When clients ask me about change orders, I’m reminded of a well-circulated photo. It shows a small dinghy named “Job” tethered to a yacht. The yacht is named “Change Order.”

The interesting thing is that this image does not represent my change order conversations lately. In many of them, to keep the nautical metaphor going, the change order is less yacht and more torpedo.

Discussion about change order difficulties tends to be one of two types. It’s either about the change orders that didn’t happen, or all the ones that did. This seems to present a “darned-if-you-do-darned-if-you-don’t” situation. But let’s investigate a little closer and see if there is a third side to the coin…

Counting with imaginary numbers

It’s not news that competition for work in most parts of the industry has increased or that margins have decreased. But I have been surprised at the number of contractors who tell me that they have bid for jobs at break-even or at a loss.

There are times when this might make sense – times when having some work is better than none or when winning one job is likely to help win others down the road. Yet it’s a surprisingly common practice for business owners to bid at losses, and when I ask them how they plan to come out in the black on the other side of these projects, the nearly universal answer is “We’ll make it up in change orders.”

Every construction project is a gamble – you’re betting that your estimate is accurate, that labor and material prices don’t go through the roof, etc. But most of the risks are either things within your control, or are at least calculated on likely outcomes. Yes, change orders are nearly inevitable. But to count on them as the source of profit is to bank on an unpredictable variable that is not under your control, that is hard to manage, and that you may wish to use for a completely different purpose – business development (more on this in a moment).

Too much of a good thing

So on one hand, change orders can be troublesome when we expect them, and they do not occur. The flip side is that when they do occur, they can generate more pain than gain. Change orders can be harder to manage – and present more of a profitability challenge – than pre-planned project work.

By definition, the work associated with a change order is work you did not initially plan for. It may mean shuffling resources, making quick material purchases, or incurring overtime labor expenses. The best project managers may be able to roll with these changes, but even the best have trouble ensuring that all costs have been covered when billing the client, that the cost estimates are accurate, and that billing occurs in a timely fashion.

Change orders cost a company more than labor and materials. All of a company’s overhead – office, management, and other costs – need to be rolled into the pricing. But the biggest exposure a contractor faces is rejection. I’ve heard too many stories of contractors who delayed submitting their change requests to the client until near the end of the project only to have requests rejected after work has already been started or even completed.

The edge of the coin

When gathering my thoughts for this blog entry, I called a local GC friend and asked him if he considered change orders a significant source of profit. He was silent a moment and then asked me, “John, do you consider your customer support team a source of profit?” My reaction was “No, they’re a cost center but an important one. They keep our clients happy, and a strong support team helps with new business.” “Exactly,” said my friend. “That’s how we train our PMs to think about change orders. They are our opportunity to show off our flexibility and execution. In fact, we often make a command decision not to charge for some if the costs can be easily absorbed, particularly for strategic clients.”

“So you don’t make money on change orders,” I asked? “They’re a cost center to you?” “No,” he chuckled. “We make a lot of money on them. But it’s not easy money, and it’s certainly not money we plan for.”

When I hung up, I realized that I had that “third side of the coin.” Change orders can be good or bad to your bottom line. It is a toss of the dice, but having top-notch project management and cost estimating will weigh the dice in your favor. What change orders always represent is another opportunity to satisfy a client.

So when it comes to change orders, I suggest you plan for them, but don’t count on them. Make money when you execute them, but execute with care. And like everything else you do for clients, use them as an opportunity to build long term relationships. After all, change orders come and go, but in our business, lasting relationships are the key to lasting and profitable business.

How do you handle your change order requests? Are they a dinghy or a yacht?

QUESTION:  What can I do to market my construction business? 

In a previous post Construction Company Marketing Package we discussed what the elements of a good marketing package for a construction business are. 

Now the question becomes what the heck do we do with all the shiny brochures? 

The tactics below are geared mainly towards contractors that doing project work – marketing service work is different and is covered very well by a fellow consultant, Adams Hudson who has a regular column in both Contractor and Contracting Business magazines.  Each column is a wealth of knowledge about service marketing. 

