Q&A: DEC Roundtable

Q: The public safety sector has long been considered recession proof. To what degree has the economic downturn affected the corrections market?
 

Thoene: For me, corrections is recession resistant, not recession proof. We’re on the tail end of the recession, but given the length of time it takes from selling bonds to passing a tax to actually bidding out a job, we’ve seen a significant impact from the downturn in the West and Midwest. We may not have been affected one or two years ago like everyone else, but we’re definitely feeling it and it’s something we’re still trying to deal with.

DeMent: One of the effects that we see is that even after jobs bid, they’re taking longer to award or get shelved completely. Needless to say, we’ve seen margins decrease, and we’ve seen more competition and, maybe, with less qualification.
 

Otto: There’s no doubt that our industry is 18 months to 24 months behind the rest of the economy because of the length of time it takes for the issuance and passing of bonds and then getting the project into design and on the street. It’s been quite challenging. DEC’s are starting to see that the number of projects has decreased, while the level of competition has increased significantly.

Claborn: We really didn’t feel it until this year. In 2009, our sales have been greatly impacted by increased competition. Not wanting to decrease our margins, our sales have obviously dropped. One of the things that caught us with this downturn was the California market. We had geared up to handle more work and then all that was jerked off the street. We haven’t decreased our workforce yet, but it’s coming if sales don’t pick up.

 

DeMent: We try to keep a close eye on what’s coming and respond to what is already here, but as far as having any idea of what to expect in 18 months, that’s a tough one. There is definitely work out there right now, but I think we’ll have to ride this out through next year.
 

Thoene: I feel like we’re hunkering down for a long, cold winter that’ll stretch into a good chunk of next year.

Otto: We’re optimistic, or at least hoping, the duration of the downturn as it affected other sectors is narrowed when it comes to us. There’s work out there, but there are also more DEC’s competing for it than in the typical market.

Claborn: As was said earlier, we were probably the last ones to feel the recession, so I expect us to be the last ones to get healed.

 

DeMent: I think all of us here today are experiencing increased competition and much of it is coming from companies that are under qualified or unqualified for the jobs they are bidding. It’s almost like people are afraid to enforce qualifications, maybe because of the fear that doing so would eliminate competition. But, maintaining some level of quality in our industry is an extremely important subject for all of us.
 

Otto: What we see in the DEC market is similar to what has happened in the rest of the economy. There are so many factors to take into consideration on these projects. Is it going to be under budget? Are they going to shelve it because of something else that’s going on in another part of the country?
 

You’ve got groups that have experience with $1 million to $2 million jobs and groups that are familiar doing business on $5 million to $10 million jobs. Now, that lower group is reaching for that $4 million to $5 million job because there is uncertainty in the market and economy and they’re not sure what tomorrow brings. Then the groups that were doing the larger jobs drop down to the $1 million to $2 million jobs, again because they’re uncertain of what’s going to be out there.
 

So as far as the lack of qualification goes, can the firm at the $1 million to $2 million level that’s reaching up service that project and provide a level of quality that the firms with experience on the larger jobs can offer?

That’s a pretty significant shift, and some of that is coming from the general contracting situation. In the past, where you might have five to 10 general contractors bidding, now you’re seeing 15 to 20.

Thoene: Because of increased competition among the general contractors, they’re just waiving bonds left and right and letting anybody and everybody come to the table. Even if the DEC can’t submit a bond, the general contractors are still taking numbers from them.

Claborn: The general contractors are experiencing the same kind of economic turmoil that we are, and part of the reason they’re reaching down to the firms that are unqualified is they’re looking for that advantage on bid day that will help them get the job.
 

We’re all affected by the economy, but if the architects and owners are not going to prequalify general contractors or subcontractors then they’re going to get who they get. As an industry, we need to be proponents of stronger prequalification processes, especially when we have a degree of influence with the decision-makers.
 

