The truth about the dismal construction industry...

T

tobnpr

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Nov 12, 2006
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New Port Richey, Florida
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http://www.reuters.com/article/GCA-Economy/idUSTRE59F47W20091016

I've been a contractor for thirty years and have been through many cycles, but nothing as crazy as this...
I'm astounded by the number of incompetent contractors I have to compete against, day in and day out. Too stupid to realize you can't sustain a viable business without turning a profit.
I had one of my suppliers say that some guys underbid jobs to "generate cash flow". WTF does that mean? Money in/Money out = failure. They underbid and front-load their draws, use draws from current work to pay the last job's bills- until the pyramid crumbles...

I refuse to work for free- which means we haven't had as much work as we'd like.

One of the major General Contractors I work for has had such a problem with "low-bid" contractors not paying their bills that they're now requiring monthly Affidavits from sub and sub-subcontractors confirming they've been paid.

Anyone else in a line of business that has become so ridiculous you can't earn a profit?
 
How about the boat business, Mike?

We are still seeing stupid $ deals that make little sense being made on boats to generate cashflow. Dealers still have an overhead nut to cover.......electricity, insurance, floor plan cost, taxes, salaries, and other fixed costs....... and it takes cash to pay those bills whether or not an individual boat sale is profitable. Granted, it's got to end somewhere, but its still happening.
 
it's everywhere, not just construction. I went shopping last week and picked up a dozen summer silk shirts for $3 each. I don't even think that would cover the shipping from China.
 
It's just weird that everything is so cheap and foreign laborers are leaving the country in droves. Its strange that we all expect things to be even cheaper and don't recognize we've got the cheapest stuff in the world. Nobody wants to or can pay for construction work. Many can't get a loan to buy or build anything. Salaries are going down. When this all turns around, we'll be making far less and paying far more. The gov't will be taking more of our reduced incomes, leaving even less for us to buy/hire. Pretty soon the Indian's will be hiring us to run the phone lines. I'm going to investigate my options internationally. Under the current administration, the life as we knew it will never return. If the republicans don't take back the reins next year, then I'm going to seriously consider bailing out.
 
Mike, I have been a GC in Maryland for about the same length of time that you have been in business. This current economy is by far the most difficult I can remember in our sector. It is hitting the subcontractors particularly hard and is devastating and forcing some of trades to throw in the towel and close up shop. A typical example would be a mason or excavation contractor – which are two of the highest overhead construction trades due to the investment in equipment. When times were better several years ago they may have purchased additional equipment and hired more workers to keep up with the volume of work. But when someone turned off the faucet and the work stopped for many of them, they still have the equipment after laying off the workers. No one wants the equipment, so it becomes repossessed and the out of business sign soon follows.

I see several things happening here. The most troublesome is that many highly skilled workers are leaving the trades and their skill set is irreplaceable. You can not replace a carpenter with 25 years experience with an import from south of the border, making 25% of his salary and expect the same level of craftsmanship.

Another thing, that may turn out to be positive, is that this may act as an across the board weeding out process. Those that never understood what it takes to run a successful business by adopting the unsound practices that you have mentioned, will perhaps go out of business. They will of course create some collateral damage on their road to ruin, but if you hang in there – just maybe you can be the “last man standing”.
 
tobnpr said:
http://www.reuters.com/article/GCA-Economy/idUSTRE59F47W20091016

I've been a contractor for thirty years and have been through many cycles, but nothing as crazy as this...
I'm astounded by the number of incompetent contractors I have to compete against, day in and day out. Too stupid to realize you can't sustain a viable business without turning a profit.
I had one of my suppliers say that some guys underbid jobs to "generate cash flow". WTF does that mean? Money in/Money out = failure. They underbid and front-load their draws, use draws from current work to pay the last job's bills- until the pyramid crumbles...
Click to expand...

I've been in the biz since '74, with my own firm since late '80. Seen a number of recessions along the way. The strategy of selling dollar bills for 0.98 to try to cover cash flow only works if the recession is a short one, with a sharp recovery. This one has already been one of the longest, and its recovery looks to be rather anemic. So yes, there will be a number of firms that hit the wall and die.
 
