May 5, 2008
Bidding wars | With more contractors fighting for fewer jobs, construction veterans are waiting for an industry shakeout
By Sara Donnelly
Phil Morin, president and CEO of PM Construction in Saco, doesn't like crowds where his firm's money is involved. He's seen the number of contractors going for hard bids ˆ commercial or institutional building contracts often awarded to the lowest bidder ˆ double or triple over the past year and a half. He's seen big companies like Pittsfield-based Cianbro Corp. and Pizzagalli Construction Co., a Vermont company with an office in Portland, go for small projects he believes they wouldn't touch in better economic times. He's watched contractors pouring in from out of state for Maine gigs and, worst of all, some bids so low he believes the contractor would have to take a loss to complete the project. People are desperate for work, Morin explains, and some will take on a job just to keep their employees busy.
The maddening crowd has driven Morin away from bids almost entirely. PM Construction, a commercial design/build firm, stopped trying for most of Maine's hard bids back in early 2007 because Morin didn't want to spend $5,000 to $10,000 competing for a contract against 20 other firms. Last year, of PM's $32 million in revenue, only about 20% came from hard-bid projects, whereas 60% to 70% of the company's work had come from such projects in years past.
"What we've seen on the competitive bid side is the businesses on the bid list, instead of three or five or six, you've got 15 or 20," says Morin. "It becomes a bit of an exercise in terms of who's willing to do it for less, or for nothing."
PM now relies primarily on selective bid lists, in which the client chooses which firms can bid, and negotiated contracts, in which the client has worked with PM before or been referred to them. The negotiated contracts may be for a single project or for several. Morin says he predicted the current building slump back in 2007 and began cementing the client contacts he says will make 2008 one of his best years ˆ he's projecting revenue of $51 million.
Peter Benard, president of Ledgewood Construction in South Portland, says bidded projects large and small are becoming more competitive now that the economy is slowing. Massachusetts and New Hampshire companies are entering the state more often to compete for large, multimillion dollar projects, and general contractors and subcontractors are offering bargain-basement prices to snag smaller projects. Ledgewood itself has been "a little bit more aggressive" going after open-bid contracts, though Benard would not say by exactly how much it has shrunk its profit margins to win bids because "everybody would read that and I'd be in trouble."
Stretching bids
Around Maine, contractors report open bid projects are attracting double or triple the number of bidders as they would have when the commercial market was hot. And it's no wonder: While contracts in private construction have dried up over the past two years, work in public construction, which often goes out to bid, has hung on. Private construction in the United States ˆ some 75% of all construction work ˆ fell 7.1% from February 2007, to $1.1 trillion in Feburary 2008, and a consistent weakening in private work has dragged down total U.S. spending on construction every month since February 2006, according to the U.S. Census Bureau. But public work, bucking the trend, in February inched up 0.4% above January totals and increased 8.2% over February 2007 rates to roughly $295 billion.
The fact that a public contract can provide critical work these days hasn't gone unnoticed. Some say competition is coming from businesses outside of Maine, while others say companies are going for contracts outside of their area of expertise. Still others say large companies are after contracts they wouldn't have considered in better times. All this means bid prices are shaving away at profit margins, as companies scrape to find work in a sparse market.
Bidding wars happen during every economic downturn that affects the construction industry, says Peter Hill, president of the Maine Contractors & Builders Alliance in Camden.
"You're spreading fewer jobs among a lot of contractors and that in itself will bring a lot of competition into the market," Hill says. Fewer contracts plus hungry contractors ˆ Hill says it's basic common sense that the market is going to get tough.
"It is somewhat more competitive," agrees Kevin Reilley, vice president of Benchmark Construction in Westbrook, a general contractor currently working on a Best Buy and a Staples in Augusta, among other projects. Reilley says that during a recent bid for work on a Naples school, Benchmark was up against an unusually crowded field. "To some extent we might see some of the new contractors that traditionally hadn't focused on commercial construction trying their hand at it," he says.
Competition for contracts has increased around the country, says Ken Simonson, chief economist at the Associated General Contractors of America, in Washington D.C. Simonson says contractors are bidding for work outside of their typical coverage area and reaching outside of their areas of expertise to develop projects they've never done before but that have similar materials and labor needs. A subcontractor who had been working on single- or multi-family residential units, for example, might bid on a school project, Simonson says, or a small commercial contractor experienced in building strip malls might reach for a university student center. In the scramble for work, contractors run the risk of underbidding a project, especially in light of soaring materials prices. If the project runs them too far into the red, it may never be completed and can sink the company for good.
"When you have 10 bidders listed [for a project], at least some of them are going to not wind up with enough work to do, or they're going to make a bid they wish they hadn't," Simonson explains.
Survival of the fittest
"It's a natural selection process where the weak companies will disappear," says Randy Poulton, vice president at Nickerson & O'Day, a commercial contractor in Bangor. "This is a cyclical business. The economy is good, the bigger contractors get bigger and the smaller guys come in because there's more work than the established guys can handle. What you have now is people are desperate and people are taking jobs not in their area of expertise."
Poulton says the company has decided not to bid on "three or four" projects because more competition has lowered the odds of winning the contract. In a recent example, Poulton opted out of trying for a $4 million to $5 million project in Lincoln that already has nine registered bidders.
"We like it when our odds are one in four, or one in five, but when it's one in 10, we pulled out of the project," says Poulton.
Poulton won't know until 2009 whether taking his company out of the running for those projects will significantly hurt revenue. Nickerson & O'Day is currently busy with construction management work that doesn't go out to bid, and those projects won't wrap until 2009.
Mike Wight, co-owner of Broughman Builders in Ellsworth, says the construction crunch means more subcontractors are knocking on his door looking for work. He says a new construction worker comes into his office nearly every day looking for work, when months ago he wouldn't have seen someone looking for a job even once a week.
