The annual Midwest Construction survey of specialty contractors in Illinois, Indiana and Wisconsin found billings for the top-150 firms in the tri-state region last year were $4 billion.

The survey also found top specialty contractors' revenues for all work worldwide were $8.9 billion in 2002.

A Glum Market

As expected, a sputtering economy seemingly stuck in low gear is the top concern among industry executives.

"The economic conditions we've been muddling through are challenging for every contractor," said Mark Shambaugh, chief executive officer of Fort Wayne, Ind.-based Shambaugh & Son LP, a multi-trade contractor in mechanical, electrical and other areas.

All interviewed firms have experienced a drop in billings this year compared to the comparable period in 2002. Declines are ranging between 10 and 25 percent.

And, projections provide little comfort. Robert Murray, vice president of economic affairs for McGraw-Hill Construction, said in his recent midyear update in Chicago that contracting for new construction in Illinois, Indiana and Wisconsin is expected to decline 5 percent in 2003, to $39.1 billion.

All major construction segments are projected to see falloffs, he said. The exception is manufacturing building, which is expected to see a 2 percent increase, to $630 million.

Generally Sour Outlook

Expectations among executives for the rest of 2003 and the early part of 2004 are generally negative.

"I think it [the market] is going to deteriorate some more," said Warren Hill, president and chief executive officer of Chicago-based Hill Mechanical Group, an HVAC contractor. "The consulting engineers and architects are not busy. If they're not busy, we're not going to be busy."

Karen Johnson, president of Morton Grove, Ill.-based Roughneck Concrete Drilling & Sawing Co., a concrete cutter, said other players she has talked to think the bottom has been hit and a slow ride to equitable conditions is beginning. The question is how long a recovery might take.

"Some people are saying another year and some are saying another year and a half before we come out of it," she added.

A fortunate few are seeing only modest declines, such as steel erector Danny's Construction Co. Inc. in Gary, Ind. A great deal of infrastructure, especially for bridges, has reached the end of its life, and renovation projects are ongoing.

"The Chicago Transit Authority has a rehab program, along with the Chicago Department of Transportation and the Illinois Department of Transportation," said Bill Hanson, division manager for Danny's.

Other worries include the perception of condominium overbuilding in Chicago, the slow pace of project completion and the threat of backlash from terrorists and its effect on the market.

On the upside, the stock market enjoyed a slight uptick in June, interest rates remain historically low and the tax cuts President Bush helped push through Congress are coming.

A number of hefty projects promise bright futures, including the $3 billion Power the Future project in Wisconsin, the $2.5 billion Lakeshore East project in Chicago and the $1 billion Midfield Terminal Development Project at Indianapolis International Airport.

Major Economic Issues

A few economic issues might prove crucial to specialty contractors for the rest of 2003 and into 2004.

Layoffs: Some firms are laying off employees. Some are cutting trades staff only, while others are axing trades and office staff.

"We've had multiple layoffs in the field and office," said Steven Witz, director of business development and marketing for Skokie, Ill.-based Continental Electric Construction Co. "We'd rather size right for the next expansion and growth."

Insurance Costs: Rising insurance premiums for liability and health, due in part to lackluster stock-market performance for the last year and a half and other economic factors, are the No. 1 cost concern among specialty contractors and an increasingly critical issue.

"Insurance companies have doubled premiums and taken away scheduled credits," Roughneck Concrete's Johnson said. "It's been brutal."

Contractors report increases in liability coverage between 20 percent and 45 percent over those before the current economic slowdown, in addition to increases in health and property premiums.

The Levy Co., a multitrade contractor in Northbrook, Ill., that focuses heavily on drywall, painting and plastering work, has increased the co-pay contributions employees make for health coverage and prescription drugs, said Allan Burke, secretary/treasurer of the firm.

Continental is shopping for a better deal, Witz said.

Others are looking far afield. Roughneck is monitoring the performance of an offshore insurance group located in the British Virgin Islands specifically designed for the firm's subcontracting specialty.

Budget Deficits: The Midwest states are facing immense fiscal deficits, and the possibility is looming for cutbacks in capital funding.

Projections for the next two years indicate that Illinois will experience a $4.8 billion shortfall and Wisconsin a $3.2 billion deficit. Indiana's current shortfall is $760 million.

Illinois contractors, for one, might have dodged the fiscal bullet.

Gov. Rod Blagojevich's proposed budget includes $1.7 billion for the next fiscal year to repair and rehabilitate the existing network of roads and bridges, relieve congestion and fund new construction. Blagojevich opted for a mix of budget cuts; a pension-financing plan to save $1.9 billion; $1.3 billion in new, recurring revenue; and $800 million in one-time revenue sources.

Contractor Reaction

Responses to the market situation are varied.

Some firms are being aggressive and fighting to retain market share, such as Roughneck. The company is keeping its name at the forefront of general contractors' minds by increasing its advertising budget, sending employees to industry functions and faxing solicitation letters that describe the firm's capabilities.

"Just last week we faxed out 144 solicitation letters to lots of different general contractors," Johnson said. "I notice we got a response to that because people call and ask for bids."

Bucking industry trends, The Levy Co. has recently hired two estimators.

"In the future, there will be fewer jobs, so you have to bid more of them to maintain volume," Burke said.

Others are simply trying to ride out the market by running their companies as efficiently as possible to control costs.

Political Issues

A number of political issues are facing specialty contractors in Illinois:

Contractor Set-Asides: In 1996, the Builders Association of Greater Chicago filed suit against the city of Chicago to overturn an ordinance that requires set-asides of 25 percent for minority business enterprises and 5 percent for women business enterprises in city contracts. The bench trial started in May.

The ordinance goes against 14th Amendment rights of equal protection, said Al Leitschuh, BAGC executive director.

Some disagree. "Minorities and women don't get the work when these programs don't exist," Johnson said.

Scaffolding Ordinance: In April the Scaffolding Ordinance went into effect in Chicago.
The regulation was proposed soon after a March 2002 tragedy in which two people were killed when scaffolding on the John Hancock Center came apart in high winds and fell.

Key provisions include requiring building owners to obtain a scaffolding permit for work on buildings 40 ft. above grade in the central business district or 80 ft. above grade elsewhere in the city.

In addition, the permit is valid only if the scaffolding operator has a structural engineer's certification of approval for the scaffolding and $1 million in liability insurance.

Structural Work Act: The Illinois Structural Work Act is being discussed in the Legislature, but was not called for a vote in the most recent legislative session. The act, which was rescinded in 1995, would allow a construction worker to file suit for an injury-causing accident while also receiving workers' compensation.

A coalition of about 25 contractor associations has formed the Alliance to Help Employment and Development to head off the proposal.

"We're absolutely opposed to the reinstatement of the Structural Work Act," said Sharon Topel, executive director of the Association of Subcontractors and Affiliates/ASA Chicago.

Some unions argue the proposal provides additional worker protection. Most contractors regard the proposal as onerous and anti-business.

E-permitting: Contractors who build frame garages or install water heaters can now apply for permits and pay for them via the Internet and print them out in their offices.

Other short-form permits for discipline-specific work will soon be offered online, with the next phase for electrical-wiring work, said John Roberson, executive director of the Chicago Department of Construction and Permits.

Contractors who want to participate in the online initiative need to go to the DOCP office, 21 N. LaSalle St., to sign up and get a user identification and password. For information, call Kristin Cabanban at (312) 744-6698.