Clog the Drain that is Sucking Your Profits
July 29, 2016
In the economic climate of 2009 (when this post was written), the mantra had become, “The good news is we were low bidder. The bad news is we were low bidder.” Remember when it felt good if you were the low bidder? It’s been a while. It used to be that you could be low bidder by 10% and still make some money as most everyone had a little fat in their estimates. I have seen results of some public bids in which the low bidder may be 20-30% lower than the middle group. I don’t know of anyone who has fat in their estimates today. If you are that low from the group, you are going to lose money on that project. If you are able to pull your bid, do it. If you are 10% low, you most likely won’t make any money. Bidding is that tight. In my 35+ years in the construction industry, I have never seen it more difficult for the small to midsize contractor to survive than it is right now.
It’s obvious that it is a classic example of “supply and demand.” There are too many contractors fighting for too few jobs. There are too many contractors trying to maintain their company size in a contracted market. The “Robbing Peter to pay Paul” business model is in full swing. Relationships don’t mean as much as they used to. Low price is being taken to an extreme.
I have witnessed contractors winning a lot of bids in a short period of time…building their backlog with low margin work. If you think grabbing market share in a downturn is a wise business move, think again. There is risk in any construction project. There is also reward. However, when everyone has sharpened their pencils, it is mostly risk. If your bids are low enough to grab that market share, you are going to have some loser jobs. Those jobs will cost you more to complete than what you will be paid. Who is better off? The companies that didn’t lose the money and aren’t writing that check to the project owner are better off.
You can make the cashflow argument somewhat. However, even if you have front loaded the job, you might only be paid 90-95% (depending on retention) of your invoices, and if you are performing the jobs with a lower margin than 5-10%, you are collecting less than your outlay. And don’t forget, you are collecting that 90-95% of your work value 30-60 days (if you’re lucky) after you have done it. Of course, if you are using this cash “to pay Paul”, your company is in a death spiral, because your other work is low margin too. If you thought that grabbing market share would somehow put some of your competition out of business, it might. And your company, won’t be far behind.
What’s the point of all this negativity? I hear almost all contractors say a phrase “when the market comes back”. Guess what? It won’t come back on its own. And in my experience, it rarely ever recovers to the profit level it once was.
The market won’t come back until contractors start pricing their work so that they can make a reasonable profit for the risk that is taken. Of course, bid collusion is illegal, and I’m not suggesting that at all. What I am suggesting is that you right size your company to determine that job level margin you need to pay for your overhead and generate a profit for the risk you undertake. And then bid responsibly. Responsible bidding is what will bring back the markets. It’s past time for contractors to wise up and stop doing work for free, or pay for the opportunity to do the work. Today’s panic prices are not sustainable business models. Panic pricing (ridiculously low) will put you in a financial hole you won’t climb out of in this economy. Bidding responsibly will bring back the times when it felt good to be low bidder.
