Q:
First, I want to say thank you for your articles on your website and in Construction Business Owner. As someone new to the business part of construction, they are a ton of help and keep me motivated to make our business a continued success. This year, we celebrate fifty-one years in business, and it has been no easy feat.
I have been involved with the business end of the company for about four years, since my grandpa passed away (he ran the company for forty-seven years with only an eighth grade education and a lot of hard work). We are a concrete company mainly dealing with public works construction. Sidewalk reconstruction is our main focus. But with the state of the economy right now, we are losing our work to bigger firms who are eating up all the small work.
We broke even the two previous years. But this past year, we took a big loss. We lost out on our main project this year to a company from out of state traveling five hours to do a sidewalk job. We couldn't compete with their price. Right now, we have some work but nothing very steady. I have been thinking about purchasing a small curb machine to get into the market of street reconstructions and small parking lots. With the way the business is now, I need to find a new market to break into. I know I can't just rely on one type of contract anymore. There are eight other firms with curb machines in our area now. I know I can't compete on large jobs with them, but I think I can fit in a niche with the small street reconstructions and make some money there. The machine I am considering costs about $36,000. I am curious what you think about such a large purchase right now? How do you decide whether or not to purchase equipment?
Jeremy Stone
Stone Concrete
A:
Why are you in business? I am sure your goal is not to break even for two years and then lose money for the next three. Figure it out, or go broke. Who is in charge of your profit and loss? They need to be replaced with someone who can manage your company to make money. Can't you rent a curb machine for several months from another contractor or supplier? Don't buy anything now until you know you can actually get jobs at the price you need to make a profit. Bid the machine jobs as if you had a machine. When you get the jobs, rent a machine and see if you can actually make money on them. It is not the time to buy without a need, and you don't need it until you get some work. And I bet you can find a used machine for under $10,000 if you looked hard enough. Also, start looking for new and more complicated types of jobs where there is less competition. You said you wanted to diversify. Get out of your truck and go do it.
Q:
We are grading and utility contractors located in Atlanta, GA. I am hoping you can provide some specific guidance on our situation. We currently have fifty hourly employees, eighteen salaried employees in the field, two estimators/project managers, two office personnel and me (vice president of operations). We are doing about $15 million a year. Our business is about 95 percent commercial and municipal work. We built up a small nest egg but were forced to buy more equipment to keep up with the work demand. We currently have about sixty-five pieces of equipment that are new and old. The profits that use to be are no longer there, and we are having to hard bid every job in order to get any work. And yes, some are "stupid cheap," and we are now taking jobs at cost and below just to survive.
My question: What opportunities are out there that would help complement our business? We have thought about offering a turnkey package on site work to include paving and curbing, but that market is also cheap. We know when the economy does turn around, we would like to get into real estate development, but what do we do now?
Bill Cupertino, Owner
Land Movers, Inc.
A:
Unfortunately, you are not alone. Tens of thousands of other contractors are just like you-in love with owning yellow iron and now in big trouble trying to stay alive. When work was plentiful, you didn't think about diversifying, looking for new customers, or offering any additional services. Now it's too late, as you realize what you should have done five years ago. How can you survive doing work below cost? Eventually, you'll run out of money spending more than you make. That is not a survival strategy. It would be cheaper to close the doors and stop spending your hard earned nest egg trying to keep people busy. You must act now. To get work in the tight market, you'll have to mark up your work at half of your previous markup rate to get less work than you need to break-even. If you were using an overhead and profit markup of 16 percent, you'll have to lower it to 8 percent to get any work. This means you must cut your overhead and fixed costs by at least 60 percent and your field costs by at least 20 percent. Sorry, but you will also have to layoff at least thirty-five people, and the remaining employees will have to take a 30 percent pay cut to keep their jobs. Immediately sell every piece of equipment you own that has debt on it, even at a loss, to stop the bleeding. You can always rent equipment when you need it in this market.
Make it your goal to find new markets to attack like water quality, energy and transportation that will have lots of money to spend. Add more construction services such as design-build, general contracting for energy and wind construction, bridges, dams, pumping plants and communications. Only offering earthwork and utility services is what you used to do. Now you are a new full-service infrastructure company with new opportunities to find. Happy hunting.
Construction Business Owner, July 2009
