Discover how one business owner moved his construction company in a new direction.
Editor's Note: This is the second in our 2011 series, "Profit Builder."
John Hockey had 20 years of commercial construction experience when he decided to start his own company in 2002. He had previously served as vice president of a major hotel and retail general contractor located in Northern California and as project manager for a large national general contractor performing design-build projects on public and private buildings. He had gained experience in every aspect of the business including managing the operations, construction, business development, marketing, estimating and budgeting. Owning his own business seemed like the next best step when his business partner died in 2001, and their California business closed.
So in 2002, he moved his family to Palm City, Fla. and started a land development and contracting company. His new company participated in various real estate, construction, consulting and development enterprises. At the height of the real estate boom, he was also involved in land speculation and served as the qualifier and real estate broker for a local home builder who built a significant number of homes.
A Positive Start to Business
In 2006, Hockey was offered the opportunity to buy Caliber Contracting, Inc., a local 10-year-old commercial construction company. With seven employees, Caliber had built a reputation as a quality contractor specializing in commercial, retail, medical offices and restaurants on the East Coast of south Florida. Caliber had grown quickly from the real estate boom throughout the ’90s. Their many loyal customers were primarily real estate developers who hired Caliber on a negotiated basis to build shopping centers, offices and other tenant improvement projects.
Hockey took the risk and purchased this successful business in 2006 from Caliber’s founder. With Hockey’s experience and business development talent, he quickly continued growing the company from $3 million to $5 million in two years, with jobs ranging from $100,000 to $750,000. His company continued focusing on commercial construction projects acting as a general contractor providing project management and supervision and using subcontractors to perform the work. Hockey’s ship was headed in an excellent direction, and Caliber’s future looked bright.
Changing the Construction Company's Direction
Then, a storm came on suddenly. In 2008, the slow economy hit Florida hard and fast. Retail companies and restaurants began to show signs of a slowdown as their customers stopped buying. Next, Caliber’s medical and doctor’s office projects disappeared. Then, tenants for Caliber’s developer customers dried up, construction lenders stopped loaning on new projects, projects started to fail, foreclosures were everywhere, and Hockey’s customers stopped building. To make matters worse, the housing market had come to a screeching halt in Florida, affecting everyone.
If you have ever skippered a large boat, you know how hard it is and how long it takes to turn a moving ship around. Changing directions quickly is not an easy task.
Likewise, deciding to change your business, even when the facts are in front of you, is no easy decision. It takes energy, courage, confidence, leadership, toughness, the willingness to try new ideas and strategies and the ability to replace your crew if they are uncooperative. You will encounter resistance, negative energy, pain and challenges.
In 2009, Hockey made the decision to strategically change his business model. Rather than competing against an increasingly large list of competitors on the fewer projects available to bid, he stopped going after projects that had little hope for bottom-line success. He decided to change his customer targets from private customers to government agencies and cities. He also changed his project mix from retail and commercial to public works construction projects and maintenance contracts.
New Construction Revenue Opportunities
As Caliber’s backlog dwindled, Hockey began to search for new construction revenue opportunities that could generate above-average margins—jobs with limited competition and complex processes, and jobs that only allowed select or qualified contractors. Getting started was the difficult part.
Since Hockey had not done much public works contracting in Florida, he started a comprehensive search for jobs that met his company goals. The company qualification process was painful and took several months. To become qualified to bid, Caliber had to find government agencies to target, register with these agencies, learn their paperwork system, get their bonding and insurance requirements in place, and find subcontractors who specialized in this type of work.
After several months, Caliber was placed on a few public works bid lists and started bidding smaller building and annual maintenance projects in the $50,000 to $300,000 range to get experience. They tried several government agencies including the U.S. and Florida Department of Transportation, National Park Service, Florida Department of Environmental Control, U.S. Navy and Coast Guard, Department of Veterans Affairs, the Department of Defense and others. The process of elimination helped them learn how to be successful on bids, how to work the system and more importantly, where to find the profitable and less competitive projects.
Throughout Caliber’s first year of this new journey, the company continued seeking jobs that would generate revenue, cash flow and profits quickly. These included projects with a high gross margin potential that would start immediately, finish fast and have little competition on the bid list. Hockey’s strategy was to find the right jobs to bid. These targets included difficult projects that scare competitors away, are hard to qualify for, are awarded based on set-aside advantages and are easy to manage to keep the company’s overhead low.