Mike,

I'm right there with you brother. "Hand to Mouth" works untill the hand misses the mouth. These guys are back handing money from the next job to pay for the last job. I have seen a bunch of them crash around here...especially the guys that "bought" a lot of cheap work and can't handle it because of the negative cash flow.

One of my clients has 2: existing nursing homes that have to be sprinkled by 12-31-2010 (Fl Statutes on existing NH) they signed contracts with me in excess of $400K a year ago. I met all of the milestone dates for State AHCA approvals (plans) as well as running the schedules for the other subs. I then signed them up for another $million on each for dry wall, framing, paint, etc. Once they got their approvals in June this year from the State...they cancelled all the contracts on some made up BS and jerked over $2 mill out of my cash flow over the next 12~14 months.:smt013 I now have a ravenous Miami Beach lawyer filing lawsuits. I know what they are doing...pushing this to the wall with the expectation of getting an extension prior to the end of next year.:smt021...I will win this...just got to go through the gymnastics.

Meanwhile...I will not take on looser work...I can loose my ass fishing every day...no need to play like I'm making money working for nothing.:huh:

Small business LOCs are non existant. the banks have all of the money but they won't lend it...they don't have to. They have their boi in the White House stroking them checks anytime they fall short.

I have head hunters after me to run Nuke work in Phoenix or Homestead for 12~18 months for decent money. I have Nuke experience from 25 years ago and if something doesn't change soon I might go dormant, keep my 2: tickets alive and go earn some money. I wouldn't think twice about the Homestead/FPL deal because it's close. Phoenix would be a stretch...close the house up here(forget selling it:smt043) and rent a furnished apt in AZ. It's doable but not likeable.:thumbsup:
 
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Jim:

You hit the nail on the head. Just hanging on, and taking whatever work we can get that's profitable. Whoever survives, will be in a flush position if and when things turn around. My brother is a custom builder in the Baltimore area, same problems up there as well.

And, as you said John- I can stay home and fish and save myself the aggravation. I heard on the news the other day that the construction unemployment in Florida is at 24%. That obviously doesn't inlcude all the 1099 independents that make up a large percentage of the workforce. I'd say it's closer to 75% unemployment.

Sometimes it feels good just to vent. Keep hangin' in there guys...and hopefully the phones will start ringing again soon...
 
fwebster said:
How about the boat business, Mike?

We are still seeing stupid $ deals that make little sense being made on boats to generate cashflow. Dealers still have an overhead nut to cover.......electricity, insurance, floor plan cost, taxes, salaries, and other fixed costs....... and it takes cash to pay those bills whether or not an individual boat sale is profitable. Granted, it's got to end somewhere, but its still happening.
Click to expand...

As usual Frank hit the nail on the head. People do strange things at this stage of the ecomony, but they have to do them to survive. There are those fixed costs that have to be covered and sometimes it is better to take a job for something over its variable cost so that there is some contibution to the fixed side of the equation. That fixed contribution may allow the business to hang on for another couple of months.

The fear in the construction insdustry is that the GC doesn't pay his subs and the project owner gets stuck paying twice for some portion of the work. It is a good idea to make sure that the GC has paid his subs before paying him.
 
I got out of the trucking business. Because theres too many cut throats out there. :smt013. I drove truck for over 33yrs. Its not getting any better out there for the young guns. :smt021
 
"The fear in the construction insdustry is that the GC doesn't pay his subs and the project owner gets stuck paying twice for some portion of the work. It is a good idea to make sure that the GC has paid his subs before paying him.

This is sound logic. What has become a problem though with credit lines gone, the GC has to reach into his pocket to pay subs before he gets paid....many times there has to be a degree of trust involved with waiting for the GC to be paid by the owner before the sub gets paid.Mechanics lein laws help with this to a degree. Most contracts here in Florida are pay when paid contracts. With the economy like it is with credit lines drying up, this becomes a loose/loose scenario.
 
At the bank here we pay the subs direct out of the draws. As you say, seen too many taking $$ to pay for another job instead of the one the line is intended.
 