Otto: You have general contractors searching for more competitive numbers because the work just isn’t out there. But by the same token, it starts at the architect level, the consultant level, and the DEC’s maybe need to educate some architects and consultants at some of the smaller firms where the justice portion of their practice isn’t as significant. I’m not talking about the large firms, who we all know are in tune with what’s going on in the market with the manufacturers and DEC’s.
 

DeMent: But even in the case of larger firms, if the owner or firm is threatened with legal action, haven’t we seen them cave?

Thoene: Lately, I’ve seen a lot of that. Three or four years ago, it didn’t seem to bother them as much. Now, if you send a letter that comes from a lawyer, you’re approved.

DeMent: Absolutely, that’s your qualification right there, whether or not you’re actually capable of performing on the project.

Otto: What folks maybe don’t realize is that brings another level of risk. Firms that are reaching to do work, but are frankly not capable, add risk because you as an owner or architect or general contractor have no idea if that firm will be here today and gone tomorrow. That kind of thing has always been there, but it has been compounded by the market we’re in right now.

 

Q: This reaching component, are we talking about staffing capacity of the smaller firms and skill level of personnel to carry out larger, more complex jobs or is it more about issues of financial stability, bonding capacity and so forth?
 

Claborn: It’s all of that: the skill, the capacity, the finances.
 

Thoene: I don’t know about the other guys here, but we’ve seen a major shift in the bonding market. The bonding agents are struggling to stay in business and they’re out there trying to find people to give bonds. We have found it easier to get bonding.
 

That’s a danger for some of these smaller firms — getting a bond for a job they really aren’t equipped to handle — which is something I had not seen until the last 18 months to 24 months.
 

It has been strange to see the market go in that direction and to see bonds easier to get. We’ve talked to our bonding company far less in the last one to two years than we ever have, at a time when we were doing more than we ever had. So we would expect them to be more involved, but we’ve found the market quite different from what we expected.
 

Claborn: That hasn’t reached us yet in the Southeast. In fact, this past year was the hardest they’ve underwritten me in my 11-year history. I had expected it with the economy, and while I haven’t been out looking for new bonds, I haven’t heard of it getting easier or of the market getting any softer. Back when the stock market was going strong, the bonding companies just wanted the premiums so that they could invest the dollars, and there was not much underwriting.

 

Q: Extending the definition of contractor qualification beyond the smaller firms reaching up, has some of the increased competition come from of multi-sector corporations entering the market?

Thoene: I don’t think we’ve seen a tremendous amount of that on the detention equipment side. That’s more prevalent in security electronics work. On the DEC side, I see more of a move from general contractors trying to buy hardware from a broker and install it themselves, than some type of spin-off picking up our scope of work.

Claborn: In the past, firms jumping into our industry with no experience would come in hard and strong and leave weak and with less cash. It is a specialized industry and they don’t seem to stick around.
 

Historically, our industry has been controlled by vendors and their distribution base. So if our vendors won’t sell to these firms, it tends to keep them out. If the vendors’ sales are down, they’re going to look to sell to someone else and that’s when we run into problems. Some of the smaller vendors are also trying to step up.
 

The guys that know what they’re doing won’t use them, but some of the other firms will take a price and use them on a job. Everything we’re talking about here works upstream and downstream.

 

Q: Do established DEC’s have the capacity to absorb that kind of pressure on their profit margins or can they leverage other metrics to increase competiveness against the price point?
 

Claborn: As a specialty contractor, there was a certain level of margin that we were accustomed to that we are not getting today, and I think our margins will stay at that level for at least a year and longer. That forces you to adjust your whole overhead structure.

We’re having to broaden our scope of responsibilities to include more items in order to make up for lost revenue, which creates more risk and history will tell you that once we start putting things into our scope, they hardly ever disappear.
 

Our market has really changed since I entered 11 years ago and electronics have changed the game more than anything. Some of my colleagues on this panel manufacturer their own electronics, some broker them. Architects try to limit that change by bidding electronics separately. Sometimes with the DEC, sometimes without, so we’re having to change just to survive.
 

DeMent: Is part of this not driven by construction managers who want to minimize their risk? We’ve had Division 5, Division 8, Division 10 stuff put in our scope; we’ve had commercial hardware, stairs, railings, painting, all kinds of stuff. The more the construction manager can get into our package, the more that gives them a single source of responsibility to turn to.
 