In the first six months of the new construction business development strategy, Caliber bid over 50 projects and landed only three through trial and error.
Caliber worked hard to turn their ship around and change their course of business. And it is starting to pay off! They have learned a lot and are now emerging as a successful public works contractor. As their commercial business dwindled, Hockey had found a way to become profitable again in a short amount of time. He refused to wait for the economy to turn around. He was willing take a risk and invest in his new business plan. Today, his company looks very different than it did a few years ago.
Business Lessons Learned
By bidding on different types of projects, Caliber learned where to place their efforts to get the highest return. For example, they learned that city and county low-bid construction projects do not fit into their construction business plan. They found that too many contractors have been doing this type of work for years and know all the tricks, making it too hard for a new company to win any work.
Caliber later discovered that energy and environmental projects have a better opportunity to make a higher margin and acquire repeat business on an ongoing basis. These include technically intense jobs such as energy upgrades or retrofits on public or government facilities. Some other projects Caliber has had success with include re-carpeting a Coast Guard facility, gaining an annual contract for maintaining and repairing DOT turnpike facilities, repairing government building roofs and converting facility lighting to solar power for the National Park Service. With their success on these complex (and less competitive) projects, architects and engineers are now contacting Caliber to bid joint venture design-build projects. ν
Q&A
1. What did not work in your construction business, and how did you change it?
First, we had to stop lying to ourselves. When people said to me: “When the market comes back, then… ” I respond by saying, “You and I know it isn’t coming back!” Like any 12-step program, the first step is admitting there is a problem. Do not gloss over reality or pretend it does not exist.
Spending lots of money every month on overhead without work to substantiate it will not work in the company’s favor. You need to run your business by the numbers, and be proactive in cutting overhead to match your gross profit revenues. Also, consider what takes less overhead to manage. For example, we bundle some of our subcontractor packages, so that one sub can do more than one trade. For example, metal studs, drywall, ceilings, insulation and doors are bundled into one contract.
Acknowledge that there has been significant margin erosion as a result of increased competition. Conventional wisdom suggests you should become less selective in choosing jobs to bid. But I suggest the opposite is true. By being more selective, you can optimize your reduced overhead and estimating capacity. Set realistic targets, and do not continually bid lots of jobs in hopes of winning one.
2. What is working for your construction company?
The market does not support an additional level of markup today. Therefore, we have started self-performing some of the work with our own crews to lower costs and become more competitive.
We have also distributed our overhead load by involving more strategic business relationships to secure public procurement. For example, we have ventured with different set-aside contractor companies for disadvantaged business, disabled veterans and small business-owned contracts. Many of these projects required us to self-perform at least 15 percent of the work.
3. Can you share any management, field or bidding tips?
We are now listening more, learning more and talking less than ever before. We used to think we were so smart and knew it all. The economy proved us wrong, and we have humbled ourselves and have ventured into new unfamiliar areas.
We now pay more attention to cash flow and getting paid fast when we select jobs to bid on. If the pay will take forever or lots of retention will be withheld for months, we avoid this type of project since the margins will not make it worth the risk. Short-term maintenance and retrofit projects go quickly and generate lots of cash and gross margins.
Expect the unexpected. The old rules do not apply. The good old days are over when you trusted your older customers to take care of you. Minimize your downside risk by expecting that payments will be difficult to get and usually late. Also, do not expect to get paid unless you do your required paperwork properly and manage according to the contract requirements. Make it your priority to stay on top of receivables, and make those nagging calls every day to get paid promptly. Install company procedures to track liens, notices, statutes and required paperwork on every project.
Make quality and safety an even bigger priority. Many under-worked building officials will try to find something wrong with your work. Be armed with lots of donuts and excellent supervision to get your work approved, or else! Remember, even attorneys need more work today than ever before.
Increase your subcontractor pool by using an automated bid request system. We had gotten comfortable and would use the same subs on every job. But now, we must be more competitive. Get at least five or 10 bids on every trade to increase your competitiveness, and prequalify all of them to avoid poor performance or under-funded companies.
Also spend more time analyzing your bids after the fact. Look at your competition, costs, markup, subcontractors and market. Find alternative material sources. Consider international companies and Internet shopping, and ask your standard suppliers to become more competitive.
Construction Business Owner, February 2011
