric, a company with its headquarters in San Jose, Calif., and branch offices in Northern and Southern California and Arizona.
However, when contractors are well into a job and prices rise, that solution isn’t available.
“Some things are mandated. For example, on certain federal jobs, we aren’t allowed escalation for material costs. The jobs won’t start for a year or two after the bid, so we have to be careful when bidding,” Withers said.
On nongovernmental jobs, Collins takes a different tack. “We look at it this way,” Withers said. “If the cost of the material went up, and the cost of overall construction went up, you would assume that the value of the product—our services—had gone up, as well. The project is worth more because the owner had to pay more for it, and if the owner doesn’t pay us the additional costs that we incurred, then we say that he is unjustly enriched because he has the value of the property without paying for it.”
Chris Payne, vice president, division manager, Contra Costa Electric, Martinez, Calif., said his company is now specific in its proposals.
“We now qualify in our proposals that the pricing for all copper materials are only being held for so many weeks. We also try to include language so that we will be compensated for any price increases due to the volatility in the market. We didn’t foresee putting that in a contract a few years ago, but we do now with the instability of the market,” he said.
And owners are following suit.
“We find that owners are trying to purchase big copper cables, transformers, the big ticket items, early on when they know they are going to have the project and before they get to the bidding process,” Payne said.
The rise in the cost of transportation due to skyrocketing gas prices is another current market force. It has happened so quickly that contractors and other companies involved in the construction industry are still trying to figure out how to respond.
“This fiscal year, we anticipate a $300 to $500k reduction in gross profits due to the increase in fuel costs for current projects based on current fuel prices,” Withers said. “If the cost goes up more, our gross profit will go down even further. And the delivery cost for materials by manufacturers and suppliers is going up, which increases the cost for the materials.
“On most of our contracts, there’s no allowance for us to ask for more money, so we are tied into our budgets,” Withers said. “But in terms of recovery, we are looking to curtail our driving. And our distributors are doing the same, asking that they make fewer deliveries to our job sites. On large projects, we do put in estimated costs for fuel but not for smaller projects, but we may have to start adding that to our bid proposals.”
Withers said, if gas prices continue to rise, the construction industry will suffer.
“Large increases in material costs and other costs of construction will stifle the amount of construction,” Withers said. “Projects will be put on hold or scrapped altogether because they won’t pencil out. The owners cannot absorb 25 to 40 percent increases in project costs, unless, of course, they are a public agency and can raise taxes to pay for it. We have seen the economic impact of housing construction coming to a halt. What happens if large construction follows?”
Yet forces that cause negative effects in one area can also prompt an upturn in another area. The high cost of gasoline has created heightened interest in alternative energy sources.
“In response to the interest in alternative energy, we started an alternative energy division that is really focused on photovoltaics,” Spillane said. “We are offering full design services as well as labor for installations, doing the financial models to make sure it makes financial sense in terms of all the rebates. It’s something we’ve dove into head first in response to the fact that our clients have included alternative energy components on their projects.”
What will be the next market force? Stay tuned. How will electrical contractors respond? It’s hard to foresee.
CASEY, author of “Kids Inventing! A Handbook for Young Inventors” and “Women Invent! Two Centuries of Discoveries that have Changed Our World,” can be reached at [email protected] or www.susancaseybooks.com.