I closed last month’s installment by stating that there must be hundreds of looming barriers to entry that a residential drywall contractor should consider before attempting to launch into the heady world that is the commercial side of our industry. In offering only a few of the most daunting obstacles, I hope to give pause to those reckless upstarts who believe that the step up is unencumbered. It is not. In fact, the path is littered with the corporate cadavers of those who have tried before and stumbled—coal-mine canaries. Some of the more intimidating issues must be dealt with directly in the pre-award phase and thus confront the estimator in the immediate sense. But all of the snares presented below must be assessed in counting the cost, and so they inflict their impact on the estimate in any case.
I should point out that many general contractors these days are requiring bidding subs to submit a prequalification statement that includes, among other things, a historical itemization of completed commercial projects, contract amounts, GC references and years of experience in the commercial field. This safeguard that the GC employs to minimize the prospect of a sub’s failure to perform, also substantially reduces the number and volume of bidding opportunities to the commercial newcomer. Similarly, many commercial projects require the sub to provide a payment and performance bond, the cost of which is commensurate with the risk factor that the sub presents. Again, GCs tend to disqualify newbie subs whose bond costs are above a certain percentage of the bid amount, low bid notwithstanding.
Insurance. Insurance is another formidable cost of doing business in the commercial world. Securing a commercial general liability policy might be enough to send any novice into terminal sticker shock, especially considering the additional named insured requirements that many commercial construction contracts impose these days. Of course, insurance costs go to the labor burden line on the estimate, but a newcomer’s experience modifier rate may weigh him down considerably and, once again, blunt his competitive edge in winning work.
Beyond the preconstruction phase, a number of menacing risks and costs lie in wait for the commercial neophyte that a sojourn through the residential world did not prepare him for. Post-award snares include convoluted contract terms, new equipment costs, elevated safety standards, supervisory structures, labor relations and extended payment cycles, to name a few.
Language. As I’ve stated in previous issues (“Tag—You’re Obligated,” November and December 2010), commercial subcontract terms have recently gone from onerous to treacherous, and navigating through them is an act in which naiveté may prove fatal. Unfamiliarity with egregious terms like “pay-if-paid,” “schedule compliance” and “failure to perform” may have been forgivable back in the salad days of yesteryear when they were more often hypothetical, but in the present dog-eat-dog atmosphere, the consequences of ignorance are likely to come home in the form of a reality smack-down.
New Equipment Costs. A sobering itemization and upfront spending estimate of a commercial drywall startup might be sufficient to freeze a prudent entrepreneur in his tracks. New equipment costs alone are often much more disquieting than what first impressions dictated. Where a residential contractor may have gotten away with very little in the way of equipment (a spray-texture rig is likely his most extravagant item), a busy commercial contractor can expect to lay out tens or perhaps hundreds of thousands in the first year for scaffolding, trucks, fastening tools, cutoff saws, laser levels, manlifts, taping tools, spray equipment, welders and safety equipment—just for starters.
Safety Rules and Requirements. Speaking of safety, one of the first wake-up calls that will confront a commercial newbie comes in the form of the stringency in safety rules and requirements in comparison with the more relaxed atmosphere in residential. Absolute compliance with OSHA safety regulations is the rule of the road in commercial work. The elevated level of danger involved on commercial projects mandates a serious commitment to conforming, but compliance comes with a cost, both in terms of investing in expensive equipment and in a necessary reduction of productivity. Any attempt to cut corners will result in more dire consequences.
Extended billing cycles. Perhaps one of the most daunting barriers to entry in the commercial world—I believe the most intimidating one—lies with the extended billing cycles that we encounter when we enter into contracts for commercial projects. The effect of these agreements generally results in the commercial subcontractor carrying a substantial amount of the cost of performing the work for extended periods of time. Most contracts provide for 30-day billing cycles with 10-percent retention allowances. It typically works like this: You can bill for the volume of work (and material) in place at the close of each month, but not a penny more or you risk your entire billing being thrown out. The GC will pay 90 percent of your billing 30 days later, which means you will pay for material and labor costs incurred out of your own pocket for the previous billing period, plus any costs in the interim until your first payment is received (and it is often delayed). Given this scenario, it is clear that unless a sub who aspires to the commercial world has the resources or the credit line to underwrite a portion of his own performance until final payment, better not make that leap.
All of this is summed up in an appropriate adage that first tickled my ears when I was an apprentice drywall hanger: If you can’t run with the big dogs, best keep your puppy ass on the porch!
Vince Bailey is an estimator at Valleywide Plastering in Phoenix.
