In a recent conversation with contractor and Pavement Advisory Board member Nick Howell of T&N Asphalt Services in Salt Lake City, UT, he expressed concerns about his local competition underselling their work early just to get some jobs in the books. Underselling can mean a few things, but most common its the practice of selling services under or below your competitors. While this might seem like a good idea to get your season started off busy, here are five reasons underbidding is actually bad for your business and the industry as a whole.
1. Losing Money:
While this may seem like a no-brainer, contractors don’t see underselling as losing out on really big money. They just see it as money coming in now.
“The problem with underselling in the asphalt industry is that often the pricing is below cost,” Howell says. “Anyone selling services below cost is asking for problems no matter how they twist it. We are all in business to make money, so when you are selling your services or products below what they cost you to provide them, you are just asking for problems.”
Typically in a seasonal market you will see this happen in the spring, as later in the year most companies are flush with cash and maybe not as desperate.
“Reasons why selling below cost happens are always debated, but usually come down to generating cash flow to run your business. Despite the fact that you’re below cost, contractors need to realize that none of that money is really yours to keep. It's money for materials, labor and other costs associated with the job. Profit is the only thing that's yours, so if you’re below cost, there is no profit,” Howell says.
2. Unrealistic Expectations for Your Work Force:
We understand this one. You hired good guys back and you want to get them out there working but don’t yet have the money to pay them so you undersell work just to generate cash to pay them. Be careful.
“Guys are just turning dollars with selling below cost, but regardless its a dangerous practice,” Howell says. “Im in the frame of mind that I’m in business to make money, so if I can’t do that, Id rather sit at the office and go broke than out sealing a lot while losing money.”
Plus guys who are busy at the start of the season are going to expect that all season long and next spring as well. It's not a good idea to keep the vicious cycle going.
3. Upsetting Your Job Costing:
If you haven’t mastered job costing yet, take some time to learn why it’s essential for the survival of your business in this article.
You need to know what it costs you to be in business for the entire year before you can make any decisions on selling below cost.
“People that do any job below cost run the risk of not recovering by seasons end,” Howell says. “Keep in mind, with the average seasonal business, you may only have 100 or so working days a year, so if many of those are wasted on doing work below cost, despite the reason, it can make it hard to not only catch up, but build your winter nest egg.”
4. Customer Confusion:
By setting a precedent of a lower cost to customers, you’re not only doing a disservice to yourself, but to the entire industry. Customers don’t know the reasons why the work is so cheap this season, they only see your price this year and will expect it year after year. That’s a problem.
“Customers don't know what is happening," Howell says. “The ultra low price can often set a precedence in the rest of the seasons pricing and create customers that expect that as the new normal. We need to remember with asphalt maintenance, there are few options between maintaining and paving, so there should be no reason to keep lowering prices and race to the bottom.”
5. Industry Reputation:
This is the big one. Do you like what you do? Do you want to keep doing it? Then make sure you’re doing everything you can to put your best foot forward and make the industry look good at all times. Underselling can be counterproductive to that.
“The hidden problem with selling below cost is that often corners can get cut to minimize the losses and as such, that can come back to bite you should the job fail,” Howell says. “Many years ago in my market, seal coats would easily last 3-5 years, now with constant corner cutting due to below cost selling, some seal coats show wear at just a year or even less.”
That doesn’t make the industry look good.
“Not to mention the problems if you get the reputation of the low cost leader among your peers,” Howell says. “Im a firm believer in knowing your costs and estimating correctly. We’re all in business for the same reason: to make money. It’s important to have that crucial job costing figured out and ensure you are not the one bidding below cost. Lets all stop the race to the bottom and bring the asphalt industry back to what it once was.”
