Top Ten Factors in Running a Successful Construction Contractor Business
It is not easy running a construction business. There are many pitfalls and ways to lose money but if you follow some basic steps you can not only make a living but become very wealthy. Many successful construction contractors have learned there are certain things you absolutely must do right all the time and certain skills you must have or acquire in order to make it in this very competitive industry. In this article I will summarize what it takes to be a successful construction contractor in their order of importance.
Most Important Factor: Hands On Experience
Do not even think about starting a construction contractor business unless you have at least five years of broad (meaning general, not specialized) construction experience. The only exception to this is if you intend on specializing in one area and one area only. We call this a niche. Niche’s can be very profitable, but they can also go away, change or be replaced by technology, new products, changes in the industry or societal changes. The best chance for success in the general contractor business is to gain experience doing everything. This general experience has many benefits. It gives you the ability to identify and hire competent individuals, fire incompetent ones, evaluate good work product and identify poor work product. Probably the most important thing it gives you is the ability to transition from being a technician to being a manager. The best experience comes from small to mid-sized construction companies that require you to be a jack of all trades. Larger companies have a tendency to pigeonhole you into niches. That is fine if your business model is a niche, but if you start a general contractor construction business with skills in only a few niche areas, you will fail unless you hire to your weaknesses.
Second Most Important Factor: Outstanding Accounting System
If you do not have a sound accounting system your construction business will eventually fail. This CPA has witnessed this too many times than I care to recount. Sound accounting systems allow you to evaluate whether or not you make a profit on a job by job basis. Going with gut instinct is dangerous and fraught with risk. A sound accounting system helps you identify those things you do right on each job as well as the mistakes you’ve made. Numbers don’t lie. Unfortunately, my experience has shown me that most construction contractors pay little attention to their system of accounting. There is a fear that proper accounting will set the business owner up for higher taxes. Thus, cash received on a job and cash disbursed go unreported in an effort to avoid tax. What a mistake. I don’t care how great your gut feeling is on each job, if you don’t have an accounting of every penny on each job, you can rest assured you are flying blind and losing money on each job. You will go out of business and your family life will suffer. If you decide to start your own business you need to act like a professional business owner and that means creating a sound accounting system. Failed accounting systems lead to litigation, failure and bankruptcy.
Third Most Important Factor: Effective Management
When you have hands on experience in the industry, forged by many years (at least five years) of working in every facet of the construction business, you are better able to make the transition from technician to manager. Effective management requires that you have sound procedures on many aspects of your business. Well-defined work product processes, along with accompanying task-specific checklists, allows you to drill your workers on every aspect of a task within a job. You should have a work product process with accompanying checklists for just about every major task within a job. This eliminates human error and allows you to make corrections before the task is officially completed. It is a construction company owners #1 management tool. You must develop a process for each job and each task. This process must be in writing and stored in a binder for each job, along with the task checklist. The task checklist should be calendarized. Your jobs binder should include the following:
Tab #1 – A copy of the signed contract and any change orders.
Tab #2 – Budget for the job. Budget for each change order.
Tab #3 – Accounting for income and expenses. The income portion would include the contract bid price, monies received either as deposits or as the stages of the project are completed and monies received for change orders.
Tab #4 – Task List Summary.
Tab #5 – Task #1 Process Summary and Checklist.
Tab #6 – Task #2 Process Summary and Checklist.
Last Tab – Customer sign off letter on completed work along with standard testimonial letter signed by customer, listing customer’s name and contact information along with permission to use the testimonial in marketing and as a reference for prospective customers. You will transfer copies of each testimonial letter to a separate binder that you will take with you to each prospect. This testimonial binder may be the only thing separating you from your competition. It gives assurance to prospects that you take customer satisfaction very seriously and may be the difference maker. It allows prospects an opportunity to reach out to previous customers in order to obtain references. It also shows the prospect your company is very organized and well run. Lastly, have a picture of the before and after on each job in this binder.
