 Jim Huston |
I’m trying to get into any market I can just to stay in business. Can I use my same general and administrative overhead numbers for commercial work as residential? Can I use the same labor numbers for construction as I do for maintenance?
Markets throughout the U.S. are down and more competitive than ever. Many contractors submit bids that are below their break-even point; and in some cases, below their direct costs. Pricing for commercial and residential lawn maintenance, fertilization and irrigation service work is also tightening as more contractors are getting into these markets.
The short answer for these questions is no. You shouldn’t use commercial rates to bid residential work. You also shouldn’t price residential and commercial maintenance using the same labor rates. Here’s why:
Maintenance labor tends to be 5-10 percent lower than construction labor. Construction general and administrative (G&A) overhead runs roughly twice that of maintenance per man-hour. Construction work is much more management intensive than maintenance work. Due to its repetitiveness, a maintenance supervisor can supervise twice as many laborers as does a construction supervisor. Normal G&A overhead per man-hour (I call this OPH) for a seasonal construction company runs $15-$18, while that of a seasonal maintenance company runs $8-$10.
All else being equal, and without including equipment costs, the cost for a $10 laborer with just G&A overhead would be $20 for maintenance and $28 for construction. That’s a huge difference – 40 percent more at this level.
Also, the difference between commercial and residential maintenance G&A overhead, and commercial and residential installation G&A overhead is less pronounced. However, it’s real and it is measurable.
Commercial maintenance and installation work is easier to manage. Dealing with homeowners requires more time and meticulousness on the part of management than does the commercial equivalent. This is one of the reasons why $10 million- or $20 million-plus commercial contractors are much more common than large residential ones. On average, G&A overhead per man-hour for commercial companies is 10-20 percent less than for residential companies. The difference is less pronounced than the difference between maintenance and construction G&A overhead but it is less.
My competitors seem to get every bid. It appears as if they’re working for almost nothing. I work at my break-even point or below already. How do I compete?
This situation is not only a reflection of the current market, but it’s also a scenario that we often see in what I call a hyper-competitive market. This is a market where there are lots of contractors (often the number is increasing steadily) chasing a limited amount of work.
In a hyper-competitive market, the pressure is for contractors to get creative and bid work at their break-even point (BEP). This means that they are pricing their work without net profit. Material, labor, labor burden, equipment costs are covered as is G&A overhead – this is the BEP. However, no or minimal net profit is added to the BEP. The contractor hopes to make up for lost net profit with enhancement or extras added to contracts. This strategy can work, but it’s dangerous. What happens if you don’t get work beyond the contract amount? The theory is that you’ll at least break even, and you can accurately identify your BEP.
Recessions create this price-war mentality, and you can even justify it to an extent. However, once contractors are driven to pricing work at their break-even point, it takes years for a given market to recover. On the other hand, offering loss leaders in a normal market is a strategy that most contractors don’t need to put on the table.
How do you compete? Two things: First, provide excellent service to your customer base. This tends to make them more loyal to you (and your prices). Second, know your numbers. If you have to price work at break-even, know how to calculate your BEP. A little education in arithmetic can go a long way to enhance your bottom line.
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