Thoene: Do we want to do concrete, combo units and lights on certain jobs? No, because that’s increased risk and also increased stress because you’re asking the same project manager and team to manage a job with 20 percent more scope-out. But, it’s something we have to do in order to keep our revenues and margins where we want them.

Q: Is trimming profit margins or broadening work scope a sustainable strategy? Are they the only options?
 

Otto: Whatever aspect we’re talking about, whether it’s the size and value of jobs or broadening the DEC scope, it all goes back to the qualification process and identifying when a firm is reaching beyond its capability, whether that’s performance-driven or financial. In order to get the job, they should have to do what the rest of us do, and that is package it all together.
 

Thoene: I think all four of us here are committed to maintaining the reputation of our industry and we do that by talking with architects and consultants and, perhaps even more importantly, through your relationships with general contractors. If they’ve been bitten by one of these guys, and you walk in with an honest evaluation and help them out of a hole, then the general contractors can be some of your biggest allies in keeping the right players in the market.

 

Q: Assuming the kind of shortcomings we’re talking about come to light, even if only when product, installation or after-sales service problems start cropping up, is this more of a short- to medium-term phenomenon than a fundamental shift in the structure of the industry?

Thoene: For me, it’s more market-driven than anything else. If the market turns around and there are different size bones for different size dogs, that’ll really spin it back. If this market continues being this tough then the situation will only get worse.
 

Having said that, reputable general contractors typically recognize the value point and they communicate well across the country. They learn their lesson once and start partnering with people who they know can get the job done. So from the perspective of well-established, reputable general contractors, it is essentially a medium-term problem.
 

With some of the smaller architects on the other hand, I think this will continue to be a problem because they approve everybody and their dog, or they approve a batch list and think of it only in terms of it being a problem for the general contractor.
 

DeMent: I don’t see this passing quickly. In essence, we’ve become mini-general contractors and I think you adjust to that and you put the people in place to get the different elements of the work done. On the plus side, as the complexity of the job increases that increases the need for the DEC to be more qualified.
 

To provide the engineering and coordination that’s required, the scheduling, the procurement of materials, the quality control, there’s a lot of stuff we do on a project. More often than not, when we speak in terms of qualification, it really comes down to people and the experience they have in doing the work. In order to do the job properly you’ve got to have the right people in place.
 

It’s often said that profit is the cost of doing business. We have to figure out how to do that even in the midst of turbulent markets. Whatever the challenges, we all have a basic plan that we stick to and, ultimately, we perform. That’s what it’s all about: Performance for our clients, and hopefully at some point the value point gets recognized and not just the price point.
 

Because let’s face it, we’ve all seen it happen: An unqualified DEC gets a job and eventually the job gets done — unless they go out of business — right? There may be a whole lot of pain all the way through but in the end it gets done, and that’s why I think they’re allowed to stick around.
 

But, what we’re talking about here is a different level of quality and different level of performance that’s not just about wading through the job but actually providing all of those services that we, as reputable DECs, provide to our clients. It’s what they expect. Engineering, coordination, scheduling, project management, and manning the job with qualified and experienced field personnel, these are the things we bring to the table.
 

Otto: These one-man or fly-by-night operations may do the job; they may even finish the job, but if you’re not getting your phone calls returned or they can’t get someone out to the site because he’s the only one they have and he’s on another job, you could have two other trades sitting there waiting. Our clients should recognize that there is a value to what we offer that equates to dollars and cents.

 

DeMent: I would guess everyone on this panel takes a long-range view of business and interest in our industry. We’ve been in it for a long time, and we’re going to remain in it for a long time to come. When that’s the case, you have a totally different approach to business than when you’re in it to make a quick dollar and get out. That’s a major challenge for us in the current market.

 

Claborn: Increased competition. You mentioned competition from spinoffs entering the market, but I’d look more at some of the publicly owned companies that have recently been taken back into private ownership. Those guys are armed with deep pockets, and they’re willing to take jobs at a loss just to get them on the books.

