Construction Today

Smooth Sailing

Many factors can make or break a construction business. Communication across the firm allows for the fast analysis and resolution of problems.

By Dan Schneider

Most construction company owners strive to run a smooth and profitable operation, and yet they stumble along the way. Although a construction company can be one of the most difficult business models to manage by even the most seasoned entrepreneur, many of an owner’s struggles result not from the complexity of the model but from ignoring the details of the business. In virtually every construction company, the details relate to three key components of the business: sales and marketing, operations and financial/risk management.

The sales component of the business model is responsible for bringing new and profitable customers into the company and maintaining the company’s existing customers. The operations component focuses on completing the project; this is where a company either wins or loses at the profit game. Lastly, the financial and risk-management component is the company scorecard for measuring its successes and failures.

The Three Components
The most critical aspect of sales and marketing is to ensure the company has a proactive sales process to consistently and continuously fill the sales pipeline. Unfortunately, many construction companies rely solely on word-of-mouth, which can hold them hostage to changes in the economy that affect the demand for work. When developing a sales and marketing plan, the owner needs to know the answers to these key questions:

• What are the company’s core services?
• What are the target markets in terms of customers, geographical locations and the customers’ buying and decision-making processes?
• How much is the market willing to pay?
• What are the sales channels (direct selling, direct mail, tele-prospecting, etc.)?
• How and when will they advertise?

A sales plan is essential, but it cannot operate in a vacuum. Rather, it works hand in hand with other components.

Within operations, there are three key areas critical to control: purchasing and managing of job materials, staffing and managing of job labor, and client satisfaction. When a company is struggling to be profitable, one only needs to examine how the company manages its field labor and job materials. Simply stated, if the materials ordered are incorrect or late, and/or workers are static at a job site, labor and time are wasted.

Another mismanagement issue relates to lack of preplanning at the actual jobsite. That is, prior to the start of each day, the job foreman or supervisor must have the day’s materials planned and loaded on the trucks or physically on site, as well as have all field employees assigned to their jobs. Without daily preplanning and prearranging all jobsite details, a company is quick to lose control of its field productivity and, ultimately, its profits.

In the area of financial and risk management, generating the cash flow necessary to maintain their financial health is the No. 1 challenge faced by many construction companies. Managing a positive cash flow is the most important element of the construction business model, and many owners use their personal funds to start the business or rely on some type of a line of credit.

In an ideal world, every dollar that flows through the company covers the costs of all the money spent on labor, material and overhead. But, if any of the components of the business model fail (i.e., sales slump, field labor and job materials are mismanaged or there is an error in bidding), a company’s financial health or cash flow suffers. Then, business owners get into financial trouble and begin to believe the next job will generate enough profit to cover the profit shortfalls.

Another cash-flow problem exists when job payments are held until the end of a job (this is called "retainage"). Depending on both the size of the company and the job, profit could be pending for up to one year, which is a long time for any company to survive without those funds.

Managing the company’s labor force is critical to its long-term survival. One bad workplace accident or employee lawsuit can devastate the company’s financial stability. Business owners need to think of safety and their employee hiring and managing processes as financial investments. After all, sometimes just one incident can increase the cost of doing business beyond a small – or even mid-sized – company’s financial capabilities.

The Internal Links
In running a successful construction company, it is extremely important for the sales/estimating process to be closely tied to the operations component of the business. The sales staff – usually the job estimator – is responsible for obtaining a certain dollar amount of jobs to meet the company’s sales goals. In an ideal scenario, the job estimator and the operations manager discuss the entire estimate – including such details as labor and material needs, and start and stop dates – prior to its submission.

However, in many cases, the job estimator prepares the bid/proposal without input from the operations manager. Then when the company acquires the contract, there may be a conflict of resources within the field operations. For example, the operations manager, who is not aware of this bid/proposal, may already have crews fully committed to other projects.

Additionally, if the company lacks a strong job estimator, then regardless of what dollar amount is placed on a contract, crews will be unable to perform a successful job. If labor and materials are improperly budgeted for a job, the company stands a good chance of losing some or all profits. When this occurs and the company needs to salvage any profits, it has only two options: first, reduce the amount of actual labor put into the job, thus potentially sacrificing the quality of workmanship. Or, second, go back to all the material vendors and renegotiate material prices. Both options are counterproductive to the business.

It’s All in the Details
At the completion of every job, it’s crucial for the business to know whether or not the customer is satisfied with the work performed. Rework can mean disaster to a small company. If management pushes the completion of a project without paying attention to the quality of work, the result is an unhappy customer, and aspects of the job will need to be redone. Establishing a post-job completion quality check or walk-through is an inexpensive means to ensure the customer’s requirements are met.

When sales and operations work in concert, greater efficiency is obtained by their ability to finetune he estimating and operational processes. Employee incentives can be offered if a job comes in under budget, thus increasing morale and quality of work. Usually, when a company spends $25,000 on a budgeted $30,000 job, the excess goes straight to the bottom line. If that is the case, owners can set up a mechanism to track each job in a given time period and assess the profits and losses.

Many factors can make or break a construction business. Communication in all areas allows for immediate analysis and resolution of existing predicaments. Scrutinizing the details of each part of the construction company’s business model helps determine which ones need to be changed, updated, excluded or included. This empowers business owners with the ability to adequately plan for future resources, conditions and job environments, and allows them to stay focused on truly managing the business.

Dan Schneider is consulting services director with IPA. IPPA and its combined family of consulting firms provide comprehensive business consulting, tax planning and business valuation services to companies in the United States and Canada, For further information, call (800)531-7100 or visit www.ipa-iba.com.