Residential remodeling took a huge downward turn after the housing bubble burst. Some remodelers lost businesses, some switched professions, some retired early—you name it. At SJB Construction, we opted to diversify: Instead of channeling 90 percent of our business through our residential division, we would do more commercial work. We had prior experience with commercial jobs, so we weren’t starting from scratch; rather it was a matter of fine-tuning processes and renewing old relationships.
Here are some of the opportunities and challenges awaiting contractors who enter the commercial market.
Finding the Work
We’ve found two main sources for work: property management companies and large commercial contractors. Both business types often have more work than they can complete, and they like to hire subcontractors that can deliver quality work at a fair price. As with residential projects, these connections are relationship-based, but they don’t require the kind of marketing effort needed for the residential side of the industry.
A third source of work is tenant improvements. These jobs typically originate with retail stores or business owners who are leasing commercial space that needs remodeling. Some of these jobs are considered too small by larger commercial contractors, so this work may be easy to win.
If fact, that’s one advantage a residential contractor has when transitioning to commercial work. The higher overhead of large commercial firms sometimes prices them out of the job. A nimble residential team with smaller overhead can be very competitive, and commercial budgets often leave room for a comfortable profit margin. So don’t count yourself out, even if you have no commercial experience.
When it comes to bidding, commercial clients are detail-oriented. They take care of the exploratory and design work early, so plans and specifications are more complete and you can bid accurately. Keep in mind, though, that deadlines can be a big deal, especially in tenant improvements, so take urgency into account when bidding on these jobs.
Insurance and bonding. In many cases, residential contractor’s insurance will cover small- to medium-sized tenant improvements, but additional insurance may need to be purchased for some commercial work. As for bonding, the minimum bond requirement in California is $12,500 for general building contractors, but you can purchase additional bonding if necessary. Like insurance, the size of the bond required depends on the project, and the cost reflects your company’s experience record and assets.
Pros and Cons
Commercial and residential construction are very different. Here are some areas where you will need to make adjustments and reeducate your staff.
Methods and materials. New materials, unfamiliar building systems, and more formal jobsite procedures will be part of a steep learning curve, so it’s important to have enough cash flow and manpower to cover mistakes or estimating errors until you gain more experience. Commercial projects may also require you to change some of your practices. In a commercial facility, for example, you may not be able to turn off the water or electricity as easily as you can in a private residence. Your work hours and access to the site may also be restricted.
More regulation. Commercial work often attracts more public attention and scrutiny, so it’s essential that contractors comply not only with local codes and regulations, but also requirements from agencies like the Environmental Protection Agency and OSHA. This may mean additional training—for a safety officer, for example—as well as additional meetings and documentation to prove compliance should you ever be audited. If you’re not already doing some of these things, you’ll have to figure in the cost of compliance.
Longer payment cycles. This is another reason to prepare financially so that your cash flow is adequate. Residential contractors typically receive progress payments directly from the homeowners at the jobsite on the day the payment is scheduled. On a commercial job, however, it can take 60 days or longer to finally receive payment because there are more layers of administration for the invoice and payment to pass through. This is especially true on jobs where some of the funding comes from government sources.
Layers of management. One difficulty many residential remodelers may have with commercial projects is making the adjustment to working with a third party instead of directly with the owner. Commercial projects are usually supervised by a project manager who spends very little time on site and lots of time in the office. This puts a premium on communication skills, and getting an answer to a question sometimes takes longer than it does when working with homeowners. In the worst case, it may require a formal RFI (request for information).
For example, we have dealt with a property management company acting on behalf of property owners who frequently are not local. In some cases, we’ve had to schedule our work around when the owners would be arriving instead of scheduling to our convenience. It may take considerably longer to get a response from an owner who is out of the country, and cultural differences can complicate communication (just as they can in a residential job).
Paperwork. The management structure generates reams of paper, and keeping up with it can put a strain on the resources of a residential remodeler. Make sure you have adequate staff in the office to handle all of the documents necessary to keep the project moving. If you need to make a hire, look for someone who is proficient with computers and software and who is more comfortable in an office setting than your field employees are. Having the right person in this role will not only help get the paperwork done, it will ensure that clients and other trades view your company as professional. We look for people who have a project management certificate, experience with bidding and permitting, and five or more years of construction experience; a background in architecture or engineering is also a plus.
Taking on commercial work requires making some adjustments and moving out of your comfort zone. But contractors who prove themselves capable of performing in this arena can expect to be on the priority bidder list for years to come.