There are two things we need to do – (1) is to reinforce with our existing customers why they use us and (2) introduce ourselves to new potential customers. 

In this post we are going to focus on getting #1 dialed in creating a foundation to build on for #2. 

The only way I have ever seen projects get sold is with basic, old-fashioned personal sales tactics.  What I’m going to describe below is truly stating the obvious but the problem we see is that few contractors engage in these activities on a regular basis. 

Start with your existing customers because that is the easiest way to get additional work. 

Do you have one centralized list of all your customers setup in a place where you can add in notes about them and keep track of details such as birthdays, spouse names, etc? 

If not then you need to set one up – Outlook is a great tool for this. 

You should be in regular contact with all your current customers at least quarterly just checking in to make sure they are happy with your company’s performance.  This typically isn’t a problem in a small company because the owner is heavily involved in the management but once the company grows this little detail can slip through the cracks on the assumption that other people in the organization are taking care of the relationship. 

For past customers you should communicate with them regularly.  These should be prioritized ranging from ‘1 – would like to do more work with them’ to ‘3 – don’t bother’ or some other system that suits your business.  Often times if you start making calls or visits you will find that there are some reasons why they aren’t doing business with you currently and that can be an opportunity to fix some of your internal problems and win back some work. 

Having new marketing collateral can be a great excuse to drop by and see a current or past customer.  They may not be aware of new people within your organization, new capabilities such as an added service team or of new project experiences. 

Don’t get too caught up in thinking that just because they have or are currently doing business with you that they know the full scope of everything you do.  We have a client who is primarily a glazing contractor but also does doors and hardware.  They have the word ‘Glass’ in their company name and because of that they were overlooked by an existing customer for a large scope of work on the doors and hardware because the customer “didn’t know they provided that service.”

Don’t leave anything to chance.  Make sure that all your current and past customers know the full scope of everything you do. 

Also make sure that this information gets to all levels – it doesn’t do much good if the owner of the company has your information but the estimator does not. 

Your goal should be building tighter relationships at all levels within the customer’s organization.  Everyone from the field foreman to the project manager to the accounting team should know and love your organization. 

Work heavily on building those relationships and getting your new marketing package out. 

While you are there meeting with them ask for referrals. 

Look at this exercise with existing customers as a way to hone your skills in presenting your company and its capabilities.  It will set you up for phase 2 where you will work on introducing your company to new potential customers. 

As always, ask any questions and comments are always welcome.  You can post them here or send an email to david@dbrownmanagement.com.

Obviously we have been getting a ton of questions about the economy and what we believe the current market holds for contractors. 

With the people we talk to on a regular basis including contractors, developers and people who provide services to the industry we can place companies into roughly three major categories:

1. TROUBLED:  This is the group that thanks to our media’s philosophy of ‘bad news sells’ we hear the most about.  The truth is that in most cases when we start peeling back the layers of the onion it is apparent that many of the companies in this group are having difficulty or failing due to reasons that were present prior to the overall economic problems.  The economy has only highlighted these underlying flaws in strategy and execution.   
2. STAYING THE COURSE:  Construction has always been a cyclical business and for those companies with management teams that have been through this before they are simply staying on course making minor corrections but avoiding rash moves that lead to over-correction and more problems.  For these companies they will emerge with a stronger team and will have executed plans to make already lean operations even leaner. 
3. GROWING:  There are a percentage of contractors out there who have built their businesses for long-term stability including having diversified revenue sources and conservative financial management systems.  During boom times they saved their pennies and have always been on the lookout for strategic opportunities.  They are positioned to grow through a downturn by being able to build at cheaper prices (for developers), have the time and money to improve their business infrastructure and even start or buy into new markets at discount prices.  In addition these businesses will have access to talent that was not available in a booming market. 

