From residential to commercial work
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What risks are involved when moving into much larger scale jobs? June 4, 2003
Question
How do you move from 100% residential to the commercial arena? Cash flow, contracts, bids, etc... I already deal with these issues, but the commercial world seems like such a huge unknown. It seems that one would need to add personnel just to climb into the ring. And if the lines of credit are not in place, your butt gets kicked. Assume that space and equipment are not an issue (I have most of both). I've been working small for 15 years and it feels like there may be more money to make in the commercial end. Is this a false assumption? It seems you are at greater risk of getting stiffed in the commercial arena vs. residential. Knock on wood, I have never been stiffed. Hurry... I want to bid on that $250K library project!
Forum Responses
(Business Forum)
Set up your bid just like the bank would if you were building a house. Outline in your contract/bid that you will need to have so much down with draws at x, y and z portions of the job. Explain that you are small but very capable of doing a job like this, and have in the past (even if you haven't), and need the cash flow to provide them with the valued product and service they would want throughout and after the project is complete.
As far as going from residential to commercial, your prices might have to come down a bit, although you will be making it up in the fact that this is a large job and there are several things that you will be streamlining and/or subbing out to make this job more efficient for you.
From contributor A:
I don't think there is a need to explain you are small for getting paid monthly. The only thing you may need to do differently than other subs is make sure you can bill for work in progress that hasn’t been delivered to the site and you may need to insure or bond that work. All the other subs can deliver material to the site on the 25th, get paid in 30-45 days and their vendors are happy. You may need to start working a month or two before delivery so if they don’t allow you to invoice for work that hasn’t been delivered, you have the ability to finance the job longer. Typically banks will loan short term against contracts if you don’t have a line of credit or they will bump your line if you need to for larger contracts.
We are just now getting paid for a project we started work on 9 months ago. The owner had a letter of credit from the tenant secured by cash but the tenant wouldn't allow them to draw against it (they threatened bankruptcy).
It took the lawyers 4 months to work it out. Typically we get paid in 45-70 days and then retention 60-90 days later. Most GCs have you bill once a month that is a projection through the end of the month. You need to supply a schedule of values so they know how much we will be invoicing before you ever start.
Your typical residential job will have more management time with fewer multiples and reduced economies of scale. At each price point in commercial you compete against larger shops from farther away.
From the original questioner:
What is a bid bond/security and what purpose does it serve? Is it expected at the time of proposal? How do you justify spending hundreds of dollars on plans for bids you may win 1 out of 5?
From contributor A:
Generally large public projects require performance bonds; this ensures the GC and owner that the job will get done if your company fails. You need to contact a bonding company through your commercial insurance broker and get set up to bond a job. Once you are bondable they will provide bid bonds to you at no charge, then they will charge you for the performance bond if you get the job. Typically a bonding company will want to see the bid results and if you are more than 10% low they will want more detail before they bond if you are new to them.
On public works if you give a deposit for plans you should get your money back if you return them. You can also join a builders exchange or plan service and get plans that way.
Public and private work are two different animals. Public work is generally awarded to the lowest bidder with no preference for your past history or service unless it’s a GC you partner with, then they may risk using your number instead of the competitor's but they generally don't like to do that. That relationship is price-based and that makes it somewhat adversarial. Private work is generally more team-oriented and can be driven by customer satisfaction and subjective decisions. It takes two different mindsets for each type of customer. In public works you give them only what they pay for; anything you add to the project above that is out of your pocket. In private work if you do a little more and make a better product, the customer and GC accept it and recognize the value. Private work generally allows for the owner to reject any and all bids without reason; public work must accept low bid unless there is a valid reason to not use you (not bondable, didn't perform on the last 3 public projects, etc.). In California, if a general accepts your bid and lists you, they must use you and award the contract to you.
The advantage of public works is almost all jobs are bonded and you are guaranteed payment. The disadvantage is everyone knows about them and you must sell on price alone.
We started out doing exclusively commercial but are now diversifying because of cash flow. Commercial is good work if you have the discipline to control the GC, who is demanding and thinks theirs is the only job in town. Control schedules, draws, and don't get behind on them. They are notorious for leveraging the fact that you need money. Be careful to know the contract and payment terms. You may have to pass on a good portion of work, but I just bought a few pieces of equipment from my competition who just went belly up (they did 7 million a year in sales) because the contractor didn't pay them. It was in their contract that they didn't get paid until the contractor got paid. Cash is king and unless you have a wad in the bank or your employees will wait to get paid or your supplies will finance you, then you can't run a business just because your receivables show a nice profit. Chances are you'll lose the margin waiting on your money. Just practice common sense business principles and do your cash flow budget based on worst case scenarios.
I would suggest you do not start out with a project this size. $250,000 is a big first bite. We had 1.2 million in sales and looked long and hard at anything over 100,000. A job that size goes bad and you are out of business and deep in debt. How much risk are you prepared to take on something you know little about? The tighter the market gets, the harder the GC is to deal with. Know thy customer, grasshopper.
It seems to me that novices in the commercial market (and I was one myself) underestimate some other things, for instance the amount of management it takes to run a $250,000 job, which in all likelihood must be run simultaneously with several other jobs (we rarely have fewer than 40 projects going at any one time). If you are committing all of your resources to one project for an extended period, what happens to the rest of your customer base? Can you ramp up to do this project for two months without killing yourself by ramping back down? Can you maintain the sales pace required to support the overhead you take on by ramping up? Does the project include work of a type that you have never done before in residential and if so can you price it and cover all the variables that you are unfamiliar with? It seems unwise to me to take on a project that is much bigger than 15% of my gross sales, and to leap blind into the hard bid rat race is a questionable business decision at best.
Never sign a contract that says the GC will pay you when/if he gets paid. You are working for the GC, not his customer; you have no control over who the GC takes on for work. It is up to him to investigate the credit worthiness of the customer, not you. If you sign on those terms, your neck is way out there. Been there, done that - now have a pen that crosses out that paragraph. It hasn't cost me a job yet, though it has caused some heated discussions. We do mostly negotiated work. Bid work is a game of trying to provide the cheapest solution you can get by with. Negotiated work is generally a better deal for the customer. I'm not sure that a shop should try to do both, as they take different mindsets.