As John said, mechanics' and materialmens' lien laws are pretty tight in Florida. Assuming the GC and or Owner are astute enough to require the proper paperwork, enough protections are in place for the Owner.

This goes far beyond forgiving profit and trying to recoup only some overhead on a job...
I'm as small and low-overhead as you can get. Just me, with an office in my home...aside from the telephones, I have no fixed overhead. I resisted the temptation to "get big" when things were booming, because I've witnessed firsthand what can happen when a company loses control.

I "took" two CVS Pharmacy's last year at a minimal 10% margin- to keep my employees busy and pay the phone bills. This year, the jobs are going for LESS than what these cost me to build last year (direct costs and insurance). I have "A" list pricing from my suppliers- so I know that no one purchases materials for siginificantly less than I do. So, it's either stupidity- or as John and I have said robbing Peter to pay Paul...

I just got back from picking up some draw checks from the client I mentioned above. I saw one of the Accounting Managers and commented on all the new "paperwork"...She told me that in the last few weeks, the number of subcontractor bankruptcy filings they've seen has been staggering. No doubt, these are the guys that have been bidding $.75 on the dollar...

Trust me, if you're "low bid" these days...you've probably got a problem...
 
tobnpr said:
Trust me, if you're "low bid" these days...you've probably got a problem...
Click to expand...

The problem with the below cost bid. is it's not helping cash flow it is not doing anything but postponing the inevitable.....your going under eventually if you keep it up.

My motto is if your going to go bankrupt.....get it over with quick and move on. There is nothing worse than dying slowly
 
sprink56 said:
I have head hunters after me to run Nuke work in Phoenix or Homestead for 12~18 months for decent money. I have Nuke experience from 25 years ago...


What is your experience with "nuke work". Depending what it is I might can help. No 12-18 month contracts but month here month there.
Click to expand...
 
Blueone said:
The problem with the below cost bid. is it's not helping cash flow ....
Click to expand...

Yes you can improve cash flow over the short term with below cost bidding.

The idea is to use cash flow management (not profit) as your short term goal. This allows you to survive until better economic times return.

Many companies are managing for cash flow not profit today. Even Sea Ray’s parent company Brunswick is doing it right now. They have been very up front about it.
 
It's really just borrowing money, but from different sources. When a below cost bidder wins, who's at risk? not him, he's already in trouble so what does he have to loose? It's everyone else that's at risk. He gets some cash flowing in, feeds enough out to keep the guns quite for awhile. The buyer, vendors, etc... all take the risk that he won't go bankrupt on this job. It's the same in every industry right now. somebody is working, they give you a crap rate but you'll take it cause no one else is working. Gives you a little cash to keep you happy, the backend takes "a little longer than expected". But he's got another job next week that he wants you to do, so you say... eh ok. Pretty soon there's 5-6 jobs you're backed up on but a little money is still coming in so you continue. Then one day... doesn't answer the phone. After a few weeks you get nervous. It's already over at this point. I see it all of the time.
 
TurtleTone said:
it's everywhere, not just construction. I went shopping last week and picked up a dozen summer silk shirts for $3 each. I don't even think that would cover the shipping from China.
Click to expand...

Do they have a front and back and don't match you tennis banana hammock>?
 
Presentation said:
Yes you can improve cash flow over the short term with below cost bidding.

The idea is to use cash flow management (not profit) as your short term goal. This allows you to survive until better economic times return.

Many companies are managing for cash flow not profit today. Even Sea Ray’s parent company Brunswick is doing it right now. They have been very up front about it.
Click to expand...

Dudes, there is way more to below cost bidding in the construction business than simply submitting the bid, getting the job and then performing the work at a loss.

The tactic here with this risky practice is to submit a proposal that you know should be lower than all others to “win” or be awarded the contract – then the fun begins. The GC will then utilize several methods to make lemonade out of the lemon he started with such as:
-Beat up on the subs to lower their prices by a certain percentage or be dropped from the project
-Put the project out to other subs to bid
-Hit the client with very costly change orders for any deviation from the original specs
-Look for errors, omissions and ambiguities in the drawings and specs that can be used to generate additional costs.
 
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