Whatever group you are currently in your goal should be to focus on moving your business into the ‘GROWING’ group.  Some of the elements that every company should be working on in order to move their businesses in that direction include:

• REVENUE DIVERSIFICATION:  All sources of revenue have different sales cycles and are tied to different elements of the economy.  If you are tied too closely one source of revenue your business may be subject to rapid growth but also to rapid decline – for instance anyone related to the production housing markets in rapidly growing metro areas.  Revenue diversification is painful and slow but once a company is properly diversified the overall earnings become much more predictable.  Does your business have a mix of public, private and institutional revenue?  Does your business have service elements along with new construction?  Remember that when businesses can’t afford to build new structures their spending on maintenance increases. 
• BIZ-DEV AS A PROCESS:  One of the weakest disciplines we see with all contractors is their business development processes.  This goes hand-in-hand with revenue diversification and growth.  Do you have a centralized customer list that everyone in the company works from?  For each revenue source (market area) do you have an exhaustive list of all potential customers in a centralized database?  Do you have a regular and formal communication program that keeps your company’s name in front of all customers and potential customers at least quarterly?  Does at least 25% of your business each year come from new customers?  If you don’t have business development down to a process then you open your company up to significant problems when existing customers or markets start to tighten. 
• ACCURATE SCOREKEEPING:  Many construction businesses that we see have poor financial reporting systems in place.  If you can’t see a clear path from a particular source of revenue all the way to the net profit line including accurate accounting of direct and indirect expenses associated with that source of revenue then you can’t make accurate management decisions.  This is something we see as a problem in companies of all sizes and sophistication levels.  Having financials that provide an accurate picture of exactly who is contributing (or not contributing) what is crucial especially in times like these where you need to make hard decisions about what to cut and what to invest money in. 
• FINANANCIALLY CONSERVATIVE:  Businesses and individuals who are being hit the hardest right now are typically those who were the most leveraged.  It is a perfect storm of failure to get hit by both slowing revenues, later payments from existing clients and tightening of credit.  Businesses who remained relatively unleveraged and worked hard to build working capital are able to make great decisions right now about how to use that capital. 
• TALENT MANAGEMENT:  This is one area where the best companies really shine.  They have developed strong, loyal and cross-trained talent that can effectively scale up in boom times while effectively scaling down when necessary.  We saw too many businesses that took advantage of a single booming industry such as telecom in the late 1990’s and they built sizable organizations but their depth and breadth of talent was limited.  Many of their people could only do a single function and while that worked well for the original Ford assembly line it does not work very well for a contractor when economic changes in a market require scaling back.  An organization with strong cross-trained talent can scale back to a much leaner “fighting weight” than an organization with a bunch of people who are only good at a single discrete function of the business. 

There are dozens of other factors that flow into this including investment in internal systems for streamlining operations but these are basics that every company should have been working on and should continue to work on. 

If your company falls into group one and you take a hard look I bet that you will find some underlying problems in one of these areas; most likely in the revenue diversification and conservative financial management of the business. 

We will be discussing each of these in more detail in upcoming posts.  In the mean time reflect on this graphic showing market activity from last week taken from Sunday’s NY Times.  As much as it feels like it the volatility of the market does not really change the underlying dynamics of a business. 

Do some research on what Ben Graham calls “Mr. Market” and read into how Warren Buffet describes having a business relationship with “Mr. Market” in one of Berkshire Hathaway’s annual reports.  Some Google searches should turn up some good reading.  Right now we are experiencing a challenging time when there are some serious underlying problems with the market.  This is making “Mr. Market” moodier than usual and this moodiness is doing more damage than the underlying root causes.  As a contractor keep in mind that… 

Structures still need to be built and maintained – contractors still need to perform those functions. 

As always if you have any questions or situations you would like to see specifically addressed in this blog please leave a comment or email david@dbrownmanagement.com

QUESTION:  I Need To Market My Construction Business More – What Are The Elements Of A Good Construction Marketing Package?

This is a question that we are getting more and more these days considering the tightening of the construction market and economy as a whole that has gone on for the last couple years. 

