ForConstructionPros.com

Each option calls for proactive overhead adjustments. The initial step is to right-size your business for overhead based on the revenue and gross margins anticipated. This involves initial cutting of easy to identify, wasteful overhead spending that has occurred over the years, plus subsequent, more painful cuts of costs and personnel as needed.

The impact of adjusting margins
If you're going to play the margin game, keep in mind that cost adjustments are a part of it.

For example, if you do $10 million in billing at a 30% margin, you generate $3 million to cover overhead and administration expenses. Cut that back to 20% and you lose $1 million of margin; you would have to increase billing by 50% to $15 million in order to earn the same $3 million. If increasing billings is out of the question, then $1 million in cuts are required to earn the same bottom line. Of course, to weather the economic "storm," most contractors will be satisfied with a reduced profit, so you need to consider that in the equation.

Managing margins means knowing your overhead and cost structure, so you know when and where you can cut costs. This requires being able to predict profits and cash flow for different levels of business and margins. If you cannot manage and predict cash flows to produce a reliable result, the chance of making it through these bidding wars intact is doubtful.

This process also requires an assessment of your risk tolerance, because there are jobs out there you should stay away from. They may be too big, require working capital you don't have or require skills out of your comfort zone. It just doesn't pay to take on a job that could put you out of business.