Vol. 2 No. 3 The Recovery Act Will Benefit You... In BMG’s last Idea File, we shared our free 16-page Recovery & Reinvestment Act general overview. In addition to outlining which segments of the construction industry were receiving funds, we briefly mentioned how these funds were going to affect construction and related equipment sales. Since new equipment sales are key to your success, here is more detail on how the Recovery Act may affect your company.
The $26.7 billion in highway- and bridge-related Recovery Act funds have been rolled out more quickly than any other segment of the $787 billion plan. Many projects have already been started or will be shortly. As of May 5, more than $9 billion, or only 1/3, of highway- and bridge-related funds have been committed to projects. New equipment sales will be on the rise, but will be slow during the initial round of Recovery Act projects. Low bidding and buyer apprehension will delay many new equipment purchases until later this summer. No matter what size your company is, the best opportunity to gain sales is from a focused effort on the top states. For example, the top 25 states equal 78 percent of the highway and bridge funding. Many manufacturers will take a passive approach and wait for the demand at the dealer and rental store level to increase, rather than proactively going after the business that exists. By redirecting your salesforce to these key states, and specific counties within these states, you will be able to capture dealer, rental store and, more importantly, contractor demand for your product. It will help increase awareness of your product offering and influence future purchasing decisions from existing and new customers. Contractors Underbidding To Win Bids According to Construction Financial Management Associate’s 2007 survey of 756 contractors, their net margin before income taxes was only 2.7 percent. Today, some contractors have said they are currently willing to settle for less than 1 percent margin or bid jobs near cost just to get the work. States and cities all over the country are reporting that bids are coming in 10 to 20 percent, and in a few cases even 30 percent, below the original estimate. Contractors are also expanding their trade area and bidding on jobs outside their core geographic focus. For example, a $200,000 drainage ditch project in the Baltimore area received 21 different bids—two to three times as many as in the past, and the winning bid was 18 percent below the estimate. This competition is good for the states, cities and the American public. It drives prices down and more jobs get completed within the same amount of money, but it can hurt contractors, material producers, equipment manufacturers and sales channels. Lower Bids Threaten Equipment Purchases Contractors are turning more to purchasing used equipment and rental to fill the gap between their equipment inventory and their needs until the economy gets back on solid ground. If you are already involved in the rental industry you know that the national rental chains will also be slow to update their rental fleet inventory. Many have just announced a 20 to 25 percent decrease in first quarter results. United Rental also announced it will be closing 39 branches in the second quarter and put all new store construction on hold. The small and regional rental companies are going to have a conservative fleet management approach like contractors. The significant lack of attendance at the 2009 ARA Show clearly reflected this.
On the bright side, the second wave of Recovery Act money will be released mid-to-late summer. In addition to larger highway and bridge projects, contractors will start seeing aviation, national park, utility and water projects. This increased demand for services will help stabilize the industry by reducing the number of bids and the competitiveness of contractors—slowly driving prices closer to the state and city original estimate levels. Once this is achieved, contractors will feel more secure in purchasing new equipment. BMG estimates that the demand for small and mid-sized equipment will steadily increase throughout the summer and, depending on how the year ends, should be stable by this time next year. Heavy equipment may see some growth mid to late summer but may not stabilize until late next year.A Deep Recession Clearly Drives
Innovation For Some
Even during these times, we see and, in some cases, play a part in the considerable innovation taking place within manufacturers and sales channels today that are clearly separating some companies from the pack. These companies have stretched beyond the traditional boundaries in strategic direction, new product and market development, and sales and marketing strategies and tactics. Here are just a few of the innovative efforts by manufacturers we know personally:
BMG believes that when business begins to aggressively return, these companies will have a value to the end customer well beyond price. Given that everyone today has a mountain of inventory, the price wars already developing today could be the most ruthless we’ve all experienced to date. |
Contractors, just like you, are in survival mode and are very cautious right now. It is very important for them to win bids so they can maintain cash flow and keep or rehire their employees. The lower cost of materials has helped contractors reduce their overall bids, but they are also willing to settle for lower margins—meaning they will have less money to purchase equipment for a while. 
Hopes & Dreams Will Come True
At BMG, we have the rare privilege to see this economic recession from many sides of the construction, mining and aggregate and environment and recycle equipment industries on both a domestic and global basis. We see how it affects those who perform the actual work and those that manufacture and sell equipment and services to them. Our breadth of clients and market segments served give us this expansive perspective.