On paper, turning a profit and losing weight have a lot in common. On paper, few things could be easier.
To lose weight, you simply burn more calories than you consume, and the first law of thermodynamics takes care of the rest. To turn a profit, all you need to do is ensure you spend less on the job than you are paid for it. Very straightforward.
Unfortunately, there is more to the world than paper. Shedding those pounds is always a lot easier said than done, and requires one to stay on top of every calorie.
Turning a profit—especially in these times—means staying on top of every phase of every job, all the way from bidding only those jobs that hold potential profit (and steering clear of those that are certain to lose you money) to monitoring every labor-hour and bit of material spent on the job.
And just as you need to know your precise calorie-intake and what activities burn precisely how many of the little villains, so you also have to know (not guess or hope, but know) which jobs will see a profit and precisely what your actual costs are as you undertake and work the job.
Job Selection
Owners and developers realize that contractors these days are hungry and now will often bid with microscopic or even nonexistent margins simply to land a job, and they know that they will probably never see their projects built at less cost than today. As a result—to get their jobs contracted and under way before the market turns back up—requests for construction bids appear to be on the rise.
This, at first glance, is good news, but beware: Many developers today are only looking at price and will award the job to the lowest bidder, who is likely to give away the shop just to land the job.
Spending your resources to take off and estimate such jobs may indeed be foolish. So which jobs should you bid? Which jobs should you not bid? Which jobs have the potential to return a profit?
Too Many Bidders. Depending on local market conditions, contractors around the country have determined the maximum number of competitive bidders they are willing to contend with.
As David Sharpe of C-Sharpe Co. in Alabama puts it, “If there are more than six bidders, we stay clear. We find that if there are 15 or 20 bidders, at least two of them don’t know what they’re doing, and so don’t know their true costs and will invariably underbid the project. But these are the guys who tend to win the jobs, so there’s no use expending the effort to chase that project.
“In this economy, some owners are seeking the absolute cheapest price, and we don’t bid on those projects. Other clients realize that the contractor has to make a reasonable profit, if for no other reason than to stay alive, and those clients we will bid.”
Karl Pearson, chief estimator at Builders Services Group in Florida, concurs: “If the number of bidders reaches double digits, we stay away from it. We want to see a maximum of three or four bidders. If they let anyone in, you know you will face bad organization and that the weaker trades will be in your way and push you out of sequence. This, in turn, means we can’t complete and bill on time.
“In fact, we don’t do a whole lot of work for people we don’t know. In the end it comes down to past experience and relationships.”
Michael Hoffarth, project manager at Canyon Plastering & Drywall in Arizona, agrees aw well: “Unless we have done business with one of the GCs in the past and want to retain that relationship, we steer clear if there are four GCs and 20 subs bidding.
“Also, we will not lower our price just to stay busy. There’s no need to expose ourselves to liability when there’s no profit to be seen.”
Steve Eckstrom, vice president of California Drywall Co. in San Jose, sees it this way: “We often see jobs going to bid with a long list of GCs who each, in turn, is inviting four or more subs to bid. We know that one or more of these subs will ‘dive’ to get the job.
“Also, if there is no prequalification system in place and everyone can bid, we tend to shy away.”
The Profitable Project. So, what signs do you look for, or what can you do to ensure that the project you are invited to bid can in fact turn a profit?
Sharpe says, “We do a fair amount of research of the client or owner to make sure that the project is actually funded and ready to go.”
Brian Mead, president of Commercial Builders, Inc. in Florida, offers this view: “In today’s market, if it is not a negotiated project, there is no profit in it for us and we don’t bid it. Over the last year I’ve learned that multiple-bid, competitive projects are truly a waste of time. I no longer take off and estimate them.
“These days, the only competitive bids we submit are for existing clients that we have long-term relationships with.”
Robert Aird, president of Robert A. Aird, Inc. in Maryland, takes this approach: “For us, a profitable project is one for a contractor or owner we know and trust with a scope of work that matches our skill set.
“Also, by insisting on preconstruction meetings with related trades, we clear the way for a smooth job without the frustrating and costly miscues, sequencing problems and poorly done work ahead of us that we all too often see and that cut into our profits.”
