If I followed you around for a day, what would be your primary focus? Would you be spending time calling subcontractors or suppliers, scheduling crews, making sure materials get delivered, pricing bids, visiting jobsites, and telling supervisors what to do? Do your busywork activities help improve your margins, find better customers, win better contracts, or move you towards achieving your overall goals?
Most construction business owners and managers work hard on tactics and never get focused on what really matters to make their companies better.
Ask yourself this question before you start doing the many day-to-day activities it takes to run your construction business: “What should my top daily priorities be to grow my business and increase our profit margins?”
Is there something else you should be doing to give you a higher return on your time and energy? If so, then someone else in your company should be doing what you’re doing, and you need to take care of the big picture strategic issues.
Are you a Money-Maker or a Money-Saver?
Money-savers are focused on saving money, including getting work done for the cheapest price, maximizing field crew efficiency, reducing costs at every level, hiring low cost employees, providing the minimum acceptable service required by contract, and running their business with too few people.
Money-makers are focused on making money, including seeking profitable sales, developing loyal customers, implementing written standardized systems, building an accountable responsible management team, finding higher margin work against less competition, and investing in better ways to build their businesses.
Read next: Margins, Mark-Up & Making Money!
What’s your day to day priority? Do you spend your time trying to save every dollar possible? Or are you focused on building a profitable construction company by investing in experienced managers, supervisors, employees, systems, and finding perfect customers?
Is your priority doing things to increase the value of your company, identifying areas to fix, tracking company goals, meeting with your management team to stay on track, finding responsible managers to fill important positions, spending time with customers, training employees to improve field productivity, and reviewing your job costs with project managers and supervisors?
Are you satisfied with low margins?
The average construction business owner is satisfied only making between 2% and 4% pre-tax net profit. Why? Because they don’t know their numbers, don’t track job costs, or review financials on a regular basis. They’re out of control and don’t have written business systems. They don’t have a management team and, therefore, can’t delegate getting projects built.
Another reason for low margins is because most contractors continually bid on projects which require minimal pre-qualification requirements to get on the bid lists. Almost any contractor can get on bid lists for government projects, public works, shopping centers, remodels, or other ‘commodity’ construction projects.
Without a high bar or threshold to qualify for projects, you end up bidding against too many competitors who sell low price. This strategy to win enough volume to keep busy with low margin high competition work will keep you poor and stop you from having enough positive cash-flow to grow your company.
In contrast, the top high margin contractors make 5% to 10% net profit or more. They set and track goals, have a management team to run the business, know their numbers, and have a business development action plan to find and keep high margin customers. They don’t bid on open bid lists against long bidder lists.
They focus on securing customers who value expertise, qualifications, technical skills, engineering knowledge, professional field foreman and supervisors, screened qualified field workers, safety records, training programs, performance ratings, completing difficult projects, reputation, financial strength, and capacity to complete projects on time.
High margin contractors focus on finding projects where their expertise and track record will set them apart from the competition and entice customers to want to only hire them. And they have an ongoing program to develop customer loyalty by building personal trusted relationships with their customers via spending time with them and working to meet their goals.
Read next: 6 Steps to Develop Customer Loyalty
Decide what you want
To become a high margin contractor, you start by setting goals to achieve what you want. Consider these decisions, options and choices you make every day:
- Make high or low margins
- Out of control or organized
- Everything in my head or install written systems
- Make all decisions or have strong management team
- No accountable employees or hold regular meeting
- Not enough help or have responsible people
- No steady growth or set growth goals
- No marketing or implement sales action plan
- One time customers or develop loyal customers
- Sell low price or sell added value
- No job cost tracking or know your numbers
- No goals or track specific targets and goals
Decide what you need to do to build a high margin business by deciding how you want your company to operate in the future. Make a list of what’s working and not working. Decide what a perfect business would look like to you. Take a step into the future and imagine how your high margin company would operate if you could wave a magic wand.
To get started, take out a sheet of paper and write four headings across the top:
- Business Development
Under each of these headings, make a list of what you want to achieve over the next year or more. Include everything you want to fix, improve, update, implement, or accomplish to move towards becoming a high margin business.
Under the Company heading, be sure to include your desire to set overall company goals, build a management team, find responsible employees, and get in control of your future.
Under the Operations heading, list out all the project management and field work systems you want to fix or develop in your company.
Under the Business Development heading, decide what type of customers you want to acquire to increase profit margins, develop customer loyalty, bid against less competition, and grow your company with. Also decide how you’ll market to potential customers and your sales plan to achieve your goals.
Under the Financial heading, set your annual goals for sales, overhead and net profit. Decide what you want to track on a regular basis including job costs, field productivity rates, equipment costs, crew costs, or cash-flow.
Focus on what you want
Most wealthy contractors got that way by spending time where they get the greatest return — finding great customers, doing more than their competition, developing a strategic edge in the marketplace, seeking high margin work, investing time in the hard things that make the most money, building a strong management team, and then investing in strategic opportunities.
Most poor business owners count their nickels, look for dimes, keep track of the pennies, and don’t want to invest their effort going after high profit customers and projects that require more work, technical skills, special qualifications, impressive presentations, personal service, or extra time to attract or satisfy.
As a result, these money-saver contractors only make a very small and totally unacceptable profit margin for their energy, if any, after they collect their receivables, pay all their bills, and then give themselves a puny paycheck from the leftovers.
What’s your focus and where will you spend your time? Are you a high margin money-maker setting and tracking goals, fixing what doesn’t work, developing a great team, tracking your numbers, developing written systems, and going after customers and markets where you can actually make a lot of money? Or are you continuing to put out fires, doing too much yourself, chasing cheap work, and not making any money to achieve your long term goals?
George Hedley CPBC is a certified professional construction BIZCOACH and popular speaker. He helps contractors build better businesses, grow, increase profits, develop management teams, improve field production, and get their companies to work. He is the best-selling author of “Get Your Construction Business To Always Make A Profit!” available on Amazon.com. To get his free e-newsletter, start a personalized BIZCOACH program, attend a BIZ-BUILDER Action Plan Boot Camp, or get a discount at www.HardhatBIZSCHOOL.com online university for contractors, E-mail GH@HardhatPresentations.com.