The first part of the answer is that you should have been focused on marketing before the economy started to tighten because marketing takes both consistent effort and time to show results. 

When I look at the financial performance of our clients including critical indicators such as backlog, the ones that are doing very well right now are the ones that have always had and currently have a strong focus on marketing.  The ones that are having difficulties are the ones where culturally their organizations were more focused on “doing work” during the booming economy rather than marketing. 

OK – so regardless of where your company or the economy is at, you should be focused on marketing your business every day. 

“Good marketing enhances your ability to say ‘NO’ to bad customers.”

Taking things in order first you need to decide on a few things before you even start to design your marketing package:

1. Strategy – Target Market:  Before you start doing anything in regards to marketing, you should figure out generally who you should target and with what services.  It is important to look for markets where money is still flowing – marketing to the production residential builders today is probably not a good idea!  Good markets to look at involve some type of service/repair – in good times and especially in bad money gets spent to maintain existing facilities or infrastructure. 
2. Differentiating Factor:  After deciding what potential markets are out there with the most potential, take a hard look at your company.  You need to decide where you have a differentiating factor that sets you apart from the competition.  This may be experience, specialized equipment, key personnel or relationships.  It is very important that you are honest with yourself at this point about what truly makes your company different.

Where target markets and your differentiating factors have the most overlap is your “Marketing Sweet Spot,” and this is what you should build your marketing material around. 

What comes next is what is called “Marketing Collateral,” which is the generic description for the various brochures, website and other materials that you use to market your business.  In this post, we are just going to focus on the elements that make up that package, not on an entire marketing plan. 

Company Overview Brochure:  Typically this comes in the form of an 11X17 half-folded brochure that provides a big picture look at the whole company.  It may include things like mission statements, vision, core values, brief history, overview of markets, etc.  It will work as the center piece for your marketing. 

Company Information:  This can be a 1-4 page insert sheet that provides basic information such as insurance, surety, contact information, etc.  It would answer most of the standard questions required to pre-qualify your company with a new client.  Part of this may be the insurance cert forms. 

Project List:  This should be a nicely formatted list that contains all the basics about projects your company has completed.  The information should include project name, size, client and a short 2-3 sentence description of the work noting anything key including finishing ahead of schedule or use of an innovative use of new construction technology.  You may want to maintain different lists for different project types so that your marketing package can be targeted to a specific market. 

References:  A simple one-page list relevant to a specific market that contains some selected quotes and reference contact information will be very effective.  This is more effective than trying to attach dozens of reference letters.  Get the letters, but summarize them into a single consistently formatted sheet. 

Resources:  If applicable to a particular market you are going after, you may want (or need) to produce a listing of the resources you have available including heavy equipment, software, accounting systems, project management and field crews. 

Project “Sell Sheets:”  These are individual sheets designed around a particular project that are heavy with pictures and provide more details about the project than the project list.  These are used as backup to augment the marketing package.  Once a template is designed, these can be built pretty easily to showcase individual projects. 

Key Personnel – Professional Résumés:  Building a professional résumé marketing piece that showcases the experience of all the key project personnel is very powerful.  These should be maintained for all personnel from superintendent through the senior management.  Your people and their collective experience is a key differentiating factor. 

Intro Letter:  Design a template of an introduction letter that can be easily modified when sending this marketing package. 

Website:  Your website should have at a minimum all the elements outlined above except formatted for the web. 

Every element of this marketing package should focus on your differentiating factors and your target market.  No matter how great your marketing looks in one area, it may be totally ineffective in another. 

Another thing to remember is that you need to simply be “Good enough” when it comes to building this package.  After a certain point, brochures don’t get shinier and résumés don’t get any better.  Set a strict time limit to producing this collateral in a first draft format and make the commitment to getting it out there. 

A future topic I’ll cover in another post will be actually putting this package into use – remember that the best marketing materials won’t do anything for your business unless you are getting them in the hands of potential clients.