Gene Cox, president of Custom Drywall, Inc. in California, also stresses experience with the GC and smooth organization. “I take a look at the GC involved and what track record I have with him.
“I also look at whether the project is large enough to allow us to turn a profit. The first few weeks on a job are seldom profitable, so we want to see a job of longer duration where we can set up and run an efficient production line.”
For Glenn Sieber, vice president of Easley & Rivers, Inc. in Pennsylvania, this is familiar territory. “The first thing that I look for is which general contractors are bidding the project. When I started out in the business I was advised that you can have a bad job with a good contractor, but you can’t have a good job with a bad contractor. It’s a simple philosophy but one that is always in the back of my mind when selecting projects to bid.
“Secondly, I try to determine whether the funding is in place and whether the budget set for the project appears to be reasonable.
“I then go on to analyze what other projects we are bidding at the time, the nature of the work, and whether there is something that makes this particular project a better fit for us than something else that we’re currently bidding.
“Also, I verify who the architect is to see whether they have a history of projects that go over budget, resulting in re-bids and an unreasonable amount of addenda.”
The Disorganized Project. It stands to reason that no matter how well-oiled and efficient your crew, if you find yourself on a disaster site with other trades stumbling over each other, you will be hard pressed to see any profit.
Aird doesn’t get involved in projects like that. He says, “We avoid jobs with questionable contractors, owners or funding. We try to determine who are the trades ahead of us, and we avoid jobs where we anticipate problems with poor workmanship and bad schedule management.”
Cox says, “With some GCs, poor project management makes it very difficult to do the job profitably. They run you around on the job, throw things out of sequence and rob you of your profit. Others run a tight ship and are well organized. They will allow you to turn a profit. These we bid.”
The Bonded Project. One way to shake off some—or even the majority—of your less established, or more desperate, competitors is to look for jobs that require bonded subs.
As Mead puts it, “A job requiring bonded subs throws out 85 percent of the competition, so I will go after them. With a $5 million bonding line in place, you can go after work that others can’t.”
And Cox agrees: “We look for bonded work. That lessens our competition by 40 to 50 percent. Bonded contractors also tend to be more professional and make for a more efficient work site, and that, in turn, allows us to see a profit.”
Bidding
Once you have selected a project to bid, the most important thing to consider in putting your bid together is not to give the shop away. If you lose money on one project, it may take you four or five projects to make it back, if ever.
As Eckstrom puts it, “Know your cost. Don’t go below it thinking you can make it up on change orders or that for some reason your crew will work 20 percent harder. My dad used to tell me that some of the best jobs are the ones you don’t get. Bid smart. Don’t chase the low number down into the gutter.”
Sharpe says, “We don’t bid just to keep busy. We bid to make a reasonable profit. Today many contractors don’t know their actual cost, and they will underbid. That’s buying trouble.”
Hoffarth agrees: “Bottom line: You must not bid things cheaply just to keep men busy or to keep doors open. You have to stick to your parameters and bid what you know you can do. You have to be real in your bids and not hope the crew can do more than you know they can do. And, of course, you have to know your costs.”
Or as Dave Dehorn, chief estimator of Brady Company in Los Angeles, sees it, “When you go below your known costs, you are hurting your own company. I think some of our competitors don’t know what their costs are and therefore tend to go too low on a job.”
Rob Little, vice president of Little Construction, Inc. in Indiana, shares that view: “Right now, some contractors drop their prices as a knee-jerk reaction to having no work. This does nothing but give them payroll. While it may seem OK for a short-term fix, in the long run owners and generals then start to expect all pricing to be that low, and that’ll drive us out of business.”
Desperate times do not call for desperate measures. In fact, the best approach you can make to staying profitable is to bid to your strength.
Eckstrom says, “Do what you do best. Don’t try to be everything to everyone. Find good clients to work for and perform very well.”
Little adds, “If you stay with what you are good at and price things to stay profitable, things will even themselves out.”
