Construction Executive

Six Tenets for Business Success

By Tyler Burgess

The success of a construction company is no longer dependent on the artisan or the professional craftsman turned construction company owner, running a profitable and efficient business may be an entirely new craft. By applying these six tenets–and a little bit of hard work and determination–construction company owners can master the craft of business management.

Tenet one: Produce profitable sales
Profitable sales begin with strategic bidding. The person who performs this task must be knowledgeable about the financial side of the business and understand the difference between variable and fixed costs. Variable costs such as materials, subcontractors and equipment rental will change with each project. Fixed costs like rent, insurance and wages remain the same. Armed with this information, contractors can develop quotes with built-in, predetermined profits, and salespeople can be confident the business they bring to the company makes sound business sense.

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

Tenet 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 essential. Simple advice from an accountant or attorney is not enough. Strategies that turn profits into cash include reinvesting, entity structuring, asset protection and tax planning tailored to meet the company’s needs.

For example, a building contractor with a family of four was working 14- to 17- hour days. That left him little time to enjoy the fruits of his labor. After having his business analyzed using a tax illustration, he implemented suggested techniques to legally reduce his tax burden. Consequently, paying less money in taxes meant 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.

Tenet 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. Because 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 or project, the unit cost is fairly constant. Budgeting procedures also help to control inventory, protect profits and keep costs to a minimum.

Tenet four: Maintain gross margins
Achieving the desired gross margin (sales minus the cost of goods/services) can be challenging for construction companies because of many upfront costs. But beyond initial start-up expenses for equipment and tools, companies should consider some other key factors:

• Don’t underbid for fear of losing a job. Doing so 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 sound 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.

Tenet five: Control profit margins
Maintain costs and understand where the profit is. 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 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.

Because plans don’t always go as predicted, contingency plans are necessary to maintain profit margins. For example, an electrical contractor on the East Coast was installing a freeway light post. When the concrete was delivered to the site, he discovered 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, obviously could no longer be used 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.

Tenet six: Organization counts
A well-oiled machine produces a profit. One of the biggest challenges for the craftsman turned owner is learning 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 firm grasp of roles, functions and reporting protocol 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 clear, realistic expectations and evaluations so 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 environmental stability 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 goal 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 develop something worthwhile. That goal is possible for those willing to make the necessary changes to achieve it.

Tyler Burgess is the executive director of survey services at International Profit Associates, a consulting firm based in Chicago. For more information, call (800) 531-7100 or visit www.ipa-iba.com.