Cracking the Commercial Market

Paint and Wallcovering Contractor by Pamela Mills- - 12/20/2009

2009_12_PWCcover1.gifWhen Hester Painting & Decorating started its commercial division seven years ago, the plan was built more on promise than practicality. After all, the company had zero commercial customers, recalls president Steve Hester. But he was convinced that commercial was a growth opportunity for the 41-year-old company.

The vision paid off. Today, the division accounts for 20-25 percent of Hester’s total revenues.

It’s an inspiring story, especially for the thousands of battered residential contractors who may now be considering seeking salvation in commercial work. Could they make the same leap successfully?

Don’t have your residential crews tackle commercial, says Steve Hester, who made that mistake.

Some might—but only if they proceed cautiously, intelligently and realistically. A rash commercial plunge could swamp an already-listing business.

Approach with caution

It’s no wonder that residential contractors dream of grabbing a slice of commercial pie. With big-dollar projects that can keep crews busy for months, it all looks pretty attractive, says Scott Lemons, vice president of member services for the Commercial Contractors Network in Takoma Park, Md.

Unfortunately, says Lemons, commercial is now struggling as much as residential. And contractors in every sector are trying to enter other markets, intensifying competition and hammering pricing.

“Few contractors have faced things as tough as they are right now,” says Brandt Domas, a former 30-year contractor who heads the Commercial Forum of the Painting and Decorating Contractors of America.

“New-construction commercial has always been competitive, but it’s even more competitive now. What little work there is to bid on—and it’s pretty non-existent for new—is going below cost.”

Maintenance commercial work is scarcely faring better—although, as with new-builds, this can vary by region, Domas adds.

It’s a dangerous time for contractors, agrees Pat Barry, regional trade sales manager for Diamond Vogel Paints, based in Orange City, Iowa. “It’s become very cutthroat,” he says. “People are fighting each other to see who can get to the bottom the fastest. Everyone is scrambling. And the GCs are encouraging this. They’re accepting bids from painters, knowing full well the job can’t be done for what they’re bidding.”

Although maintenance hasn’t slowed as much as new-build, property owners are already taking bids from unknown bidders, looking for the lowest price. While this could give residential contractors an in, it could also prove disastrous if a contractor underbids or lacks the money to wait for payment.

Promising possibilities

Still, it’s not all gloom and doom. There are opportunities in the commercial market. For example, commercial work accounts for half of Eunice Bokstrom’s business at Design Wallcovering in Edmonton, Alberta, Canada. She goes after niche-type projects such as small offices, high-end corporate work and restaurants—projects where quality matters more than price.

“The profitability of commercial work surprised me,” says Bokstrom, who has been in business 22 years. “You hear so much talk about how it’s so price-focused that I assumed it would all be low margins. But niche work is very good, especially if you do supply/install.”

Edge_2009_12_fig2.jpgConnecticut muralist Patrick Ganino pounds the pavement to find commercial work, looking for new construction and major renovations. He recently completed two 12-story exterior murals in Brooklyn, N.Y.—a two-month project.

Muralist and decorative finisher Patrick Ganino also owes half of his 11-year-old business to commercial work—mainly specialty projects. The owner of Creative Evolution, in Durham, Conn., recently completed an exterior mural on two 12-story buildings.

How does he find the work? “I hit the pavement,” says the author of The Business of Faux. “Last December, I was driving down the street, saw a restaurant that was opening, and went in and pitched a mural and faux finish. I ended up getting the job: $30,000 on a walk-in.”

Mike Digilio, owner of Digilio Decorating in Forrest Park, Ill., also shoots for niche commercial jobs. His portfolio includes a photo mural in the lobby of the St. Louis Gateway Arch and the entire interior of a large Chicago restaurant—four months of day-in, day-out work.

Commercial accounts for 10 percent of Digilio’s business, but he is angling to increase that. He’s interested in getting a work visa for Canada, where the economy is better, assisting contractors who occasionally need additional manpower.

Factor this in

Unlike some contractors, Digilio is happy specializing in smaller jobs. One reason: the extended—and potentially devastating—payment times typical of large commercial projects. “It could kill you, especially if you’re a smaller guy,” says Digilio, who recently declined a commercial job because of the financial risk.

“Never take a job that you don’t have the money in the bank to cover,” warns Mike Digilio.

“Someone once told me to never take a job that you don’t have the money in the bank to cover. So if you’re doing a $5,000 job, you should have that in the bank. This works fine until you get to a $150,000 job. Then you need a line of credit—and good luck with that.”

Domas seconds that warning. “Payments used to be 60 to 90 days, but now it’s more like 90 to 120 days for new-builds,” he says. “You must have equity in your business in order to carry accounts receivable—either actual money or an existing line of credit. The turnaround time for maintenance isn’t as bad, but it’s tightening.”

Consider: Hester’s biggest commercial job was a 700,000-square-foot hospital addition. The nine-month project was completed in the first quarter of 2009, and the company still hasn’t been paid in full. “It’s been dragging on for four months now,” he says. “We just sent in the final waiver last week. This says a lot about the need for cash flow.”

Terms for specialty-niche work can be more agreeable—and more negotiable. Bokstrom’s usual terms are 30 days.

Ganino, on the other hand, gets one-third up front, one-third midway and the final payment within 30 days after completion—no matter who the client is. “If it’s a big-dollar job, like $90,000, I don’t want $30,000 sitting around at the end, so I’ll split it 30%, 30%, 30%, and 10%,” he adds.

Lemons warns residential contractors not to consider bidding on a large commercial project without enough cash to allow them to float the bill for at least four months. After all, that one project could tie up a company’s entire resources for an extended period.

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