Top Ten Factors for Running a Successful Construction Contractor Business
It is not easy to run a construction business. There are many pitfalls and ways to lose money, but if you follow a few basic steps, you can not only make a living, but also become very rich. Many successful construction contractors have learned that there are certain things that you absolutely must do well all the time and certain skills that you must have or acquire in order to succeed in this highly competitive industry. In this article I will summarize what it takes to be a successful construction contractor in order of importance.
Most important factor: practical experience
Don’t even think about starting a construction contractor business unless you have at least five years of extensive construction experience (ie general, not specialized). The only exception to this is if you intend to specialize in one area and one area only. We call this a niche. Niches can be very profitable, but they can also disappear, change, or be replaced by technology, new products, industry changes, or societal changes. The best chance for success in the general contractor business is to gain experience by doing it all. This overall experience has many benefits. It gives you the ability to identify and hire competent people, fire incompetent ones, evaluate a good work product, and identify a bad work product. Probably the most important thing it gives you is the ability to go from being a technician to being a manager. The best experience comes from small to medium sized construction companies that require you to be a jack of all trades. Larger companies tend to pigeonhole you into niches. That’s fine if your business model is niche, but if you start a general contractor construction business with skills in only a few niche areas, you’re going to fail unless you hire your weaknesses.
Second most important factor: exceptional accounting system
If you don’t have a solid accounting system in place, your construction business will eventually fail. This CPA has witnessed this too many times than he cares to count. Strong accounting systems allow you to assess whether or not you are making a profit on a job-for-job basis. Going on instinct is dangerous and full of risks. A solid accounting system helps you identify the things you do well on each job, as well as the mistakes you’ve made. The numbers do not join. Unfortunately, my experience has shown me that most construction contractors pay little attention to their accounting system. There is a fear that proper accounting will cause the business owner to pay higher taxes. Therefore, cash received on a job and cash spent are unreported in an effort to evade taxes. That mistake. No matter how great your gut is on every job, if you don’t keep an accounting of every penny on every job, you can be sure you’re flying blind and losing money on every job. You will go out of business and your family life will suffer. If you decide to start your own business, you need to act like a professional entrepreneur and that means creating a solid accounting system. Failed accounting systems lead to litigation, bankruptcies, and bankruptcies.
Third most important factor: effective management
When you have hands-on industry experience, forged from many years (at least five years) of working in all facets of the construction business, you can better transition from technician to manager. Effective management requires that you have strong procedures in many aspects of your business. Well-defined work product processes, along with accompanying task-specific checklists, allow you to train your workers on every aspect of a task within a job. You should have a work product process with accompanying checklists for almost every major task within a job. This eliminates human error and allows you to make corrections before the task is officially completed. It is a number 1 management tool for construction company owners. You must develop a process for each job and each task. This process should be in writing and stored in a folder for each job, along with the task checklist. The checklist of tasks must be scheduled. Your portfolio should include the following:
Tab #1 – A copy of the signed contract and any change orders.
Tab #2 – Budget for the job. Budget for each change order.
Tab #3 – Accounting for income and expenses. The revenue portion would include the contract bid price, money received either as deposits or as project stages are completed, and money received from change orders.
Tab #4 – Task List Summary.
Tab #5: Task #1 Process Summary and Checklist.
Tab #6: Task #2 Process Summary and Checklist.
Last Tab: Client signature letter of completed work along with a standard client signed testimonial letter, listing the client’s name and contact information along with permission to use the testimonial in marketing and as a reference for prospective clients. customers. You will transfer copies of each testimonial letter to a separate folder that you will carry with each prospect. This testimonial folder may be the only thing that separates you from your competition. It reassures potential customers that you take customer satisfaction seriously and can make a difference. It allows prospects the opportunity to contact previous clients for referrals. It also shows the perspective that your company is very organized and well managed. Lastly, keep a before and after photo of each job in this folder.
