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    The Future of Commercial Contracting

    May 1, 2003
    Despite the current national slump in commercial construction, projected to be down as much as 20% or more nationally by the end of 2003, the fact is,

    Despite the current national slump in commercial construction, projected to be down as much as 20% or more nationally by the end of 2003, the fact is, just like politics, the HVAC commercial contracting business is local.

    One contractor I talked to from San Diego is having a record year. Yet others are feeling the pinch of stalled new construction due to war uncertainty, the U.S. economy, and maybe even a failure to build and leverage their service businesses to the maximum.

    Many projects, I’m told, are sitting on the drawing boards, with financing in place at the lowest rates in many, many years. A number of jobs that should be Design/Build, have turned into design-assist or design/bid/build jobs, often resulting in lower profit margins for HVAC contractors and projects less likely to make owners happy at the conclusion. Yet it seems Design/Build still accounts for 30-40% of new construction, not to mention re-negotiated over budget jobs where contractors typically are asked to come up with an in-budget design.

    Battle for the High Ground

    There is always a battle for who controls the project. Some general contractors, general contactors-at-risk, and some developers with the help of the Design Build Institute (DBIA) have co-opted Design/Build terminology. They’ve confused the market place — building owners, in particular.

    An executive of a nationally known firm that specializes as a general contractor-at-risk admitted to me recently that true Design/Build means the HVAC contractor and often the electrical contractor must be involved from the beginning. His firm and a number of others often confuse customers by selling them on the process and the fact that they’re Design/Build generals. Yet, in actuality, they’re offering a reconstituted plan-and-spec process by not selling the up-front involvement of the Design/Build mechanical and electrical contractors.

    Without their early involvement, the customer can’t realize all the benefits of the true Design/Build process, especially in terms of innovative design, reduction or elimination of change-orders, on-time job completion, and ideally a comprehensive commissioning process. The result is there’s some good, some bad, and some ugly in the current commercial marketplace, but overall some tremendous opportunities still exist.

    Inside the Crystal Ball

    What lies ahead, however, won’t be business as usual for those contractors who want to grow and prosper. Marketing and improved sales skills should play an increasing role for many of them.

    Contractors who segment and analyze their markets, then focus on the best opportunities for their firms’ on-board expertise and skills, can increase their profits and market share. This means looking at vertical markets such as schools, government buildings, industrial (particularly pharmaceuticals), retail, and healthcare — and breaking these markets down further to specific types of buildings.

    For example, schools break down to K through 12, public and private, higher learning facilities such as colleges and universities, also both public and private, and community college facilities.

    Government buildings, the fastest growing market for the Design/Build process, by the way, appear to be a strong opportunity for those contractors who can figure out how to do business with government entities. This market also breaks down into smaller segments, such as Federal, state and local buildings; special agencies or departments such as U.S. post office buildings, Army, Navy, Air Force, Marines, and Corps of Engineers. All require new contacts, plus an understanding of the particular market segment needs and purchasing processes.

    Other vertical markets will require the same careful analysis of the target market, company capabilities, identification of prospects and decision-makers, then a detailed plan to attack the target prospects. This means both a business and a marketing plan for each target segment.

    Looking further ahead, it seems all contractors who desire to participate in the Design/Build market, ideally growing both their share and the overall market at the same time, will have to develop a market education effort. They’ll need to define what the true Design/Build process is, listing the benefits to customers, then selling their own capability to perform within this process. Hosting educational seminars for groups of customers, perhaps in coordination with a Design/Build team of developers and contractors they’re comfortable working with is one way to approach the market.

    It also seems more contractors need to look into learning how to run the whole job, assuming the position of general contractor and coordinating the rest of the work. There are perhaps more pros than cons to this approach.

    Back to the Future

    But in the end, the sure way to control the job and meet the owner’s needs is to get back to basics. That means mining your service customer base to generate Design/Build work that won’t be put out to bid because you’ve already demonstrated your ability to meet the customer’s service needs, solve his problems, and form a strong relationship based on trust.

    This means proactively approaching your current customers to find out if they plan to expand their existing facilities or build new ones. This also means asking if they plan major renovations that would allow you to suggest innovative ways to address their energy costs, indoor air quality needs, projected increased equipment replacement needs, or technical problems.

    Design/Build contractors will need controls capability to stay in the game, even if they aren’t making much money on this aspect of their business. It’s hard to make money given the need for constant technical training and the competitive nature of the controls business.

    Contractors who don’t have a quality building commissioning program need to develop one. There are many would-be competitors anxious to fill the gap if you let them in.

    Finally, the long-term future looks very bright for contractors who stay abreast of rapidly changing technologies, work hard to address vertical markets with well-thought-out strategies, develop and maintain strong customer and team relationships, and really love the contracting business, as so many of the best contractors do.

    Jeff Forker is VP and Group Director of HPAC Engineering, Contractor, and Contracting Business magazines. He can be reached at 216-931-9595 or at [email protected].