Editor's Note: This is the eighth in our 2009 series, "Earn More, Work Less." To read the previous article, click here.
I recently read a newspaper article that identified the challenges facing a construction company trying to do business in today's economy.
In California, total unemployment is predicted to reach 12 percent or more in 2010. Construction unemployment is almost double that sad statistic. But the monthly statistics that astounded me were construction permits issued in the state. Commercial construction permit dollar volume was down 66 percent, and residential permit dollar volume was down 75 percent since the peak years of 2005 through 2007.
This past year, I have repeatedly heard similarly shocking sales figures from national companies that supply construction materials such as cement, drywall, light fixtures and lumber. Your state might not be in as bad a condition as California, but it should make you think about your business model going forward.
What Type of Company Would You Own?
If you were not in the construction business, what type of company would you want to own? Would it be dependent on the federal government or your state to produce enough budget money to ensure plenty of work for your company to bid on? Would it be dependent on potential customers to ask you to bid plans and specifications against an unlimited number of competitors-qualified or not? Would it be a business where you are awarded contracts based on the lowest possible price, regardless of your capacity, reputation, service, quality or workmanship? Would it be a business where you do all the work and don't get paid for weeks after you finish? Would it be a business where you do a great job and then the next contract is awarded based on the lowest bidder?
Being a contractor is a hard way to make an easy living. Most observers think contractors make a minimum of 10 percent net profit and have all the freedom in the world. However, as you build a better company, you are really at the mercy of the market and customers to create opportunities to generate your potential revenue in this revenue. In other words, you don't create your own future.
Selling One Donut at a Time
Let's compare a donut business to construction. How could a donut shop increase their steady stream of ongoing and reliable revenue regardless of the economy? Successful donut shops don't just rely on customers to show up at their door.
Many of my Profit-Builder Circle Academies are held at my office in California, and I always drop by the local donut shop a few blocks away to pick up donuts and refreshments for the group. The shopkeeper has never asked my name, contact information or why I was buying donuts. They also never look very busy, and I have never had to wait in line.
Successful donut shops do business differently than most of their competitors. They seek regular accounts to guarantee their doors stay open in any economy. They don't just rely on their reputation, repeat customers and advertisements to work. They make business happen. They seek customers who order a steady number of donuts every day, week or month. In other words, the key to building a successful donut business is more than making good donuts. It's about selling and getting regular accounts.
Successful donut shops are two different businesses in one. One department builds good donuts, serves them in an excellent environment, has good managers and charges a competitive fair price. The second department steadies revenue and increases the bottom line; they have several ongoing accounts that deliver steady revenue every month to them.
Contracting Is Not Just About Construction
Now, how can construction companies increase their steady stream of ongoing reliable sales income, regardless of the economy? Attendees of my two-day Profit-Builder Circles learn how to get their business to work the way they want and take it to the next level. The most successful business owners have two types of contracts, revenue sources, customers and business models. They do lump sum contracting work and have a significant amount of their revenue come from steady ongoing service accounts.
These successful contractors don't rely solely on bidding single jobs one at a time to generate most of their revenue. When you mainly rely on bidding or negotiating work to win contracts, your business is either hot or cold, fast paced or dead, busy or slow. You can't control your workload, and your revenue isn't steady or reliable.
A "slow and steady" business keeps your crews busy - the workload is regular every month. Annual service contracts provide ongoing revenue. With steady regular service accounts, you can plan your schedule, workload and cash flow.
Multiple types of income, contracts and revenue sources complement each other. This business model allows the type of companies who do both bid and service work to become very efficient, generate steady workflow for their employees and create wealth for the owners. But they require two different types of management, sales efforts, cost accounting, customer service, employee training, professional standards and marketing efforts.
For example: Steve is an electrical contractor who has two separate companies that work together. He has a new construction division that bids to general contractors and does commercial projects, large shopping centers and office buildings. He has 10 steady general contractor customers who typically give his company enough work to make a small profit during good times.
