As the demand for new construction continues to dry up, contractors can continue to expect more competition for commercial and industrial construction projects. The reason for this increased competition is that many projects are in holding patterns as tightening credit markets have left the private sector scrambling to find capital. This leaves only those who can self fund projects (i.e. institutions, higher education, hospitals and public projects) seeking bids on new construction.
Unfortunately for contractors, increased competition drives more aggressive bidding practices. In some cases, contractors are bidding work at a break even or sometimes a loss in order to keep employees working. This is a dangerous formula that can leave a construction company bankrupt. All it takes is one bad project to force a contractor out of business.
Crain’s Cleveland Business reported on this trend in their February 9, 2009 article titled “Construction costs’ decline a sign of times.” The benefactors to these times are the consumers. Not only is increased competition amongst contractors driving down bid prices, the decreased demand for materials has driven down construction costs. Steel and fuel prices in particular have fallen recently. As a result, we are currently in a deflationary market for building.
Discipline is the key to longevity in the construction business. Contractors that mitigate their contract risk exposure and follow fundamentally sound cost and profit guidelines will survive in the long run.