Gerry Roach, owner of Forks Lath & Plaster in North Dakota, concurs, “Hold your price and people will hire you for the good work. Quality and speed will keep jobs coming your way. Quality is number one, getting things done on time is number two.”
Measuring Costs
Axiomatically, you cannot control costs if you don’t know what they are. That means, firstly, accurate take-off and estimating—which is now almost universally done on-screen with dedicated software.
Secondly, it means accurate and timely cost reports of work in progress and the ability to head any potential cost overruns off at the pass. Ideally, to keep a running record of actual costs, this is done with project management software utilizing onsite PM hand-held computers or tablets; though any accurate reporting system, whether daily or weekly, serves the purpose.
“Since the economy turned bad,” Sharpe explains, “we have trained our field personnel to keep a much tighter finger on the pulse and to track each task on a daily basis.”
Here is how Mead handles it: “We run weekly reports on our material and labor costs against budget by percent of the job complete.”
Hoffarth’s method is to “run weekly cost reports to show whether we are on budget or not.”
Eckstrom says his company “manages progress and profitability aggressively. Weekly meetings with our project managers and superintendents allow us to track percentage complete, production attained, payment schedules, actual labor rates versus bid labor rates, billings (whether over or under), change orders outstanding and much more.”
Cox takes the weekly approach: “I see job cost reports every Friday, and I find that to be often enough. That and regular site visits. Also, the PMs and I are in the same office, and I consult with them daily about job progress.”
Software Solutions. In an ideal world all administrative aspects of the company run on a single, fully integrated software platform that manages everything from take-off and estimating, flowing into bid preparation, and (upon winning the contract) from there into material procurement and project scheduling.
A project management module then receives (remotely from the site) field data from PMs on a daily basis, maintaining a current picture of budget versus actual cost and raising appropriate flags when overruns loom.
The same platform provides accounting and payroll, all using a single, fully integrated database.
This is an ideal, and certainly the subject of its own research and article. But a cursory survey show that these solutions do exist.
Visit ctsguides.com for a good overview of many systems.
Most contractors use some form of software solution, ranging from take-off and estimating (virtually all), to fully-integrated customized software.
The computer industry often talks about the dangers of data silos—free-standing data depositories that do not speak with each other—and for good reason. This is a scenario where much time is wasted re-entering data from one system into another (where mistakes are often made, skewing the picture), and where it is hard to get a comprehensive overview of all aspects of a project.
The nature of the construction beast does not lend itself to easy computerization, but eventually, to stay efficient and competitive, most contractors will need to migrate toward integrated computer platforms.
How to Stay Profitable
To stay profitable you have to know your costs and monitor them like a hawk.
“Understand your true costs,” says Sharpe. “Then you know what to bid to make a profit. These days you also need to service your clients better and more accurately than we did in the boom days.”
Pearson agrees that you have to know your costs. “That may sound like too basic a statement,” he says, “but there’s no way around it. You have to know your true costs, and you have to know where you stand as the project progresses.”
Believe it or not, Hoffarth agrees, but he adds that “you have to know precisely what your costs are, and you need to micromanage them. A few years ago you could be a little relaxed about the costs; 1 or 2 percent were not going to kill you a few years back—today they will.
“Also, the margins today are so small that you cannot give a single thing away. Now you have to charge for everything. In the past you could take care of a few things and not worry about it; today you have to track and charge every item.”
Aird advises staying “conservative in spending. Order 10 percent less material than you think you’ll need and then buy the balance, as needed, to finish the job. This way you’re not left with surplus materials that then go to the warehouse and take up space.
“Also, pay your bills on a timely basis to avoid interest charges. Better still, pay early and take advantage of discounts—a percent or two of extra profit looks pretty attractive in this economy.
“Follow your gut. If a job looks risky, either price it accordingly, or avoid it altogether. Let the bottom feeders take it and wait for the call to come in and finish the job or to fix it once it’s fallen on its head.”
Basically, it’s just a matter of burning more calories than you consume. Or as Cox put it, “Don’t spend more than you bid to do the job.”
Simple on paper, harder in real life. But by no means impossible.
Coeur d’Alene, Idaho–based Ulf Wolf writes for the construction industry as Words & Images.