Fourth Most Important Factor: Strong Business Partnerships
A stable of competent subcontractors who have many years of experience working together is crucial to the success of a job. Each job is a team effort and having a strong network of competent individuals/businesses available to you for each job, and who understand your businesses processes, will make each job run much more efficiently. Efficiency and competency = profit on each job.
Fifth Most Important Factor: Project Bidding Process
You can be the most skilled, best managed construction company, with a stable of talented subcontractors and still go out of business if you do not have a strong process in place on bidding for each job. You can lose your shirt if you underbid a job. How does this happen? The most common cause of underbidding is not doing your homework and relying on your gut or unverified estimates rather than a fail safe process of checking and double checking each cost within each task. The devil in any construction job is in the details. The bidding process is very much like your business plan for each job. It must identify every task, every cost and each cost must be checked and double checked before bidding on the job. Where many construction contractors go wrong is in estimating the cost of tasks incorrectly. These incorrect estimates are caused by flawed assumptions on the tasks and the associated costs, which is the result of not accurately verifying and then re-verifying every task and every cost. It is a painstaking process but you must get the bid right. Your assumptions on each task must be vetted not once but at least twice. You know the rule: measure twice cut once. This adage is particularly true in the bidding process.
Sixth Most Important Factor: Marketing
Everyone in the construction business understands the importance of referrals. Most of your prospective customers come by way of referral. But referrals are not enough. What should be part of your marketing tool belt?
1. You should have an active web site that includes customer testimonials front and center.
2. You should join a networking group.
3. You should join a civic organization.
4. You should provide valuable assistance to local community non-profit groups (one or two will suffice nicely).
5. You should have a regular process of bidding jobs that are not referral-based
6. You should have a process for direct mailings very week.
7. You should have business cards, stationary, job site signs.
8. You should advertise in the yellow pages or local newspapers.
9. Customer Testimonial Binder (referenced above).
10. You should have brochures.
Seventh Most Important Factor: Stay Current With Technology and Replace Old Equipment/Tools
You must upgrade your equipment and tools to stay current with technological changes. This will not only improve efficiency but also the quality of each job. You must also replace old equipment and tools in order to get each job completed efficiently and on time. You will know when it is time for new equipment and tools when the old equipment and tools begin breaking down at a rate that causes recurring delays. When equipment/tools breakdown it can cause cost overruns and result in late completions. No matter how good the quality of your work is, missing completion dates harms your reputation.
Eighth Most Important Factor: Hire To Your Weaknesses
No matter how much experience you have and how skilled you may be there are certain things each one of us does well and certain things we do badly. More often than not, the things we do well are the things we enjoy doing and the things we do badly are the things we hate doing. A skilled business owner will hire people who do have strengths in areas the business owner has weaknesses. As an example, one of my clients nearly went out of business because he did not like having to make calls to collect receivables. My advise to him? Hire someone who is expert in collections. He took me up on my advise and eventually, his collections expert, became his partner. His business is thriving now. Hire to your weakness and watch your business boom.
Ninth Most Important Factor: Document Mistakes and Failures
This should be incorporated into your Job Process/Task List Binder. You must learn from your mistakes. Mistakes should not be considered anything other than an experience learned. Document those bad experiences and incorporate them into your job process and task list binder so as to never repeat them again.
Tenth Most Important Factor: Change Orders
Most contracts include language regarding change orders. Change orders are caused by many factors, which is beyond the scope of this article, but let me be clear in saying that you must cost out every change order as if you were costing out the job. You must then process the change order (list each task and assign a date of completion for each task) and attach a task checklist for each new task resulting from the change order. Lastly, you must get the customer to understand and sign off on the change order or you will not collect your full price for the job. Many construction contractors unfortunately do a poor job in addressing change orders. They are reluctant to highlight it with the customer and gloss over it in an effort to avoid confrontation. The reason? The reality of change orders are not addressed up front when you are bidding on the job. Customers only see the price you gave them and that is in the contract. You must address the reality of a change order occurring at the outset of the bidding process and before the contract is signed. If a customer understands from the very beginning that change orders do occur often and that a change order will increase the price of the job, you will be less shy about confronting the customer when it does occur.