A business model is the first step in a building a successful business. Identifying and choosing a business model that can deliver bottom line profitability is essential to your business' success. The term has grown in popularity as a replacement for business strategy. Strategy implies a thorough identification of how you're going to make money. Your business model answers the question "What business are you in?"
A simple way of showing the difference between a business model and a business strategy is to consider a business plan that you might share with a bank, SBA or investor in order to secure funding. The business model would be presented in the opening paragraph of the executive summary. The business strategy would be the rest of the document.
Types of business models
As simplistic as business models are, they exert tremendous power over the evolution and success of your business. When first meeting contractors, we often discover they have unknowingly adopted a business model that is difficult to grow with. The most common flawed model is what could politely be called "The Opportunist." The opportunist model is where a contractor is willing to take on any work that comes his way regardless of who it comes from and what it involves. Most bankruptcy stories I hear have a tipping point where the contractor took on a project they had no business taking on. In other words, they had adopted the opportunist model.
Your business model must align with several items: your skills, your crews' skills, existing competition and the available market. Failure to align your model to any one of those items is a recipe for failure. Here are the business models that can be successful in commercial construction.
1. Direct to GC, new construction
2. Direct to GC, remodels
3. Direct to client, construction (outside design)
4. Direct to client, construction (design-build)
5. Direct to client, service
6. Special niche; work type
7. Special niche; client type
Hopefully they are self explanatory. The larger your company, the more of these models you can pursue. Yes, you can adopt more than one business model - but only once you have a large enough staff to handle each profitably.
Extremely large contractors, say $50 million and up, might be able to adopt all of them. Small contractors need to be very careful when considering whether to adopt multiple business models. Contractors under $5 million are almost always better off limiting themselves to no more than two models. Contractors under $2 million are almost always better off limiting themselves to one business model.
Avoid common mistakes
In order to pursue multiple business models successfully you will need to avoid a handful of common mistakes. The first of which is the misassignment of overhead.
Years ago I worked with a large contractor who had two business models. One was extremely equipment heavy. The other wasn't. The contractor made the mistake of assigning the same overhead charge per dollar of job cost for all work. As they had buried their equipment costs in overhead (another classic mistake) their approach tended to over-cost one side of their business and under-cost the other side. The impact of this problem was that they kept taking jobs on the equipment heavy side they should have avoided and kept passing on jobs on the non-equipment side they should have pursued. If you are going to adopt multiple business models, you will often need to use different overhead charge rates.