Contractors from a wide variety of backgrounds share the same problems and frustrations and can often benefit from answers to these six frequently asked questions.
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As you might guess, contractors often reach out to us with questions about their business. They pretty much ask the same questions. What has always brought a smile to my face is that the same questions come from a wide variety of backgrounds: residential remodelers, residential home builders, commercial general contractors, service contractors and trade contractors. Same problems and same frustrations.
Common Question #1: My margins are shrinking, how do I increase my margins?
Quick Answer: Learn how to sell.
Real Answer: Become the lowest cost provider in your market AND learn how to sell. Margins are almost always going to be under pressure due to contractors who have no other way of getting work other than slashing price. With the barriers to entry in construction so low every time one contractor shuts his doors another comes out of the wood work. The quick solution is learning how to convince good clients that your ability to complete projects on time with minimal punch list problems is worth paying a little more for. The entire purpose of selling is to get a higher price than the lowest bidder. The best solution is learning how to minimize the amount of hours your crews use to complete their work. That trick requires faithful deployment of a handful of estimating and production management systems. It is hard work. The fruits of the effort are higher margins since your costs end up lower than your competition's. That is the best long-lasting solution to the problem of low margins.
Common Question #2: How do I know which jobs made money?
Quick Answer: Track your job costs.
Real Answer: Keep a close eye on worker hours versus estimated hours. Projects that come in with field hours below the budgeted hours are almost guaranteed to be profitable. Projects that come in with field hours 10 percent above the budgeted hours are almost guaranteed to have lost money. A complicating issue is the price you receive for the work. If the job you sold that completed within the allocated hours was sold with a tiny margin you may have made less money than a job that ran over on hours that was sold at a high margin. Of course, that is a pretty
rare occurrence in the construction industry.
Common Question #3: Do I need a business plan?
Quick Answer: No.
Real Answer: Kind of. You should develop a clear understanding of what services you are going to provide, what markets you are going to attack, which customers you are going to work for, the number of field workers you wish to employ, the way you are going to get work, and the money you intend to make. Every company should plan and every company should create an annual budget. What you don't need is the type of business plan that you will find on the Internet and in business books. You especially don't need a five year business plan of that type. The real value of creating a business plan is that it forces you to put deep thought into your business and make decisions on tough questions before they arise during the heat of the battle.
Common Question #4: Where do I find good workers?
Quick Answer: Become the employer of choice.
Real Answer: Become the employer of choice. Good workers are drawn to good companies like flies to honey. Good workers like to work for companies who put them in position to succeed. They like to work for companies where lazy workers are run off. They like to work for companies that have work. They like to work for companies who are managed by leaders who respect and acknowledge their contributions. Notice that I haven't said good workers are looking for the company that pays the best. Good workers will take a lower wage at the type of company I've described than they will for a typical company with a typical owner/management team. Once the word gets out that you are a good company to work for you shouldn't have any trouble finding good workers. On the other hand, if your company isn't like I described I don't really have an answer for you.
Common Question #5: What accounting/estimating software should I use?
Quick Answer: I have no idea.
Real Answer: Almost any package will meet your needs if you have your data systems set up correctly before implementing the software. Accounting/estimating packages almost never live up to the promises of their sales staff because few contractors have the proper job costing and
financial management systems in place. Don't buy software thinking it will lead you to the right systems. Develop the right systems then buy the software that best fits your systems and needs.
Common Question #6: I want to grow my business. What should I be doing?
Quick Answer: Building a nest egg.
Real Answer: Develop and perfect systems that can be delegated to others for ALL parts of your business. Staff your business with the most talented, hard-working people you can find. Save as much money as you can. Growth burns cash. This industry is notoriously slow pay. Combine the two and you have a recipe for disaster if you don't have a bunch of money stashed away to cover your labor and material costs for about four months. You are going to make more than one regrettable hire. That is going to cost you money in wasted salary. Growth is expensive. It is also risky as invariably contractors who are growing are venturing into projects that are larger and more complicated than they are used to. They often under-price the first few such projects as their field leaders and project managers aren't used to handling the chaos of large project. The historic job costing data has minimal relevance to the larger more complicated project. Growth is incredibly risky and difficult. It is not for the faint of heart nor the unprepared.