Lower Your Margins or Win Higher-Margin Work?

“How can you make any money competing against seven to 10 other construction companies for jobs awarded based solely on the lowest price?” This is a common frustration among contractors who aren’t willing to take a hard look at their business model and determine what they must do to improve their bottom line. Working harder or bidding cheaper are not the answers. To improve, you must be willing to look in the mirror and decide to do things differently.

Are your current estimating, sales and customer development strategies viable to keep your company healthy, growing and highly profitable? Clients always ask me how they can win higher-margin work from customers who aren’t just after the lowest price. Stuck contractors complain there are too many low-priced competitors to beat by price alone. But the stuck contractors are the ones who are also still holding on to the same poor business strategy, hoping things get better without changing.

I received the following email from a subcontractor: “The project owners and general contractors are in full control now. After the bids come in, they go to the generals or subcontractors to beat money out of them to lower the job cost. They work hard to squeeze every drop of blood out of subcontractors and suppliers. The No. 1 reason we hear is ‘The project came in over budget, and we need to see how much you can cut your price.’ I know sometimes this is true, but now it’s every project. What’s worse is we’re already bidding jobs at very low markups. If we cut our numbers more, we wouldn’t make enough money to break even. If projects are really over budget, maybe they should tell the developer they need to increase their budgets or raise the rents!”

I sought solutions to these persistent challenges — here is one of the responses I received: “You can only exist in this economy. And the risk exposure is not worth the meager existence! And inflation eats up your 5% net profit before you finish the projects, with material and energy costs going up. Plus, the 10-day project payment schedule is nonexistent, and the domino effect eats your cash flow and reputation. I don’t mean to sound doom and gloom, but is this the truth or what? This is not a great business environment to build a construction company in.”

With this outlook on the future and unwillingness to make any changes in the way you do business, nothing will get better. At times, I am presented with yet another doomed approach to doing business today: “Lower your markup, win more work, keep your crews busy, and hopefully these lowball contractors who give things away will eventually go out of business.” Waiting for others to change won’t make it better.

Are You a Commodity Contractor?

Commodity construction work includes projects with open or unlimited bid lists, like most public agencies and general contractors that do not limit bidders and only award contracts based on the lowest price. Generally, project owners and builders who don’t qualify or restrict contractors or subcontractors from bidding without strict prequalification requirements will award based on the lowest price per plans and specifications. Therefore, without stringent qualifications, the price is the only differentiating factor to award contracts. In other words, quality, performance record, financial capability, crew capacity, schedule, safety records or project requirements don’t matter much. 

Contractors who are unwilling to make the improvements required to build a highly profitable business continue to struggle and stay stuck at the same level. In comparison, a strategy to win higher-margin work is to seek new high-margin project types and customers who value expertise, strict qualifications, trusted relationships and experience. These best customer targets demand a high level of service, professionalism, design and technical capabilities, experience in difficult projects, or a proven track record in specific niche project types. For example, customers and projects with a high barrier to entry include medical, manufacturing, multistory buildings (versus individual offices), airports, shopping centers, warehouses, public roads and housing tracts.

Today’s top construction business owners are creative — they’re looking for innovative solutions to challenges and willing to change the way they do business. They know the same things that once worked won’t work today. In order to prosper at higher margins, you must focus on what sets you apart from the competition, including providing added value, faster schedules, the latest technology, proactive management, experienced supervision, personal service, and the ability to help customers succeed.

Do It Differently to Set Yourself Apart

What do you provide or perform that other contractors don’t? If you’re basically offering the same options as everyone else, you are a commodity. You must be willing and eager to illustrate the differences between you and your competition. If you don’t take the necessary steps to differentiate your company, then you force customers to make decisions based on the lowest common denominator — price.

In the following response, you’ll note this contractor understands what it takes to do business differently to make money:

“Unfortunately, selling price is common in many industries, including construction. There are ways to deal with this. First, set up a pre-proposal coordination meeting with customers where you get the opportunity to clarify their exact requirements prior to submitting a proposal. Often with bid documents, the customer’s needs are incomplete or over-specified, which adds unnecessary costs to the price. Do your homework prior to submitting bids, and look for ways to improve, redesign, or value engineer the project with a goal to reduce costs or improve the schedule.

“Second, look for ways to retain your existing customers. If you sell to them once, then you should make sure they buy from you again on the next jobs without being the low bidder against too many competitors. Help customers meet their goals and make more money, satisfy their needs and build deep relationships to make it easy for them to choose you over your competitors the next time. Spend time with your customers and take them to lunch, a ballgame or a fishing trip. The more they know you, the more they trust you and want to do business with you.”

Accept Responsibility for Your Margins

Accept responsibility for your future. Focus on solving customers’ problems, providing an excellent product and delivering what’s best for customers versus what’s specified. This involves implementing a customer development program that plants you firmly in front of them, meeting often and asking what it takes to deliver exactly what they want. With an intelligent, caring conversation, you’ll discover there are many alternative ways to work together to reduce scope or costs to achieve the same goals. And of course, look at how you choose the right jobs to bid, manage, track job costs and enforce productivity with your field crews.

Earn the Business to Win the Business

In my experience, the low bidder strategy only works as the means to an end. Finding new project targets or customers requires you to get your foot in the door. Since new customers don’t know you yet, you can develop relationships by offering the lowest price. Try bidding low initially to buy a small job to prove yourself. Then it’s up to you to impress them and convince them to use your services on future projects. Taking lower margins in a new customer relationship is not a bad idea if there’s a legitimate chance this will lead to additional higher-margin work with a long-lasting and loyal relationship.

Unfortunately, there are no easy answers in the construction world today. If you’re serious about moving your company upward with higher margins, stop bidding against too many competitors on open-bid list projects at low margins. Get focused on great projects with your perfect customers. Top business owners have turned their companies around by changing their business model and finding new ways to deliver products and services to customers. What have you done differently?