Electrical Trends: Is It Getting Harder to Make A Profit?

As the American economy becomes ever more reliant on electricity and electrical appliances, the risks of electrical contracting are seeming to multiply.

Will the number and productivity of trained workers keep pace with the demand for their services? Can suppliers and material producers keep up with demand without wildly increasing their prices? Will aggressive schedules rush the design process so much as to produce poorer - or flawed - designs?

Those are some of the risks that are coming to the fore with the escalating demand for electrical services, said Terry Simpson of Northstar Management. Simpson led a panel on risk and reward trends on construction projects at the Electrical Board of Missouri and Illinois' Electrical Expo at America's Center on March 19. Joining him on the panel were George Azanni, president of Kaiser Electric; Dave White, a commodity analyst with A.G. Edwards; Jay Ellington, professional engineer with CDG Engineers, Architects, Planners; and Tom Finan, publisher of St. Louis Constructions News and Real Estate.

"In my opinion, the largest risk to a construction project is beginning construction before all goals and objectives are clearly defined and on paper in the form of specifications and drawings," said Ellington. "I have been involved in two projects out of state with construction costs topping $115 million that were begun this way and still are not complete. Huge mistakes were made and tens of millions were wasted because the contractor had no clear direction before work began. In the end, nobody will look good and everyone will part ways and there will be no repeat business," he said.

From the contractor's point of view, Azanni said that failing to understand the full scope of the project was the contractor's number one risk, which is a failing very easy to fall into if the project's goals and objectives are not clearly defined. "Too many times electrical contractors, when deciding to bid a job, say ‘yes' when they should say ‘no'," he said. "Sometimes ‘no' is the best answer, but it is a hard one to give, for all contractors." 

Did You Catch the Price Today?

Ellington said that the second largest risk he sees is the volatility and inflation in the prices of electrical materials. "From what I've seen, from the time an estimate is put together for the bid until the time the material is ordered, the price will have increased upwards of 20 percent," he said.

"Many owners are sticking it to the contractors and that is not exactly fair. Owners have got to bend a little here and contractors need to be smart with their contract writing. Electrical contractors need to incorporate material cost escalation clauses into their contract language that will cover the added cost and protect the owners from an unexpected change order," he said.

"Because of our global economy you don't know from week to week what you're going to pay," Azanni agreed. "By the time you purchase the wire you could have easily used up not only what you used as a price in your bid, but all of your profit for the project as well. It's a serious issue with no easy solution for the contractor or owner."

Before material prices ever become an issue for a contractor's profit, however, price volatility could affect whether or not a proposed project is going to move forward and go out to bid.

"Engineers are in "no-man's land" when it comes putting a dollar amount to a project," Ellington said. "With the volatility of material costs, we are forced to estimate higher than we may need to, and that causes one of three things to happen: The owner puts the kibosh on the whole project, cuts the scope, or digs deeper into his pockets. If the engineer is way too high, a viable project may get canceled and that hurts contractors and suppliers alike. If the engineer is too low, contractors and suppliers spend huge numbers of man-hours putting estimates together for a project that does not have a prayer."

The engineering community is really having a difficult time coming up with good estimates for owners, he added, because, "We have to go to cost estimating publications like Means or Richardsons which are only published annually. The information they publish is out of date before I even see it."

Can anything be done about?

"Yes," said Simpson, "teams." When contractors, designers, and owners form teams at the start of the project they can work through design and construction together to ensure best value. "The team concept can be set up as an opportunity to share risks, budget, and schedule rewards among team members," he said.

Teamwork + Business Sense

"I am a proponent of working closely with a construction team, in fact, of pre-selecting a contractor team and negotiating a fair price to provide what the owner wants," Ellington said. "Identifying the project stakeholders up front and getting their ideas and buy-in is absolutely essential to success. That necessarily means the engineer needs to produce a set of conceptual drawings that will allow for a reasonable conceptual estimate. Arriving at a reasonable estimate is where a contractor team member comes in handy," he said. Forming the team early, he added, "certainly reduces the number of surprises that the traditional design-bid-build process offers."

"In the late ‘80s early ‘90s you could be a good field person, buy a truck and become a contractor, and do okay with little business background. Today you absolutely need to be a partner with your bank and vendors. Today there is no play in your estimates, so every move counts from pricing of material to how many men are on the job today versus yesterday," Azanni said. "Having your material delivered exactly when you need it is critical. There simply isn't time to sit on your rear. If you can assemble a great staff and can do all the things above you will see the rewards," he said. "But be careful," he added, "stay within your means; taking on more work than you can support has and always will be a ticket to disaster."

Although not part of the panel, Emily Aschinger Martin talked about the similar issues when discussing her promotion to president of Aschinger Electric (see sidebar):

"The imperative of the industry today is to move in a new direction," she said. "We are moving from reactive services to proactive: we are doing predictive and preventive maintenance, flash hazard analysis, and light maintenance services (changing light bulbs and ballasts)," she said.

"There is an emphasis today on going green and saving energy that has people going into lighting retrofit. Typically, you can pay for a lighting retrofit with the savings it generates in one to three years. We have someone doing just retrofits: he is project manager. That is what I mean by being proactive: we can sell it. The biggest thing you can do to save energy on the electric side is the lighting," she said.

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