I am not a talking head you see on the news or someone from academia who has now declared a recession. Determining what caused the bank crisis and why the stock market took such a hit and the ability to project our future economic situation are well beyond my pay grade. However, I am familiar with how recessions impact contractors.
I suspect that if most of your business was for home builders and you live in areas such as Florida and Arizona, business feels a little more like a depression. Regardless of what you call it, 2009 looks like a slower year for many contractors. Fewer bid opportunities can cause contractors to make bad decisions which turn into bad bids.
Trying to bid your way out of a recession by blindly pursuing the market is foolish. Too many contractors see bidding as a law of averages game - the more you bid, the more you win. In today’s market, the more you bid, the more you lose.
Killing yourself through the bid process can take several forms. The first is merely cutting your price to get work. If your margins were at a 30 percent gross profit and you cut your price 10 percent, you have reduced your prices by only 10 percent but you have decreased your margins by one-third, to 20 percent. Such a cut moves your breakeven point a whopping 50 percent. For example, $1 million in sales at 30 percent equals $300,000, but it takes $1.5 million in sales at 20 percent to generate that same $300,000. To think a company can make such sales gains in a down market is foolish.
However, merely bidding jobs with the same markups and not getting any work is also self-defeating. I recently worked with a contractor who thought one of his estimators was getting 40 percent of the work he quoted. When I looked closely, I found that two big negotiated jobs represented 38 percent of what the estimates won. When you took them out, he was awarded a measly 2 percent of what was bid. Many estimators are not strategic. Someone who is happy to sit and take off a set of prints day in and day out, may be someone who does a poor job of deciding what to bid, who to bid to and at what prices. You also have to be careful pressuring them to get more work. You don’t want the estimator to bid too cheaply in order to keep their job. The bottom line is that you must manage your estimating process.
For the past decade, many estimators have been struggling to keep up. It was hard to get all the prints and quotes out the door. To make matters worse, the face-to-face encounter gave way to the fax machines and the fax machines gave way to e-mails. Many estimators have quoted too many jobs to people they have never met. It is foolish to think you have the best of relationships and a primary relationship with someone who you have not dealt with face-to-face. Here are some suggestions that might help you monitor and control your estimating expense:
- Look at estimating as a cost center. Take each estimator’s salary, benefits, cars, etc., and determine an hourly estimating expense. With benefits and a car, a person that makes $60,000 a year can easily cost over $75,000, which equates to $37.50 an hour. If you, as owner, act as estimator, prorate your time and expense accordingly. Understand there is no such thing as a free estimate.
- Don’t bid to general contractors, property owners and condo associations, etc., when you have no chance of getting the work. Yes, I know you will ask, “How can you tell if you are going to get the work without bidding it?” Track your patterns. Know where you are and are not competitive. This works particularly well with general contractors. If you have bid a contractor six times and they have given the work to someone else every time, they are probably not going to give you the next job. They are probably using your price to keep their regular guy honest. If you are a leading sub in your area, they need your price. Have a tough conversation and openly discuss how you are probably not going to be low, so how are they going to work with you. Do they have a job that is not so price-sensitive or negotiated? If you are going to bid them over and over, they have to throw you a bone. If you do not have such a discussion, you will probably continue to bid and bid and not get any work.
- Be more strategic. Possibly you are using too broad or high unit prices. Look at past cost records and see where you have done the best. Not all jobs are alike. Be more aggressive where you think you have a better chance to be profitable. Think outside the box. During the 1991 savings and loan crash, I worked with a road-bridge type contractor who had deep pockets but almost no work. Only two major projects were scheduled for bid during the coming year. My advice was to only bid one and they looked at me like I was crazy. I then discussed what was the likelihood they would get both jobs and they agreed it was highly unlikely. I wanted to only bid one because I wanted the company to face a strategic choice and pick their best choice from day one. They planned, planned, cut, planned, cut and did more planning. Every minute of the job was planned with contingencies. By the way, they were low bid, and man, was that scary. It turned out to be one of the most profitable jobs they ever did. Be smart; hard work alone is not going to save you.
In closing, recessionary times call for a balance of caution and risk. The bottom line boils down to better strategic leadership. Don’t just throw numbers at projects and think all will be OK. And if you have made big bucks during the last decade and are comfortable and not willing to fight the fight, well maybe you should simply close up. Don’t throw good money after bad. Contracting is not forgiving.