Fourth Most Important Factor: Strong Business Partnerships
A group of competent subcontractors who have many years of experience working together is crucial to the success of a job. Every job is a team effort and having a strong network of competent people/companies available for each job, and who understand your business processes, will make each job run much more efficiently. Efficiency and competence = profit on each job.
Fifth most important factor: project bidding process
You can be the best-skilled, best-managed construction company with a stable of talented subcontractors and still go out of business if you don’t have a solid bidding process for every job. You can lose your shirt if you offer a lower job than expected. How did this happen? The most common cause of underbidding is not doing your homework and relying on your gut instinct or unverified estimates instead of a fail-safe process of checking and double-checking every cost within every task. The devil in any construction job is in the details. The bidding process is much like your business plan for each job. You must identify each task, each cost, and each cost must be verified over and over again before you bid on the job. Where many construction contractors go wrong is in misestimating the cost of tasks. These incorrect estimates are caused by erroneous assumptions about tasks and associated costs, which is the result of not accurately checking and then re-checking each task and each cost. It’s a laborious process, but you need to get the right offer. Your assumptions about each task should be tested not once, but at least twice. You already know the rule: measure twice cut once. This adage is particularly true in the bidding process.
Sixth most important factor: marketing
Everyone in the construction business understands the importance of referrals. Most of your leads come through referrals. But references are not enough. What should be part of your marketing tool belt?
1. You must have an active website that features customer testimonials front and center.
2. You must join a networking group.
3. You must join a civic organization.
4. You must provide valuable assistance to non-profit groups in the local community (one or two will do).
5. You must have a regular bidding process for jobs that are not based on references
6. You must have a very weekly direct mail process.
7. Must have business cards, stationery and signs in the workplace.
8. You must advertise in the yellow pages or local newspapers.
9. Client testimonials folder (mentioned above).
10. You should have brochures.
7th most important factor: keep up with technology and replace old equipment/tools
You must update your equipment and tools to keep up with technological changes. This will not only improve efficiency but also the quality of each job. You must also replace old equipment and tools to complete each job efficiently and on time. You’ll know when it’s time to purchase new equipment and tools when old equipment and tools begin to break down at a rate that causes recurring delays. When equipment/tools break down, they can cause cost overruns and result in late completions. No matter how good the quality of your work is, missing completion dates damages your reputation.
Eighth Most Important Factor: Hire Your Weaknesses
No matter how experienced you are and how skilled you are, there are certain things each of us does well and certain things we do poorly. Most of the time, the things we do well are the things we enjoy doing and the things we do poorly are the things we hate doing. A savvy business owner will hire people who have strengths in areas where the business owner has weaknesses. As an example, one of my clients went bankrupt because he didn’t like having to make calls to collect accounts receivable. My advice to him? Hire someone who is an expert in collections. He took my advice and eventually his collections expert became his partner. His business is running now. Hire your weakness and watch your business boom.
9th most important factor: errors and failures in the documents
This should be incorporated into your work process folder/to do list. You must learn from your mistakes. Mistakes should not be considered anything other than a learned experience. Document those bad experiences and incorporate them into your work process and to-do list folder so you never repeat them again.
Tenth Most Important Factor: Change Orders
Most contracts include language about change orders. Change orders are caused by many factors, which is beyond the scope of this article, but let me be clear that you should cost each change order as if you were costing the job. You must then process the change order (list each task and assign a completion date for each task) and attach a task checklist for each new task that results from the change order. Lastly, you must get the customer to understand and sign the change order or you will not be charged full price for the job. Unfortunately, many construction contractors do a poor job of dealing with change orders. They are reluctant to bring it up to the customer and brush it off in an effort to avoid confrontation. The reason? The reality of change orders is not addressed up front when bidding for the job. Customers only see the price you gave them and that’s in the contract. You need to address the reality of a change order that occurs early in the bidding process and before the contract is signed. If a client understands from the start that change orders occur frequently and that a change order will increase the price of the job, he will be less shy about confronting the client when it occurs.