As an offshoot to his contracting company, Steve started an electrical service company several years ago that installs, services and maintains back-up power generators for homeowners, commercial facilities, industrial plants, hospitals, government buildings and offices. This company seeks annual contracts for all service work required to keep customers' buildings powered during power failures. This service business has grown since he has focused on acquiring new customers, providing excellent customer service, conducting regular weekly employee training and implementing lots of sales and marketing initiatives.
Slow and Steady Wins
Generating steady business is an answer to improving your company's future, especially in the current economy. Steady business is not dependent on new construction to generate work for your crews and keep your doors open. In Steve's case, his customers can't afford to shut down during a power outage and will pay for the service his company provides. What type of slow and steady service business can you start or acquire to generate ongoing steady work and revenue?
Jim Goes Slow and Steady
Another example: Jim's business is typical for many contractors. He specializes in new construction of commercial buildings, remodels, renovations and interior improvements. His job sizes run from $50,000 to $700,000 and he does $5 million in annual revenue. But his competition is growing, and his customers are asking for lower prices. He reached a point when he couldn't make enough profit to make it worthwhile.
Jim asked me for advice. He had built several local stores for national retail chains, so I asked what he did for these companies on an ongoing basis. He hadn't pursued service work, because it takes too much time, and his company had stayed fairly busy building new construction projects. I suggested he go see these companies and offer a complete full-service package to them.
Within a few weeks, Jim set up a separate company. He put a manager in charge, added an in-house customer service coordinator, a marketing manager and a full-time salesperson. Three years later, his company has four to five service crews busy seven days a week and often working nights to accommodate these retail businesses. His service company provides anything retail store customers need: emergency glass repair, overnight painting, quick repairs, clean-up, electrical, plumbing, flooring, doors, heating or cooling maintenance, trash removal and remodeling. After only three years, Jim's service company generates more than $2.5 million in annual revenue.
Do Your Customers Want More?
Joseph owns a residential landscape company doing new installations for homeowners. He mainly works on referrals from custom home-builders, architects and past customers. Sometimes his company is busy, and other times he waits for the phone to ring. By chance, he was asked to do some hauling for one of his contractor customers. In the past, he didn't pursue this type of business because it was a nuisance and disrupted his operations. But this got him thinking about how he could expand his revenue sources.
Joseph decided to set up a new division that focuses on service work. He moved his chief estimator into the role of division manager to build the customer base, added a service manager and put a bookkeeper in charge of managing the accounts. He started by asking his customers what other types of services they needed on an ongoing basis. His homeowner customers trusted his company, liked their work and actually wanted his company to provide more ongoing maintenance for them as well. They asked for a weekly lawn and garden service, annual weed removal, yearly tree-trimming, winterization service and annual irrigation repairs. Some of his customers owned pools and also wanted his company to do their pool service, maintenance and repairs. Some customers had young children and wanted swing sets and playground equipment installed. Some wanted new barbeques installed, fencing added, stables for their horses built, cages for their pets and patio covers added. Some customers asked him if he installed annual holiday lights as well. Some customers even wanted his company to offer debris and junk removal and hauling.
Start Slow and Build Steady
As you contemplate the future of your company, what are your choices? Would you rather own a fast and furious company that depends on acquiring new contracts, one at a time, if and when your customers decide to build and when you are the low bidder? Or would you like your company to have a slow and steady division with an ongoing revenue stream and regular service customers to help you weather the ups and downs of the new construction business?
When you have a slow and steady company, you also have an asset you can sell. Service companies with annual contracts are more valuable than construction companies. The average construction company sells for three to five times its net earnings before interest and taxes (EBIT). The average service company sells for double that amount.
Start a service division now. Determine your goals and implementation plan. Hire a manager to run the division for you. Set up your office to succeed with a dedicated service manager, accounting manager and sales person responsible for the division's success. Your job is to provide direction, vision and hold your managers accountable for achieving the results you want.
Construction Business Owner, August 2009
