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May 2009

Surviving increased competition and low bidders in a challenging economy

Bobcat MT52 mini track loader

Roger Powell, co-owner of landscape company Backyards Only, uses a Bobcat MT52 mini track loader to work efficiently an stay competitive.

This story is the first part of a series addressing the challenges contractors are facing in this economic environment. In December 2008, as the effects of this recession were starting to impact all sectors of the economy, business owners who use Bobcat® equipment were interviewed and asked to share their insights into the previous year and their plans to keep their businesses viable.

The economy.

These two words used to be said with confidence. Now, they express concern and uncertainty.

While the factors that contributed to this recession have been identified, finding a solution to the problem has been a little harder. The question contractors are asking themselves right now is: “What do I do to make sure my business survives?”

“I’m not looking at a down economy, I’m looking at a way to grow my business,” says Roger Powell, an owner and partner of Backyards Only, a landscape company in Colorado Springs, Colo. Powell and his partner, Jon Herman, increased their business 25 percent over last year even though the main market for their company, new home construction, was low. Powell says some homebuilders in his area didn’t even pull a permit last season.

How did Powell manage what seems like the impossible? What are the challenges facing contractors, and how are they responding to keep their businesses viable?

Competition

A frozen money market means borrowing money for a construction project is difficult. When the number of projects in a market decreases, the contractors in that area have less work and competition increases.

There are two problems that increased competition creates for contractors. First, contractors begin to bid on work that they haven’t normally performed in the past. Often, the work that inexperienced contractors do is inferior to that of contractors established in the markets they serve. Second, in the capitalist system, competition leads to a decrease in price. Contractors experience this firsthand through competing bids that are at or below cost.

New kids on the block

With substantially fewer homebuilders pulling permits in Colorado Springs, Powell says he’s faced competition from construction workers trying to make ends meet. “I’m going up against guys who were hanging drywall last year, but since they don’t have any other work, they’re trying out landscaping and are underbidding us,” he says.

Another contractor, Keith Kamish, is experiencing competition similar to Powell. Kamish, the vice president of K.A. Kamish Excavation Inc. in St. Paul, Minn., says the downturn in new home construction led many residential excavation contractors to look for work in his market, commercial excavation. Despite the increased competition, Kamish says that 2008 was still one of the best years his company has had.

Kamish credits his knowledge of his market as a contributor to his continued success. The requirements of engineers and general contractors on commercial projects are different than residential construction. Knowing the expectations of general contractors and engineers gives Kamish an advantage over the new competition. “I’m used to compacting fill material in one-foot lifts, while some residential contractors don’t take compaction requirements into consideration. Knowing those differences are things that contractors new to this type of work have to learn, where I already know,” says Kamish.

Avoiding low bids

A reputation for knowing the requirements of a job and establishing your company in a market can take a contractor only so far in tough economic times. The most challenging aspect of increased competition for established contractors are bids from new companies that come in unusually low. When work dries up in one sector, contractors may become so desperate for work that they bid low on projects in other sectors just to get in the door.

How are contractors like Kamish overcoming increased competition and low bids? Kamish says that it’s difficult to turn down work, but that contractors need to take a longer view of their business than one job or a group of jobs that are lost to low-bidding competitors. Trying to match bids that are obviously low is a dangerous practice. Kamish says that he knows how much a job is worth, and if that job is done under its value someone is going to lose money. “I would rather go out of business having no work than doing a lot of work that’s going to cost me money,” Kamish says.

Bobcat skid-steer loader

Byron Andreas uses Bobcat skid-steer loaders in his concrete business and advises other contractors to provide exceptional customer service to keep work coming in.

While it might be hard to do in the short term, Kamish says turning down work can help a contractor in the long term. “If the competing bid is too low, I want the general contractors I work for to use the other contractor because I don’t want him here next year. I know that contractor is going to go out of business. I’ll weather the storm,” says Kamish.

Networking through employees and customers

Since avoiding low bids is impossible and doing work and losing money at the same time isn’t a good option, Kamish and Powell have had to try other tactics to stay viable. While these two contractors work in different markets, they have both used networking as a way to keep their crews working.

In economic conditions like this, many contractors find that they have to do more work themselves. This was the case with Kamish, who was estimating and bidding on his jobs and then working on them because he had let a foreman go who was not providing good customer service. Doing all this work not only took a toll on Kamish, it started to negatively affect his family. “It about killed me,” he says.

Kamish hired a new foreman and an estimator to help with job bidding, and says it was a good decision. In addition to the contacts Kamish had already established, the new hires had contacts of their own, and the larger network of contacts has led to additional business.

Powell also networks to keep his business going, but instead of relying on his employees’ contacts, he seeks referrals from his customers. Powell recently consulted with an advertising agency. As he saw the downturn in the housing market, Powell knew he needed new strategies to reach customers. The agency did not recommend that Powell advertise over the radio and in the newspaper; instead, he was given a marketing plan with unique ways to prospect for new business. One of the strategies offered was to contact previous customers who were happy with Backyards Only work and ask for referrals.

“I want to continue to target the brand-new construction, but in this economy you have to grow your business however you can. We’ve started to do work at existing homes, and those have all come from referrals,” says Powell.

Contractors naturally feel that increased competition threatens their business. Trying to match low bids in order to continue working is a risky practice. Experienced contractors need to consider the true cost of any job and the quality of the competition when submitting bids. Building a good reputation and a firm financial footing makes it easier for a contractor to lose a few low bids. A little patience can go a long way as other contractors who bid low or perform substandard work lose money or go out of business. Using new ways of connecting with customers, such as networking through employees or customers, is key to surviving super-competitive markets.