 

You’ve got the guys at the top that are owned by these deep pockets and then you’ve got the guys at the bottom who are reaching. It’s really put a pinch on my business, and our sales are way off.

 

Otto: Absolutely, it’s changed the way we do business. You have to recognize what’s going on in the market or you won’t be in business for very long. It’s challenging and you have to get creative. Obviously, we’d like more resistance from a qualification standpoint so that some of these manufacturers and firms are not able to participate on projects they shouldn’t be involved with. Unfortunately, I think there is always going to be someone who lets them in.

 

There’s no doubt that our margins have been challenged the last 12 months, and I don’t see that getting better anytime soon.

 

Claborn: One of the things we’re doing in this slow market is moving some of our project people who aren’t working to look at our products to see if we can value engineer them to make our vendors more cost competitive. We’re also trying to develop new products that we can bring into the industry to replace products that haven’t been changed in 20 years. We’ve tried to use our resources in different ways while we wait for the market to turn around, and in ways, that will put us in a stronger position when it does.

 

 

Claborn: The new group, Detention Equipment Manufacturers Association, can certainly have an impact in specification-writing and testing requirements for products to meet certain standards, and maybe in certain prequalifications. But it can’t control contractors and who they work with. That’s up to the owners and the architects to enforce.
 

Otto: DEMA should be a great vehicle to help educate the architects and consultants out there that haven’t worked on many projects in corrections. DEMA can help in terms of establishing and disseminating the testing and qualification requirements, and identifying the firms that have a proven track record of quality and service and are capable of performing as a detention equipment manufacturer or contractor on a specific project. But by the same token, due diligence has to be performed at the qualification level.

 

 

DeMent: First off, you have to look at the people, who they are and what kind of experience they have. Financial strength and the ability to bond the project are also important points. Lastly, you want to look at their track record and whether they have consistently performed on past projects.

 

Otto: The only thing I would add to that is the importance of being diligent in checking on references. In terms of performance on past work, be sure the jobs are of equal or greater size to your project.

 

Claborn: One good way to judge a prospective firm is in terms of its safety history. As for financial capacity, you can look at whether they’ve changed their bonding company recently and, if so, find out why.

 

Thoene: One area that is frequently overlooked or not touched on enough is how often they are involved in disputes or how many lawsuits they’ve been party to. If you are looking at a firm, they may not have anything current, but if they’ve got 35 lawsuits in the past, then that’s a major red flag for me. Changeover in leadership is another big one. If you see significant change in the top 5 percent of the company, that should scare you off.

 

 

Otto: I think we all recognize that the possibility is certainly there, but from our perspective it seems like the ACA has become more operations- and services-oriented, more so than manufacturing- and construction-oriented.

 

DeMent: It would probably be more appropriate for the DEMA board to approach the ACA and AJA boards and have some joint conferences on our perspective of the industry and how we could work better together. I don’t know how active DEMA has been in reaching out to the ACA and AJA, but they could certainly work together because of the many common goals we have as groups.

 

 

Otto: We all recognize the value of certifying firms based on their experience, level of expertise, performance capabilities and financial strength. Given the importance of this subject, I think many firms in the industry would concur, as it would represent a solid commitment to the stability of detention equipment contractors.

 

DEMA may be a good organization to do something in that area and could possibly even have some teeth if the program is objective and doesn’t get watered down.

 

Thoene: I would much rather go through a DEMA program than a vendor-specific program. Is there one single contractor that paid the required fee but didn’t qualify? If you don’t go through an objective certification process to prove you’re qualified, then is it really a certification, or are you just paying a bill?

 

DeMent: What we need are objective standards because these vendor specific-programs that are out there are subjective and really only serve the needs of that vendor.

 

Thoene: Historically, the DEC community has been a very independent group. We don’t necessarily like to come together for any reason. But the permanent changes that are going on in the industry are going to push us closer on subjects like this and force us to band together to come up with some real support structures through organizations like DEMA.

