September 2007: Straight Answers to Tough Questions

Q:
I exited the corporate world a year ago to enter the construction world as a residential general contractor.  My goal is to grow an organization so successful, I’ll be able to pack up a work crew and head to a needy area in another country for a few months to build schools, churches, orphanages and to teach the local workforce some trade skills. I learned how to grow a company working in the corporate world for twenty-three years. My education included all best practices; most of which are perfectly aligned with all of your articles that I’ve read over the past year in Construction Business Owner magazine.

My greatest challenge is getting started with hiring a workforce. I have the ability to do everything from pounding nails; to designing and engineering homes; to sales, accounting and project management. You name it, I can do it. But I lack one simple thing: time. Well, actually I lack one other thing: money. I’m down to my last $20,000 and have overspent on technology (because that’s what I know) and tools (because I like to play with laser levels and cordless nail guns, you know, the cool stuff). So, I’m past my stupidity phase of overspending on things that just don’t have real ROI.

My questions comes down to: What position should I hire first—a full-time accounting manager, full-time project or construction manager or full-time handyman? How can I fund the total recurring cost associated with personnel? And do you think it’s too risky to fast track by hiring entire groups of trades, like a full set of masons?

I have a vision to hire a framer who has his own company, is getting too old to frame and is looking for security, comfort and a forty-hour work week.  And my vision goes on. I’d like to hire a lead person for every single trade; ideally, someone that owns their own small outfit but is just getting too old to work. I would then take a personnel manager and have them “cherry pick” the best high school candidates (they have the most malleable minds and haven’t been jaded) to do trade work. Then train these new employees “in house” using on-the-job-training and night-time workshops conducted by the “lead” person for that trade.

For example, framing workshops would be held twice a year and consist of a series of six two-hour workshops conducted consecutively by the lead framer, and dinner and drinks would be provided for all. And each time a new employee becomes proficient at another skill, he gets a $2 per hour raise. Then the same guy that’s framing could end up sheet-rocking the house he framed, which in itself would give him incentive to gravitate toward excellence.

I’m also thinking about profit sharing and stock options and other things to keep the workforce fresh, motivated, focused and loyal. In other words: Ways to build a real team. And then as icing on the cake, I would sub-out teams to other builders and expect to get the reputation of having the best work crews in the business as our team is motivated, focused and cross-trained since their compensation is tied to productivity, quality and professional conduct.  

I’m expecting to create a positive, upbeat, empowered and energized work environment with no room for whiners, just people that want a great job, with great benefits, great co-workers and a forty-hour work week, with the exception of overtime spent for training workshops.

Right now it’s just me, the cat and the dog, and I’m overworked and mostly tired, and the cat and dog don’t really care. Whatever advice you can give would be greatly appreciated.
Timothy Sorrentino
Wellspring Building and Development

A:
Wow—All that with no money! Stop, and smell the coffee. Are you trying to change the world or build a business? Your ideals and dreams might work in a la-la land some day, but they’ll cost tons of money to implement without a return for a hundred years. Forget doing any work with your own crews until you have at least six months of payroll and business expenses in the bank as a cushion. Start immediately subcontracting allof your work to professional subcontractors. This will give you time to build your business by finding customers, preparing accurate bids and estimates, presenting quality proposals, supervising the jobs and creating some cash flow. Once you have between $10 million to $100 million in the bank, you can start your construction excellence academy and change the construction industry for the better!

 
Q:
I have been in the electrical contracting business about ten years now. I have bid a lot of projects lately, but my bid-hit ratio is 1:10 to 1:14 on private jobs. My markup and overhead is about 50 percent, and my gross margin is 33 percent. My sales volume is $300,000 to $400,000 annually, but I barely survive sometimes. What margin is comfortable in order to be competitive?
Vick Girage 
Delta Force Electric
 
A:
Your bid-hit ratio is way too low, and you are bidding too many jobs to get one! For private jobs, your bid-hit ratio should be around 1:3 to 1:5. It is obvious you’re bidding the wrong customers and jobs, or your customers don’t want to use your company if they have another choice. Do you provide excellent customer service? Do you have strong customer relationships? What is your company known for? I suggest you look at how you do business, and look for new customers and new project types. There is no comfortable margin to be competitive with unless you want to charge only 1 percent and get lots of work! Your markup of 50 percent is too high to compete against larger electrical contractors. Contractors doing $1 million or more in sales most likely only mark up their bids 20 to 30 percent. Take a look at doing more volume via larger jobs. If you double your volume, you can lower your markup rate to 35 percent, get more jobs and make more total money. But if you want to stay small, seek specialty work only your company can become the preferred expert in, and charge more for your expertise.

Construction Business Owner, September 2007