Heed advice from construction industry experts and others in the field to start the year off right.
Many construction companies continue to face similar challenges they have encountered since day one of owning their business. To stop this never-ending cycle and be successful in 2012 and beyond, you must adopt smarter management practices.
A Management Mindset
Smart management begins with integrity, according to Mark Shapiro, who has worked with business owners over a decade. Shapiro is the chief brand officer of E-Myth Worldwide, a business consulting company developed by Michael Gerber, who has written several books including The E-Myth Contractor: Why Most Contractors’ Businesses Don’t Work and What to Do About It.
“Most customers don’t expect contractors to do what they say they’re going to do,” Shapiro says. This has become expected in the construction industry. “Contractors think in terms of doing the job, not serving the customer.” You have to “project manage your time” and budget to make sure you and your staff regularly communicate with customers.
Shapiro says contractors tend to have a technician’s mindset versus a management mindset. But many owners structure their business in a way that does not allow them to be free of the technical work.
To effectively manage your business, you must have a plan. Shapiro points out that construction companies often fail to develop a vision for their business. “They don’t focus on what they want their business to look like three years from now.”
To develop your vision, answer these key questions:
- What will your business focus be?
- What market will you serve?
- What industries will you serve?
- Who do you like serving, and who has the money?
- Where will you do business?
- How many employees do you need?
- What kind of advertising will you use?
“These are the kind of strategic decisions that result in a vision,” Shapiro says. And that vision helps make all future decisions for the business.
The Key to Profitability
To be profitable in this business, you must follow sound financial management practices. Smart financial management “has to do with understanding what’s going on in your business and using those numbers as they tell a story,” Shapiro says. He advises contractors to find a financial manager or part-time controller to help manage the financial part of their business.
Michael Stone, author of Markup & Profit: A Contractor’s Guide and Profitable Sales: A Contractor’s Guide, says contractors tend to make three terrible mistakes that negatively affect profitability: competing on price, using change orders improperly and writing bad contracts.
“Those three reasons make up well over 90 percent of why construction businesses go out of business,” Stone says.
Stone, who has worked in the construction industry since 1952, advises contractors to have a system for estimating jobs and understand their overhead and cost of doing business. Stone says when you understand the numbers, you can set the right markup, which prevents you from cutting costs. “You’re either making a profit or going out of business.”
Raising your prices by 10 percent will not be a noticeable difference, he says. If the customer tells you the price is too high, Stone attributes the problem to the sales presentation, not the price.
Thomas Schleifer, a former co-owner of a construction business who has more than 40 years of contracting and consulting experience and has written several books including the Construction Contractors’ Survival Guide, agrees that managing overhead is the single most important thing a construction business must do. “Keep (your) expenses managed against available profitable work,” Schleifer advises. And remember, breakeven work will not cover your overhead, he points out. It may also be beneficial to hire some temporary employees and rent equipment.
You have to keep your financial strength intact, Schleifer says, and that can mean making the tough decision to downsize and let people go.
More Challenges Today
The construction industry has always been cyclical, Schleifer points out, and right now, construction businesses cannot afford to become financially weak. You must maintain your financial viability to avoid losses and obtain outside financing necessary to grow and build new projects.
Schleifer advises companies to continually measure their staying power—constantly test what you are doing to make sure it will sustain the business long term. Pick one or two measures to regularly review, such as working capital, your balance sheet and net worth.
Stone recommends seeking outside help from experts who have construction-specific experience. “Construction has nuances that no other business has,” he says. You also have to be willing to take advice.
Shapiro believes every business should have a coach. “People who are the best at what they do are people who use help in smart ways.”
Management Tips
“Management always begins with self-management,” Shapiro says. He recommends that you take time now to get organized—create a calendar and to-do lists, avoid clutter, clean your email, create a filing system, return calls and be able to find anything in your office in less than 10 minutes. Only then can you focus on how to manage your business, properly delegate and put systems into place.
Stone says employee problems can often be traced back to the owner. He believes construction business owners tend to hire quickly, and they take months before letting someone go.
“Most contractors are great people and try to treat employees as well as they possibly can,” Stone says. This is a great attribute, but always hold your employees accountable.
Advice From Other Contractors
Take time to talk to others who have experienced success in the business to learn from their successes and failures. Schleifer provides this perspective: “It’s fascinating that in the construction business, the various trades think of themselves as very different, and the only place they’re different is in the field.”
Other contractors in the industry shared what they have learned with CBO in our active LinkedIn group. Keep their advice in mind to start the year off right:
Jack Whealan, managing partner with Sky Top Builders, LLC, says: “Project your volume and velocity and your numbers—make a plan, know the plan, and stick to it with dogged determination.”
Frank Lott, director of construction at PreciseCM, a commercial general contractor, says: “I follow three rules: (1) Out of debt, out of danger. (2) Mitigate, don’t litigate. (3) Don’t work with anyone you don’t like.”
Danny Gunsallus, the owner of Power House Plastering, says: “Know your costs, keep your overhead low, and always service your customers.”
Michael Regina, owner of Big Sky Enterprises, LLC, a commercial contracting firm, says: “Determine your USP (Unique Selling Proposition). What is going to make you stand out above the rest?” He adds, “Your time is your greatest asset and can become your greatest liability if you’re not a good steward of it. Control your schedule; don’t let your schedule control you.”
