The Six Essential Steps For Construction Business Success

Often times, owners of construction companies tend to be craftsmen, masters of their trades.  Running a productive and profitable business, however, may be an entirely new skill set.  Enhancing management abilities, while it involves a bit of hard work and determination, can be as easy as knowing the following six steps necessary for success.

Principle Number One: You must produce sales which are profitable

Bidding is where it all starts. The person in charge of bidding must know all the costs in running a business which includes both fixed costs, variable costs, and overhead. Variable costs would include not only materials but any subcontractors which would be used, as well as additional expenditures for the job being bid, including equipment that needs to be rented, which will change for each project. Fixed costs—costs which do not vary with each job, would include insurance, leases and, and salaries.  Armed with this information, contractors can develop quotes with built-in, predetermined, profits and sales representatives can be confident that the business they bring to the company will result in sales which are profitable.

Having valuable employees is another factor, which contributes to sales profitability. With stable personnel in key positions, construction company owners only need to subcontract the minimal amount. This ensures quality, guarantees required workers are available and lowers costs—all of which impact profit.

Principle Number Two:  Turn Profits into Cash

Once a construction company is making a profit, a viable cash-management system (a process to track and effectively use cash) is required.  Simple advice from an accountant or attorney is not enough. The management of the company needs to develop a game plan to use a variety of options that will turn profits into cash including reinvesting, entity structuring, asset protection, and tax planning designed to meet the needs of the business.

A building contractor, for example, with a family of four was working 14 to 17 hour days.  This schedule left him with little time to enjoy the fruits of his labor.  After having his business analyzed, using a tax illustration, he implemented the suggested techniques to legally reduce his tax burden.  Consequently, paying less money in taxes meant that he made a higher profit.  This adjustment, among others, now allows him to work 35 hours a week and spend more time with his family.

Principle Number Three:  Control the Cost of Goods

Controlling the price of any product means precise and accurate knowledge of expenses.  While labor costs fluctuate unless the same crew is used, material costs are fairly standard.  Since construction companies generally operate within the same realm (residential, commercial, etc.), there’s no need for guesswork, because the same types of materials are used in several projects.  Although the quantity will vary from project to project, the unit cost is fairly constant.  Budgeting procedures, additionally, help to control inventory, protect profits, and keep costs to a minimum.

Principle Number Four:  Maintain Gross Margins

Achieving the desired gross margin (sales minus the cost of goods/services) can be challenging for construction companies due to the many upfront costs.  Beyond initial start-up expenses for equipment and tools, companies should also consider some other key factors:

• Don’t underbid for fear of losing a job. Doing this puts the company in a negative position, which can only snowball.

• Be cautious about working on credit. When this happens, interest and vendor balances increase, making it more difficult to get ahead. Sometimes it’s just better to walk away from projects that don’t make fiscal sense.

• Plan for the next job. Many contractors put themselves in the position of not having projects lined up. Implementing an aggressive sales program keeps the company moving in a positive direction.  Assertive sales, in conjunction with controlling costs, will help a company attain and maintain gross margin goals.

Principle Number Five:  Control Profit Margins

Maintain costs and understand where the profit is found.  Planning plays a pivotal role in achieving this objective.  If a construction owner takes on a job that is supposed to make a profit, then it is his/her responsibility to make sure it does.  Effective bidding that incorporates itemized costs can help the owner control costs and hold others accountable to do the same.

Since plans don’t always go as predicted, contingency plans are necessary to maintain profit margins.  An electrical contractor on the East Coast, for example, was installing a freeway light post.  When the concrete was delivered to the site, he discovered that the crew had no truck for transport.  At a standstill, he decided to use his personal $30,000 truck to move the concrete from the delivery point to where it was needed for installation on the freeway.  Not a perfect situation, but transporting the concrete one load at a time kept the crew moving forward.  The truck, covered in concrete was no longer suitable for his own personal use, but he was able to allocate it to the company and utilize it there.  By keeping employees who were being paid working and completing the job on-time, the project still made a profit.

Controlling the profit margin requires the business sense to react quickly when unexpected events occur.

Principle Number Six:  Organization Counts

A well-oiled machine produces a profit.  One of the biggest challenges for the craftsman turned owner is learning how to run a business.  A company cannot truly succeed without a management system that includes a well-defined hierarchy and productivity monitoring.

Everyone needs to know their position on the team and what’s required of them.  A clear grasp of roles, functions, and reporting protocols, ensures that employees make appropriate decisions.  When employees do not know the chain of command, they can become unfocused and respond emotionally, rather than logically.  Also, if workers don’t know what’s expected of them, how can they reach their goals?  Monitoring productivity requires realistic expectations and evaluations, so that everyone knows if goals are being met.

A well-organized company is structured, allowing people to work together in an orderly and methodical way.  This stable environment gives people the freedom to perform at their best, knowing exactly what needs to be accomplished.  Quality and efficiency are two sure signs of a well-managed business.

Organization starts at the top.  Owners who understand their roles can accelerate a company’s growth.  Owners need to become coaches—indisputable leaders who teach, supervise and inspire.  This can be difficult for those who are used to being hands-on.

Being the best as a construction company owner requires an honest look at why the business was started in the first place.  Generally, the intention was not to work 70 to 90 hours a week and barely make ends meet.  Owners are more likely driven by the desire to be their own boss, earn more money, and create something worthwhile.  That aim is possible for those willing to make the necessary changes to achieve it.