Construction Today

The Weakest Link

Taking a wide-angle view of your business operations could help you pick up on nuances hindering your company.

By Mike Rudd

Contractors take pride in and are famous for working long hours, often in a hands-on capacity. Unfortunately, hard work alone isn’t enough to ensure profitability or the long-term survival of a construction business. Construction companies, like other businesses, need to be effectively managed to be successful. One critically important element in that process is the implementation and enforcement of appropriate operational systems.

Business operations are a strategic set of interrelated tasks and activities in any company that is directly focused on producing a profit. Business operations flow from and support a company’s overall strategic plan. They require an owner who understands sales, marketing, overhead pricing and cost control. In addition, they need an owner who sets and enforces standards, collects performance-related data, analyzes it and then makes strategic business decisions based on it.

At this point, many contractors become stuck. The business education of most owners occurred on the job as they worked up through the ranks. They know how to work in their business, but very few know how to work on it in a managerial, strategic sense. The problem is, contractors who aren’t working on their business aren’t likely to be around for long.

Three Weak Links

Intense competition, rising costs, globalization, immigrant labor and tighter access to credit are just a few of the many challenges facing contractors each day. Each of them puts stress on three weak points common to most struggling construction firms:

• Lack of knowledge - The majority of construction business owners are entrepreneurs who built their companies with vision, hard work and an innate ability to sell themselves. They tend to be technical experts in their field but often have a poor grasp of business management concepts and tools. That’s a prescription for disaster, because in business, knowledge is truly power. Many company owners often make decisions based on assumptions and habit rather than on facts. They compound error by saying, "That’s the way things have always been done around here."
• Lack of understanding - The biggest threat to a construction company isn’t the competition, insufficient working capital or a poor economy - it’s the ignorance business owners have regarding the financial consequences of their decisions. Every decision made has a direct impact on the company’s bottom line. When those decisions are based on gut instinct and allegiance to a ser of business practices handed down through the years, the results are usually disastrous.
• Misplaced accountability - The owners of struggling businesses tend to work in the business, completely absorbed in project-related minutiae. These owners are easy to recognize. They can’t take a vacation without calling the office several times a day, and when they’re sick or disabled, the entire business is jeopardized. They mistakenly believe their technical expertise is the key to the business’s success. Ironically, the reverse is true because they actually hurt their businesses by neglecting their primary responsibility: ensuring the company’s profitability.

Adding fuel to the fire are employees who generally don’t receive the training, encouragement or opportunity to develop skills needed to operate a business in the owner’s absence. Instead, they find themselves thrust into the role of fire fighters, improvising as they move from one business crisis to another. Their seemingly small decisions add up over time and can have a substantial impact on a company’s financial health.

These weak links act as blinders, narrowing owners’ views to the extent that they are unable to assess the company’s strengths, weaknesses, opportunities and threats. Strategic planning and decision-making based on the collection analysis of relevant data cannot take place in such environment.

Remove the Blinders

The process of removing blinders begins with a contractor’s willingness to change, followed by the adoption of a wide-angle view of their business operations. Here are the steps required for such a transformation:

• Work on the business rather than in it - One contractor calls this "firing yourself up the ladder." It means abandoning the comfortable familiarity of the way you’ve always done things, stepping back from day-to-day details, viewing the business objectively, defining and assigning employee accountability and taking responsibility for its success.
• Learn what you don’t know - Owners need to learn the principles of effective business management and begin teaching and developing those skills in employees and managers.
• Develop profitable revenue - Recognize that profitability comes from the continuous interplay between revenue, operations and cost accounting. This necessitates the creation of effective sales and marketing plans combined with the establishment of a measurable set of variable - an understanding of business’ overhead, break-even points, project costs and pricing. A competitive, profitable price for work cannot be established without this type of comprehensive analysis.
• Control costs and increase productivity - Do what you promised, when you promised. An owner accomplishes this first by identifying specific employee accountability and next, by establishing and enforcing performance standards backed up with profit-based incentives. Key managers are held accountable for the performance of the company and its employees.

To maintain a wide-angle view, a company’s employees move from fire fighting to fire prevention. They’re trained and encouraged to anticipate work-related issues and plan accordingly. Success is tied to actual performance objectives, and employees are financially rewarded when their increased productivity results in greater profits. To be successful, base these incentives on factors employees can actually control, such as time, quality, material utilization, rental and tool expenses.

• Measure the results - A wide-angle view depends on business operations that provide owners with timely and accurate financial and performance-related data. With careful analysis, the critical variables that have the greatest impact on a company can be addressed. In this regard, a good rule to follow is to measure percentages, not dollars.
• Consider, for example, labor - a pivotal variable in most construction companies. In a given period of time, an expenditure of $25,000 for field labor may represent 22 percent of that period’s revenue total. In the following period, however, an expenditure of $25,000 may represent 26 percent of total revenues.

In this example, the contractor experienced a four percentage point increase in labor costs and is in serious jeopardy unless the cause is understood and rectified, or avoided in the first place. This is accomplished by collecting and analyzing data on a percentage basis—not just in dollars. In fact, it’s the only way for a contractor to get a true comparison from one period to another.

Proven Principles

The task of changing old ways of doing business can seem over-whelming to a contractor already struggling for survival in today’s marketplace. Outside assistance is often recommended, especially in the initial stages of business plan development, goal setting and the implementation of new business procedures and systems.

Adopting a wide-angle view of business operations may seem daunting and impossible to some contractors, but their business’ long-term survival may literally depend on it. The best time to start is today. Make a commitment to change and take one small step in that direction. With that mindset comes some encouraging news: When the process is executed intelligently, consistently and over the long-term, the result will be greater profitability and a more secure future.

Mike Rudd is a Project Manager for IPA and IBA. For more information, call 847-495-6786 or visit www.ipa-iba.com.