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Ted’s Blog: Discussing critical industry issuesThe Garrison Report #2009-9
Surviving in a Down Economy
Listen to the audio version of this report here
It starts with the right attitude. Not surprising, many companies are complaining about the volume of business this year. However, at every convention, some contractor usually surprises everyone by claiming it is having its best year. Of course the construction industry is down. It's down anywhere from 5 to 10 percent, but that still leaves a domestic market of more than $950 billion. When you consider no contractor has 1 percent of the market, the market for each contractor is still huge. So what is the problem?
If you are competing based on price, then it appears the world has turned crazy with contractors bidding work at below cost as reported by ENR. If you compete in that market and refuse to take work at a loss, it may appear there is very little work around.
One of the author's radio interviewees, Steve Waterhouse, recommends we learn to fire our bad clients. These are clients who want to get something for free. Michael Loulakis, Esq., explained at an event that the standard contracts they developed for DBIA were designed to be fair to all parties, but a city purchasing agent stated that her city attorneys complained that those contracts were too fair. When prospects want the table tilted their way, it's time to fire them. Prospects get what they deserve when they hire low-performing contractors. This approach is critical because even during boom times, prospects such as this steal valuable resources away from more profitable opportunities. However, during recessions the demands become ridiculous as competition reduces the value for these clients to levels that are unsustainable.
If you're thinking that we need those projects for cash flow, give it up. Profitability comes from opportunities, not from chasing losers. If you get bogged down with those losers, when the economy turns around, you will not have the resources to take advantage of the opportunities.
One of the biggest mistakes anyone in sales makes is not getting to the right people. Too often contractors are dealing with an individual who is responsible for only the construction budget. Getting to the right person is applicable at anytime, but during a recession, money decisions tend to get pushed higher within an organization. The problem occurs because the lower-level person can't make the final decision and is often dealing with only a single cost figure--in our case the contractor's bid. What makes this bad for the contractor is the fact that the construction costs represents only about 11 percent of the total lifetime cost of the building. Therefore, the contractor is at a disadvantage when he must focus on the 11 percent and is forced to ignore the remaining 89 percent.
A perfect example of how expanding the value beyond construction occurred when Steve Wynn was building one of his Las Vegas hotels. It was a structural concrete design.
However, Schuff Steel showed up with a structural steel bid. The project manager pointed out to Schuff that it was a concrete building and their price was $20 million higher than the concrete price. Schuff acknowledged both points but then pointed out that they could finish the project six months faster. When Wynn added in the extra $3 million a day in profit he would receive by opening early, he calculated he would gain an additional $480 million in revenue, and he quickly directed the project manager to change the hotel to a steel design.
In essence, contractors need to compete based on value instead of price. However, if they are going to do that, they should focus on life cycle costs, not merely construction costs. To maximize the benefit from implementing this approach, the contractor should identify all the benefits it delivers then show the value of each of those benefits. If the value of the benefits the contractor offers exceeds the difference between the construction costs, then obviously it's in the prospect's best interest to accept the contractor's higher construction price.
Another mistake that contractors often make in a recession is chasing every project that surfaces. The problem with that approach is there are often way too many bidders on many projects. Instead of expanding the types of projects one is chasing, one should narrow the focus. With the increased competition, contractors should zero in on projects where they have a competitive advantage. If you get the projects where you don't have a huge competitive advantage, you probably manage only a small profit margin that might not even justify doing the project. Worse, the percentage of projects that you may be awarded is so small in this hypercompetitive market, the cost of obtaining work in this situation may exceed the profits from the projects you are awarded.
By focusing all your efforts on the projects where you have a significant competitive advantage, you have a much better chance of obtaining work where you are able to earn reasonable profit margins. In conclusion, identify your strengths and develop a strategy to exploit those strengths by maximizing the value for your clients instead of just trying to do it cheaper.
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