The High Cost of Low Profit Margins
Apart from a few lean years, we have had a fantastic 37 year run in the construction business. I would like to say that we have long since moved away from the mistake of taking work too cheaply, but occasionally we find ourselves in the situation.
Take the time we bid an indoor football practice facility. Before I signed the contract, I questioned the price we had on the work. My estimator convinced me that he compared the productivity rates to our historic productivity data and the bid was more than sufficient. Our bid was for $800,000, but the job ultimately cost us $1.3 million. Ouch!
When Less is More
Lately, a couple of our construction companies have taken on work at margins that were simply too low and resulted in some losses. While I would like to say unexpected losses, the reality is when we took those jobs, we should have expected poor results. In retrospect, if we had stuck to our target margin and not been so aggressive, we would have still won most of the work. That would have resulted in less work on the books. However, with fewer projects, we could have staffed them with our best teams, which would have further increased our margins.
The Realities of Low Margins
We have never had too much high-margin work. We have, however, had too much work due to some of it being taken at low margins. To complete the extra work on time, we must sub out the excess work. When margins are low, we are forced to either risk tarnishing our reputation by hiring less expensive and inexperienced subcontractors or pay the price to the right subcontractors and take a loss. Issues that result from low margin work are:
- It ties up good employees who will not be available when a good opportunity comes along. You may even have to put the best employees on the low-margin project to avoid further losses.
- To prove their value to the company, other estimators see their peers stacking up the work and take on similar low-margin work.
- It eliminates the company’s ability to absorb minor problems such as material price increases, sub-contractor failure, or gray areas between trades.
Your business can thrive without bidding at low margins
When I discuss the woes of low-margin work with contractors I consult with, or even my own construction teams, I often hear that it is impossible to get work if we are not bidding at low margins. Wrong! There are ways to get work that do not involve dropping your price. Here is how you can keep your pipeline full without going in the red:
- Build relationships with customers so you do not have to be the lowest bid to get the job.
- Establish relationships with sub-contractors and suppliers so you are getting their best prices.
- Keep your safety and quality of work at the highest level so your company is sought after by customers.
- Increase the visibility of your company with marketing. Use digital advertising campaigns as well as traditional avenues including your website, billboards, and print collateral.
- Make in-person visits to potential customers and show them the value of working with your company.
- Outsell your competition by identifying new opportunities and customers. It is important to do this before work dries up because once you run out of work, it is too late.
- Discover what your company does best and focus bidding in that area of expertise.
Do your homework
We got slaughtered on a school project where the prints showed the block going just above the finished ceilings. We bid and built based on the prints, failing to read the specifications. During the punch list, the inspectors pointed out that the specifications called for all block walls to go to the underside of the gabled roof deck. We were required to go back and complete those walls at a tremendous loss on the project. Lesson learned, and wisdom I feel compelled to share.
- Read the specifications closely because they may call for work that is not shown on the prints.
- Double-check that you have everything covered in your bid by using a checklist of all items that were required on past projects.
- Have a senior estimator, foreman, superintendent, or expert construction personnel run square footage and production numbers based on similar past projects to ensure you have enough money on the project.
Do not underestimate the value of a good estimator
Have you heard the saying, “A fool and his money will soon part”? An estimator who does not understand his numbers will get the fool there quicker. Estimators can make or break a company. Their mistakes can lead to overpriced, noncompetitive bids, or worse, underpriced bids that result in no profit. Choose your estimators wisely. Make sure they know exactly what your overhead is and the gross profit you require. Equip them with the right takeoff tools and software and be sure they know how to fully utilize them. But before you put your estimator to work, you must first decide where you want your backlog to be. As my business coach would say, sales is a simple math problem. If you want to secure a $20 million backlog and your bid/hit ratio is 20%, your team must bid $100 million in work to secure the $20 million backlog.
There is no place in your business for low margins
There are many ways to have a strong bottom line without cutting margins. Too much work at high margins means you are in the financial position to manage the additional work. You are in great shape when you have ample work and normal margins. When work is light, you must keep bidding work at your desired margin, and it will eventually come your way. Just beware of the high cost of low margins!
Damian Lang is CEO at Lang Masonry Contractors, Wolf Creek Construction, Buckeye Construction and Restoration, Malta Dynamics Fall Protection and Safety Company, Three Promise Labor Services, and EZG Manufacturing. The companies will do over $125 million in sales in 2021. To view the products and equipment his companies created to make jobsites safer and more efficient, visit his websites at ezgmfg.com or maltadynamics.com. To receive his free e-newsletters or to speak with Damian on his management systems or products, email email@example.com, or call 740-749-3512.