Commercial Considerations

Concrete contractors across the country are feeling the crunch from the downturn in the residential market. For some, a changing market is old hat - they've been through this before. Others, however, are experiencing the need for business adjustments for the first time. In response to a dip in residential work and an increase in commercial jobs, many concrete contractors are increasing the percentage of commercial work they perform. The residential and commercial markets have their differences, and being prepared for some of the nuances will help you weather the changes.

The dreaded retention
Matt Stevens, a management consultant for construction contractors and author of the book Managing a Construction Firm on Just 24 Hours a Day published by McGraw Hill, says the biggest challenge contractors have to contend with on commercial jobs, especially when they're used to the residential sector, is retention. "For the average construction company, retention costs from 20 percent to 50 percent of the firm's profit," Stevens explains. "For contractors whose profit is average, the impact is on the high end of the scale. For highly profitable firms it is less of a problem."

Stevens suggests dealing with this problem head on and asking for a reduced retention at the bidding stage. If you can't get that, then look for other ways to make up the deficit, such as getting cash flow started in the right direction at the beginning of a project. He says only as a last resort should you offer a slightly reduced price in return for retention breaks. "You have to understand what retention is doing to you financially - you need to know how much you're losing and where," he says.

Kirby Justesen is owner/president of Formco Foundations in Salt Lake City, Utah. The residential downturn in his area of the country is only about six months old, but he says years ago he recognized the need to go into commercial work and the recent market change has drug him along. So far, Justesen says there's not always a lot you can do to negotiate retention, but he's had luck dealing with it another way. "We think we hit the commercial market at a good time when there are a lot of jobs out there, so we try to bid higher prices to make up for how long they hold our money. We build it in as a cost of the job, but sometimes you don't always get it all," he says.

Justesen adds that a large increase in commercial work might also mean taking a trip to the bank for higher credit limits to balance cash flow issues created by retention issues.

Stevens has some suggestions for reducing your risk when it comes to retention issues. "First, deal with people you know; second, have a good relationship with them," he says. "Don't deal with anyone doing a one-off job. If someone isn't local and is working on a one-time construction deal, you might want to pass on the job."

Stevens continues, "If you look at the number one reason people get profitable work at the get go, it's their number of qualified leads. If you've got 14 jobs in the mix, you can pass on ones that might not be good or profitable for you."

Dealing with the differences
Jerry Balmer, with Balmer Bros. in Akron, Pa., says his company has seen a considerable increase in commercial work over the past year. Where his company typically does a couple commercial jobs a year, in 2007 it had one of its crews doing commercial work all year long. Balmer has a background in bridge work, and his company is set up to take on commercial jobs, but he'd rather not do it for a number of reasons. "We have the equipment to do larger commercial work, but it's a whole different league than what our employees are used to dealing with," he says.

Balmer says the main difference is on the jobsite. "With residential concrete work, we're usually the first person on the job and the only person on the job at least in the beginning phases," he says. "With commercial work you're typically working with a lot of other subcontractors, and you have more difficulty going ahead with your project because people can get in your way and everyone has different schedules."