Ask the Construction Expert, July 2011

Q: How can I make money competing against 20 other companies for jobs awarded based solely on the lowest price?

A: General contractors who previously negotiated projects with good customers are now asked to hard-bid against 10 to 20 other competitors. And subcontractors who were on select bid lists competing against three or four competitors are now bidding against 20 to 30 other subcontractors on each project. The bottom line: 100 percent of all contractors are competing for 50 percent less work. This has caused construction business owners to panic and cut prices drastically to keep the doors open until the economy turns around.

Some think the solution is to continue doing business the same way and simply lower the markup when necessary to eventually drive competition out of business. Others think that taking a leave of absence for two to three years is the best option. But these are not real solutions to deal with this tough economy.

To deal with the challenges, you must get back to business basics. This takes a commitment to invest in your future and learn how other business owners have made significant changes to grow and profit in this economy.  Top business owners who know how to run a business look for innovative solutions to their obstacles and are willing to change. They realize that doing business the same way will not work today.

When there were plenty of jobs to build and less competition, weak business owners could survive without decisive leadership, a strong management team, estimating accuracy, marketing programs, crew training and financial competency. But today, business owners must set themselves apart from the competition to stay in business.

Differentiate Yourself

I have communicated with several proactive business owners who have offered tips on how to work smarter. Follow these suggestions to ensure your success: 

• Set up a tender coordination meeting with your customers. This gives them the opportunity to clarify their exact requirements before you submit a proposal. Often, with tender documents, a customer’s needs are over-specified, which adds unnecessary costs to the tender. Do your homework prior to submitting a tender, and look for ways to redesign the project in a way that reduces the customer’s costs. 

• Discover ways to retain your existing customers. If you sell to them once, make sure they buy from you again. Completely satisfy their needs, and build solid relationships—this makes it easy for them to choose you over your competitors in the future. They may even choose you at a premium.

 • Find a way to be the lowest price. This may mean asking your subcontractors and suppliers how they can lower the cost of doing business with your company. 

You might discover many new ways to reduce costs through deliveries, material handling, supervision, coordination and scheduling. Many times, your subcontractors and suppliers can offer tips for reducing your costs by comparing your company operations to competitors. 

Also, always consider how you train and track your field crew’s productivity.

Consider Public Works

Getting involved in public works projects is another way to survive today. When attacking public works projects, some believe the low-bid strategy works best because public projects have “too many chiefs.” Each chief has a different opinion, which results in change orders, and change orders provide for very large markups, which allow overall profit margins to grow significantly. 

This low-bid strategy also helps subcontractors build relationships with new general contractors. By bidding low initially, they can be given a chance. 

You have to earn the business to win the business. Taking a lower margin in a new relationship with a contractor is only a good idea if this strategy will lead to additional work and a long-lasting, loyal relationship. An ideal situation would be a public project with a new general contractor. In this scenario, you could provide a price well below your cost, hope for a change order and develop a long relationship with the contractor to recoup some of what you lost on this job.

This low-bid strategy represents the exception, not the rule because you could end up leaving a lot more money on the table over time than what you can recoup. 

Construction is a very risky business, and hoping for change orders is not a sound long-term business practice. If anticipated change orders do not materialize, then what? Do you cut corners to meet your already low margins? Unfortunately, there are no easy answers in the construction world today.