 

Claborn: Recently, we’ve run into a couple of jobs where the architect only wanted us to install the product because the construction manager was going to be bidding out the products directly, which cuts out the DEC completely. That’s exactly why we’ve got to get DEMA going.

 

 

Thoene: We’ve been involved with four or five lease-purchase projects, and we’re seeing more and more of that now. It can be as simple as one lock or 500 locks, up to a control system or the entire jail. With facility lease-purchase, you’ll see teams — the DEC, general contractor, lead architect and capital partner — put together a proposal and turn over the keys to a fully outfitted jail for, say, $800,000 per year. I can only see that becoming more prevalent. Much like the design-build method, the lease-purchase model gets the DEC on board much earlier in the project and brings them into completely new areas.

 

 

Otto: I wouldn’t say manage how the game is played. It’s more about protecting the reputation of our industry. We’re all tired of hearing general contractors express concern about a job because the area of detention equipment and security electronics always proves to be a complete headache for them.

 

I think all the people on this panel, for instance, are interested in raising that bar through the vehicle of a legitimate organization. Then you can say, “Hey, if you don’t want this job to turn into a debacle, then here are some great standards; proven standards that, if followed, will bring you a much higher degree of success.” While we have maybe agreed on that in the past, I don’t think we’ve gone out and said it with one voice. I think the current economy could force us together on this.

 

 

Thoene: We’ve got a person on staff at Sierra who spends 15 percent to 20 percent of his time on DEMA work. That isn’t paid by the organization, but it’s something we believe in and we will help out with the grunt work or whatever we can do to support the leadership of that organization.
 

Otto: We also have someone on staff at Chief who’s reviewing and processing specifications through DEMA. DEMA can and needs to be used as a vehicle, but we all need to get behind it to push it forward.

 

It’s really no different to other organizations for specific firm types or subtypes where the group is coming together. In ASTM or NAAMM, you’ve got the manufacturers like Chief, Trussbilt, Habbersham. Everybody has a voice in creating the standards and saying what the qualifications are.

 

For the short term, I don’t think DEMA has anything in development on qualifications of a detention equipment contractor, but it would be a great for the organization to develop and review those standards with input from all the detention equipment contractors and manufactures, and then roll that standard out to the architects, engineers and general contractors.

 

 

DeMent: Really, we had just started to hear about it quite recently and wanted to look into it. Obviously our concerns, issues and areas of interest are more contractor related, and I had assumed DEMA was an organization for manufacturers. I’d be very interested to find out how we, as contractors, interface within the organization and, in addition to speaking for the detention equipment manufacturing community, how big a voice is DEMA going to be for the DEC community.

 

 

Otto: You’ve got to start somewhere, and it started with manufacturers. From the manufacturing side, if you want to make a change to a product, then you really need the opinion of the people that are installing the products. There is a natural relationship there that makes sense for the contractors and the manufacturers.

 

Claborn: At Cornerstone, we don’t manufacture anything. We got involved in DEMA because the people that we buy from are involved and we wanted to have a voice in the decision-making process.

 

One of the concerns I’m struggling with as far as DEMA goes — and this is a double-edged sword in that when we make a rule we have to live by it — came up in reading over the specs. It seemed like the DEMA members didn’t want more competition. I don’t think there’s a person on this panel that wouldn’t like to have another choice for a security lock.

 

So we’ve got to be careful how we do this because we’re down to two or three suppliers now on a lot of products. Your choices of product are very slim and, depending on the politics of the day, you’re either in the running for a job or you’re not.

 

One of the things that I would want DEMA to do is to establish credentials for a new company that wants to enter the industry. I don’t want to shut them out because I think we need some more vendors, but there should be certain steps they have to take to enter the market.

 

Thoene: This thing will be doomed to fail if it comes off that way — that we’re just creating our own little cocoon. If it does, it will fail because we need something realistic. I don’t mind competition. I just want it to be real competition on a level playing field. We can’t let this turn into some pointless thing where we sit around thinking we can limit the market. We need realistic guidelines about how we, as an industry, do business.