School market is a good place to be, but not for everybody

May 2, 2000
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The poor condition of American schools has been making headlines for several years. Leaking roofs, inadequate ventilation systems, drafty windows, ancient mechanical equipment, and crumbling exteriors are just some of the conditions reported in many schools around the nation.

President Clinton has acknowledged the problem in several State of the Union Addresses, and just recently asked Congress to appropriate yet another $1.3 billion a year to help thousands of students escape “antiquated classrooms.”

The money has been trickling down to the schools for the last several years. School districts are requesting an almost overwhelming amount of renovation and repair work for their buildings, and hvac contractors are struggling to keep up with the demand.

Those who are in the business say there’s no place they’d rather be. They also warn that not every contractor is cut out to perform school work.

Those contractors involved with school work say that in order to be successful in the market, it’s necessary to be set up correctly. Len Pellegrino, chief estimator, Worth & Co., Doylestown, PA, says that approximately 80% of his company focuses on hvac and plumbing work for public bid jobs, which includes schools.

“Our company was based on public work. We started with schools because the prospect looked good — it looked like an area that was going to grow. It’s never been busier than now — it seems like it’s increasing exponentially in Pennsylvania,” says Pellegrino.

His company (and other contractors in the area) keep busy because many of the older schools in Philadelphia and surrounding areas need renovation and repairs. Some suburban schools are also adding buildings to their campuses due to the continuing urban flight.

Everywhere you look, there’s work to be done.

Seasonal work, tight coordination

“You can be profitable in schools if you’re set up to do it,” says Pellegrino. He notes that most of the school work takes place in the summertime, when students aren’t around.

“A lot of the construction is phased, so it requires a tremendous amount of coordination and supervision to work in schools. To renovate an entire school in the summertime is very difficult, as we require a tremendous amount of manpower then.

“After the summer rush it’s hard to be productive, because you’re working around students, or at night and on holidays. Not a lot of people can handle that. That’s one of the challenges.”

That amount of coordination also means the contractor has to be extremely efficient. Pellegrino says that one of the ways his company remains competitive is to train its people very well; they can’t afford inefficiency on these projects, or else it’s not possible to remain competitive.

He relies on a variety of training methods to make his people more efficient, everything from in-house classes to sending staff to local vocational schools.

As can be imagined, it’s also hard to keep the large workforce that is required in the summertime busy during winter. “You have to have something else — a different market that might provide you with more work in the months when the kids are occupying the school,” says Pellegrino.

He says his company also remains profitable by being very selective in the types of work it bids.

Being choosy

Matt Alberti, vice president, Enterprise Equipment, Weymouth, MA, is another contractor who is selective about the types of school jobs he pursues.

“We like to go after the older schools that have traditional steam systems — old steam boilers with steam radiators.”

Being a smaller company (about 30 people), he notes that they don’t go after jobs that require a lot of labor. “We tend to focus more on niche marketplace jobs that might be a bit out of the ordinary. It’s a little more selective.”

Alberti’s company also mainly focuses on public work, and he agrees that it takes a certain kind of contractor to be in this area of the market.

“We’ve always been in the public sector, so we’re familiar with the paperwork and what is required — it’s second nature to us. I can see how some companies could become discouraged.”

Profits on low-bid work

One of the main reasons to become involved with public school work in Pennsylvania, at least, is cash flow.

As Pellegrino notes, “You’re guaranteed to get paid every 30 days. You don’t depend on a general contractor to pay you, which can sometimes be scary. The money is guaranteed as long as you perform. That’s a big reason.” But he adds that schools are not an easy place in which you can be profitable. That’s because it’s the low bidder who gets the job, so it’s necessary to keep costs down as much as possible, or else you won’t get the work. A school district may also specify a particular manufacturer, so there are fewer options as to which kind of equipment a contractor can use. And once the bid is done, that’s it — there’s no room for negotiation.

Alberti says he doesn’t see that the profit margin is any different in schools than in private projects. “Whatever your cost is, you’re looking at covering your overhead, and you throw in maybe a 3% straight profit on the job. As a whole, you’re lucky if you’re getting an 8% to 9% markup on your job cost.”

What makes the schools an attractive place to work for Alberti is the flexible schedule. He likes working in the summertime, as well as during school vacations and at night. The summertime schedule can also be a headache, because there are only seven or eight weeks to make the project happen.

“You might bid a job now, but you can’t do anything on it until June. Then it’s short-lived. Probably 60% to 70% of our annual business is done in that time span.”

Another challenge is the school construction itself — especially in older schools that are all masonry construction. With walls that are 2-ft thick, it’s difficult to run new ductwork and piping. It’s also difficult to strike a balance between a system being functional and aesthetically pleasing, as many schools have high ceilings and nowhere to hide any equipment.

Both Alberti and Pellegrino note that it seems not too many new contractors are getting into — and staying in — school work, possibly because all sectors of the market are very busy, or maybe because some don’t want to deal with the special requirements needed to work for schools.

But the fact remains that the work is there for those who want to do it.

Sidebar: Just how bad are U.S. schools

In the comprehensive February 1995 report, “School Facilities: Condition of America’s Schools”, the General Accounting Office (GAO) presented the results of a nationwide survey of about 10,000 schools and described the conditions observed in site visits to 10 school districts.

On the basis of estimates by school officials, the GAO projected that America’s investment in its schools needed to be increased by about $112 billion to repair or upgrade facilities to good overall conditions, and to comply with federal mandates over the next three years.

The report continued that about one-third of the schools, which serve about 14 million pupils nationwide, reported needing extensive repair or replacement of one or more buildings, and 60% of schools (many in otherwise adequate condition) reported at least one major building feature, such as plumbing, in disrepair.

Moreover, about half the schools reported at least one unsatisfactory environmental condition, such as ventilation, heating, or lighting problems.

District officials interviewed for the report attributed the declining physical condition of U.S. schools primarily to insufficient funds, resulting in decisions to defer maintenance and repair expenditures from year to year. This has a domino effect, though: Deferred maintenance speeds up the deterioration of buildings, and costs escalate accordingly.

The GAO’s June 1996 report, “America’s Schools Report Differing Conditions”, broke down the $112 billion needed to fix the schools by stating the average school requires about $1.7 million to repair and upgrade schools to good overall condition. About 21% reported needing to spend above the national average of $1.7 million per school. The report added that hvac systems were the most frequently reported building feature in need of such repair.

Sidebar: Utility competition threatens to undermine hvac contractor

Many schools are now renovating their buildings to capture additional energy savings, as there are many new products available that can help drive down operating costs. That has drawn the attention of some utility contractors, who are now throwing their hats into the school ring.

“Around Philadelphia, the utility contractors are starting to target the school districts,” says Len Pellegrino, Worth & Co. “That has been a contributing factor to driving the profit margin down even further.”

He adds that some utilities have found out that it’s hard to be profitable in the public bidding forum, so they’re trying to lock up publicly funded projects, such as schools, before they ever go out to bid.

Because of that, contractors like Pellegrino are thinking about migrating a percentage of their work elsewhere. “The whole legality of the utility issue is a question, because theoretically a utility could come in and underbid other contractors, post a loss, and pass it on to their consumers.”

Pellegrino hopes that with deregulation this will happen less often, as utilities are having to become competitive as well. But for now, the Philadelphia area remains “really cutthroat right now.”

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