Wight says Broughman is having its biggest season ever, perhaps, he guesses, because of the company's well publicized construction of a house for the ABC show "Extreme Makeover: Home Edition" and referrals from previous clients, and he agrees with other contractors that the competition will thin the pack.
"It's the old saying, 'The strong will survive,'" he says.
The maddening crowd has driven Morin away from bids almost entirely. PM Construction, a commercial design/build firm, stopped trying for most of Maine's hard bids back in early 2007 because Morin didn't want to spend $5,000 to $10,000 competing for a contract against 20 other firms. Last year, of PM's $32 million in revenue, only about 20% came from hard-bid projects, whereas 60% to 70% of the company's work had come from such projects in years past.
"What we've seen on the competitive bid side is the businesses on the bid list, instead of three or five or six, you've got 15 or 20," says Morin. "It becomes a bit of an exercise in terms of who's willing to do it for less, or for nothing."
PM now relies primarily on selective bid lists, in which the client chooses which firms can bid, and negotiated contracts, in which the client has worked with PM before or been referred to them. The negotiated contracts may be for a single project or for several. Morin says he predicted the current building slump back in 2007 and began cementing the client contacts he says will make 2008 one of his best years ˆ he's projecting revenue of $51 million.
Peter Benard, president of Ledgewood Construction in South Portland, says bidded projects large and small are becoming more competitive now that the economy is slowing. Massachusetts and New Hampshire companies are entering the state more often to compete for large, multimillion dollar projects, and general contractors and subcontractors are offering bargain-basement prices to snag smaller projects. Ledgewood itself has been "a little bit more aggressive" going after open-bid contracts, though Benard would not say by exactly how much it has shrunk its profit margins to win bids because "everybody would read that and I'd be in trouble."
Stretching bids
Around Maine, contractors report open bid projects are attracting double or triple the number of bidders as they would have when the commercial market was hot. And it's no wonder: While contracts in private construction have dried up over the past two years, work in public construction, which often goes out to bid, has hung on. Private construction in the United States ˆ some 75% of all construction work ˆ fell 7.1% from February 2007, to $1.1 trillion in Feburary 2008, and a consistent weakening in private work has dragged down total U.S. spending on construction every month since February 2006, according to the U.S. Census Bureau. But public work, bucking the trend, in February inched up 0.4% above January totals and increased 8.2% over February 2007 rates to roughly $295 billion.
The fact that a public contract can provide critical work these days hasn't gone unnoticed. Some say competition is coming from businesses outside of Maine, while others say companies are going for contracts outside of their area of expertise. Still others say large companies are after contracts they wouldn't have considered in better times. All this means bid prices are shaving away at profit margins, as companies scrape to find work in a sparse market.
Bidding wars happen during every economic downturn that affects the construction industry, says Peter Hill, president of the Maine Contractors & Builders Alliance in Camden.
"You're spreading fewer jobs among a lot of contractors and that in itself will bring a lot of competition into the market," Hill says. Fewer contracts plus hungry contractors ˆ Hill says it's basic common sense that the market is going to get tough.
"It is somewhat more competitive," agrees Kevin Reilley, vice president of Benchmark Construction in Westbrook, a general contractor currently working on a Best Buy and a Staples in Augusta, among other projects. Reilley says that during a recent bid for work on a Naples school, Benchmark was up against an unusually crowded field. "To some extent we might see some of the new contractors that traditionally hadn't focused on commercial construction trying their hand at it," he says.
Competition for contracts has increased around the country, says Ken Simonson, chief economist at the Associated General Contractors of America, in Washington D.C. Simonson says contractors are bidding for work outside of their typical coverage area and reaching outside of their areas of expertise to develop projects they've never done before but that have similar materials and labor needs. A subcontractor who had been working on single- or multi-family residential units, for example, might bid on a school project, Simonson says, or a small commercial contractor experienced in building strip malls might reach for a university student center. In the scramble for work, contractors run the risk of underbidding a project, especially in light of soaring materials prices. If the project runs them too far into the red, it may never be completed and can sink the company for good.
"When you have 10 bidders listed [for a project], at least some of them are going to not wind up with enough work to do, or they're going to make a bid they wish they hadn't," Simonson explains.
Survival of the fittest
"It's a natural selection process where the weak companies will disappear," says Randy Poulton, vice president at Nickerson & O'Day, a commercial contractor in Bangor. "This is a cyclical business. The economy is good, the bigger contractors get bigger and the smaller guys come in because there's more work than the established guys can handle. What you have now is people are desperate and people are taking jobs not in their area of expertise."
Poulton says the company has decided not to bid on "three or four" projects because more competition has lowered the odds of winning the contract. In a recent example, Poulton opted out of trying for a $4 million to $5 million project in Lincoln that already has nine registered bidders.
"We like it when our odds are one in four, or one in five, but when it's one in 10, we pulled out of the project," says Poulton.
Poulton won't know until 2009 whether taking his company out of the running for those projects will significantly hurt revenue. Nickerson & O'Day is currently busy with construction management work that doesn't go out to bid, and those projects won't wrap until 2009.
Mike Wight, co-owner of Broughman Builders in Ellsworth, says the construction crunch means more subcontractors are knocking on his door looking for work. He says a new construction worker comes into his office nearly every day looking for work, when months ago he wouldn't have seen someone looking for a job even once a week.
Wight says Broughman is having its biggest season ever, perhaps, he guesses, because of the company's well publicized construction of a house for the ABC show "Extreme Makeover: Home Edition" and referrals from previous clients, and he agrees with other contractors that the competition will thin the pack.
"It's the old saying, 'The strong will survive,'" he says.
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