While new housing has been in decline since the nearly 2 million starts in 2004 and 2005, the National Association of Home Builders (NAHB) forecasts that the market will hit bottom in 2007 at about 1.6 million starts but then begin a strong cyclical rebound in 2008.
The U.S. Census Bureau reports continuing above-average expenditures on residential improvements by homeowners at a level of approximately $230 million through the end of 2006 and onward.
Industry sources believe that this means residential projects—design/build in particular—will offer significant opportunities for the electrical contractor over the next two years.
Who are these guys?
Approximately 80 percent of electrical contracting firms are engaged in some kind of design/build work, which on average accounts for approximately 40 percent of their income, according to reports prepared for ELECTRICAL CONTRACTOR magazine last year by Renaissance Research & Consulting Inc., based in New York City.
Industry sources generally agree residential design/build, particularly the single-family home sector, is largely served by the smaller electrical contractor—a firm with one to nine employees and revenues between $250,000 and $1 million. However, there are also a significant number of much larger contractors operating in the upper end of this market—the multifamily and high-rise condominium sector.
However, once an electrical contracting firm, regardless of size, enters into residential construction, there is typically a 50–50 average revenue split on design/build versus bid/build on single-family homes and a 40–60 average ratio for multifamily dwellings, according to Susan Metzger, director of research at Renaissance.
“Residential design/build has matured beyond simply following the code,” said Tom Glavinich, associate professor of civil, environmental and architectural engineering at the University of Kansas, Lawrence.
“The upper end of residential work has moved into more sophisticated lighting systems and controls, telecommunications, structured cabling, home theaters and the latest security systems. I think electrical contractors will be looking more closely at residential design/build because this is a market offering high-quality project work,” Glavinich said.
Also, with regard to single-family dwellings, demographics and investment choices are at work in this scenario. There is still a significant amount of discretionary capital in the hands of homeowners who understand the benefit of enhancing their real estate values. They may also be involved in a family situation becoming more commonplace. Due to the spiraling costs of elderly care, senior citizens will be moving into the homes of their children, with three generations sharing the same living space. Existing homes will require considerable adaptation, with much of the renovation electrical/electronic in nature.
Leading-edge technologies will be involved in this kind of remodeling, including data communications, increased energy efficiency and environmental enhancement systems. For the seniors in particular, improved lighting is critical, and some homes are already being fitted with elevators to facilitate movement throughout the house.
Basically, project value for the electrical contractor today ranges from $10,000 to $50,000 for single-family design/build remodeling up to nearly $10 million when working from the ground up on a 60-story apartment complex.
How to become a player
To a large extent, this is a fairly exclusive club, and establishing a relationship with the general contractor is critical to the electrical contractor if he expects to be a player on the team.
“Referrals drive the whole design/build process,” said Joe Delanno, president of Design Solutions Inc., Arlington, Mass., a consultancy for general contractors in this field. “Reputation and word of mouth are the key elements in getting this kind of business, and the first thing an electrical contractor has to do is understand how this kind of project evolves.”
The homeowner or project developer, depending on the scale of the job, initiates the procedure, almost always on the basis of referrals or prior experience with the general contractor. The general contractor then assembles the team, including the framer, plumber and the electrical contractor.
Breaking into this circle isn’t easy, but it can be done with some strategic planning.
According to Delanno, an electrical contractor should be looking for a general contractor with a track record in design/build work as well as potential for growth. This general contractor would be the owner-principal of a $750,000 to $1.5 million firm, with two or three lead carpenters in the field, a production manager, a bookkeeper and a clearly defined and proven business plan.
The best approach, Delanno suggests, is straightforward. Ask how the general contractor works within the design/build business framework and how the electrical contractor might fit in and be of assistance. The electrical contractor should suggest intent is to work over the long term on this kind of project.
On the other hand, the electrical contractor has to display respectable credentials if he wants to try out for the team. The electrical contractor’s own referrals have to be in order, meaning that the contractor has an acknowledged business record, professional personnel and a reputation for craftsmanship in the field.
Beyond that, the contractor should have a more than average understanding of current technological developments and new products and have a staff that is aware of not only the National Electrical Code (NEC) but also other codes and standards. Furthermore, the company’s employees should either have, or consider obtaining, Leadership in Energy and Environmental Design (LEED) certification training.
How the process works
Assuming the general (GC) and electrical contractor (EC) strike an initial agreement, it is probable that, in the early stages, the GC will ask two or three ECs for bids on a design/build job. But if the EC proves his ability to deliver the quality of work required, quite often the EC will become the partner of choice.
According to Delanno, once the EC has secured his position, it’s important that he request participation from the earliest possible point in the planning process. The GC should provide the EC with a profile of existing conditions, a schematic layout and a drafted electrical plan. It is at this point that the EC demonstrates his expertise by trouble-shooting the electrical plan.
“Knowledge of the applicable code or codes is, of course, critical,” said Jim Walters III, president of J.M. Walters & Son Inc., Metropolis, Ill. “But the electrical contractor should also be on familiar terms with the local authority having jurisdiction [AHJ] in Code matters.”
And according to Frank Amabile, president of Shamrock Electric Co., Elk Grove Village, Ill., it is very important that a contractor know who the AHJ is before starting on a project.
“For jobs in Chicago, the Code is established and the electrical contractor knows exactly what it is,” he said. “But when you get out into suburban areas, they may say they follow the NEC, but they may also have 15 local addenda to it. The contractor has to be aware of this.”
Shamrock Electric does 65 to 70 percent of its business in design/build, working with various engineering and general contracting firms on townhouse and high-rise condominium construction—some projects earning $8 million to $10 million for the firm.
“In this sector of the design/build spectrum, distinctions between residential and commercial begin to blur,” Amabile said. “A 41-story, 190-unit downtown condominium is a residential structure, but it’s also commercial because you’re putting risers in, doing deck work, putting in a parking structure below the building and providing as much as 200,000 square feet of retail space on the ground floor.”
According to Amabile, there are two absolute necessities for working in this residential design/build league: The electrical contractor has to have errors and omissions insurance and a state-of-the-art computer-aided design (CAD) system.
Most developers and general contractors will require this form of insurance, which guarantees that if something required by code is inadvertently missed, the electrical contractor will install it at no additional cost to the owner.
At Shamrock, the CAD system is essential to the design/build process. The company has two full-time CAD operators with e-mails and PDF files going back and forth among the team members to expedite the procedure.
Industry sources say ongoing, detailed communications among all parties concerned is the key to a successful residential design/build project. This line of communications includes the homeowner, the general and electrical contractors and, sometimes, local distributors. A good relationship with a distributor also results in leads for other design/build projects when a homeowner comes in and seeks advice on having a system replaced or updated.
After the general contractor has gone through the initial overall planning of the project with the owner, it’s advisable for the electrical contractor to meet with the client one-on-one and get an in-depth definition of exactly what the customer’s electrical systems expectations are.
This might include showing the customer lighting fixture and control samples, or even taking the client to a local distributor’s lighting showroom. Electrical contractors who have been involved in this market over time agree that the earliest possible involvement in the project has been the key to their success—and to referrals for future jobs. EC
QUINN reports on a broad range of business and industry issues for journals in the United States and Europe. He can be reached by phone at 203.323.9850 or by e-mail at email@example.com.