I'm a builder, have been for more than 20 years.  Everywhere I go and with everyone I meet in this business, the talk among builders, architects and developers always comes around to the question, “Have we hit bottom yet?”

While I am totally unqualified to make predictions about the global economy, recessions and macro economics, I do know my little slice of the world that I live in fairly well.

The answer to that question in our world is: Yes, absolutely, the bottom.

I have a friend whose mission is molding young minds in the ways of business at a large university in Philadelphia. A few years ago he explained that my business (construction) was seen by those immersed in the study of strategic sourcing business models as low hanging fruit; an industry ripe for reform. Apparently, the multi-tiered and often unintelligible supply chain model that the construction industry has lived on for so long emerged as a target for revitalization through smarter modeling. I took this to mean that a new wave of MBA business strategists wanted a piece of the action. Why leave all that multi-tiered profit taking to contractors?

Another friend of mine works for a national firm that specializes in providing owner’s representation for companies building or leasing real estate. Their mission is to represent owners during construction who don’t have in house development experts. They make sure their clients get treated fairly and are not taken advantage of. They believe that the construction industry is immersed in profit, making their role essential to keep contractors honest and to reduce cost exposure.

A lot of people have spent a lot of time wondering just how deep the profit pool is in the construction business. I’m not sure that any of us, even those of us in the business, ever really knew.

Now we know.

It was not accomplished through theoretical economic modeling, or ball busting of the first order. The answer came from the mother of all recessions that we find ourselves living through in 2009.

The recession has drained the pond and it’s not pretty at the bottom. In the shallow puddles of muck left at the bottom, the survivors lay like comatose carp in muddy silt, tails quivering in the hot sun, praying for some one or some thing to re-fill the pool.

So, how deep was the water? Now I can give you a pretty good idea based on current pricing and bid results.

Right now contractors are annihilating each other with estimates that stretch the concept of competition to territories uncharted. Many contractors haven’t bid a job with profit for 8 months, overhead has dwindled to a line item for the “Johnny on the Spots” and a cheap first aid kit. I’m seeing plenty of jobs where the low bid is less than the total of subcontract prices. No overhead, no profit, just a little cash flow to keep the gills wet.

Bear in mind my slice of life represents pricing from the general contractors and construction management firms. As a GC/CM,  I’m at the top of the food chain. The sub-contractors are doing the same thing and so are the sub-sub-contractors. Every tier is pricing at cost or less. The people bidding at less than cost are usually those with additional tiers below themselves. The conventional thinking is “I’ll get it back when I buy out my subs” The problem with this theory is that it doesn’t work, there’s no room left.

As a result, I expect to see the casualties mount and endless legal claims filed because the work that is selling at these prices  may be un-buildable. The pricing structure is in a death spiral and it’s unsustainable.

My advise to other contractors: Pricing work for less than cost will put you out of business in a more horrific manner than having no work. Same result, just more agonizing along the way and, you will take others along with you that had not intended to go.

So just how deep was the pond? Six years ago we built a large 1200 seat church. It’s a an artful high end building designed by one of Philadelphia’s leading ecclesiastical architectural firms. At the time of construction (2003) a classroom addition for the church was carried as an alternate. The price at the time to add the classrooms was  +-$1.8MM. The church did not have the funding, so only the church was built.  3 years ago the church came back and asked for a current budget on the classroom addition, same size and scope as before. The estimate with inflation was +- $2MM. Still too much, they needed to do more fund raising.

Five months ago the church put this work out to bid. It is the same size and scope as the original. Final 2009 winning bid was +- $1.3MM. The recession discount was 35%, and that appears to be a developing pattern.

I’ve looked at this from several angles and the discount appears to be a range of 25%-35%. In my opinion, that percentage is all of the fat and probably most of the operating cost in the supply chain. When you consider GC/CM markup in normal times are 3-6%, sub contractor markups were 15-25%, factor in second tier sub-contractors and suppliers, discounts in this range make sense.

Where do go from here? We’re at the bottom, construction prices cannot go any lower unless commodity process, wages and/or the cost of manufactured goods we use drop lower. The question I ask now is, “How long do we stay at the bottom?”

Until the banks start lending and the Dow goes up enough that people don’t feel entirely broke, pray for rain.