Build a sizable profit by knowing the financial facts about your operation
by George Hedley
June 7, 2016

On any given workday, what is your main focus? Are you spending your time scheduling crews, making sure materials are ordered and delivered, pricing bids, visiting jobsites, calling subcontractors or suppliers and telling supervisors what to do? Is there a better way to get a higher return on your time spent? If so, then someone else in your company should be doing what you are doing. Are you a moneymaker or a money saver?

Moneymakers are focused on seeking profitable sales, developing loyal customers, implementing written standardized business systems, building an accountable responsible management team, finding higher margin work and investing in the future of their company.

Money savers are focused on saving money, getting work done for the lowest price possible, maximizing field crews, reducing costs at every level of the operation, hiring low-cost employees, providing the minimum acceptable service required and running their business with too few people.

Which type of owner or manager are you? 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 and systems? Moneymakers work to increase the value of their company, build their image, increase customer loyalty, train employees to become better and improve field productivity.

You Can't Save Your Way to Big Money

Look at the hotel business. Luxury hotels are committed to giving guests the best possible experience. Top hotels treat customers as valuable guests and strive to give them what they want with impeccable service. Hotel managers don't focus their time on trying to save as much money as possible or schedule people based on running the most efficient hotel operation. They focus on creating satisfied customers who will come back over and over again. This investment and customer priority creates profitable, loyal customers. It also stops high-end customers from shopping around for the best price.

Low-price hotels do whatever they can to pinch pennies. The furniture is bolted to the floor; they only offer one thin towel and there is no morning newspaper; the clothing hangers can't be removed from the closet rods; hot water is turned down to lukewarm; and it seems like the front desk clerk's goal is to make customers' lives miserable with his/her attitude. Guess what? These low-price hotels are like most unsuccessful construction businesses. They push low prices to win work and do only the minimum required by the contracts. They constantly struggle to win enough work, generate sales and make any profit.

Find Your Focus

Invest in your future by developing a great team, going the extra mile, doing more than the minimum required, finishing projects ahead of schedule, doing your own punch list, charging fair prices on change orders, giving customers a great experience and offering the best quality workmanship. Profit starts with revenue. Revenue comes from customers who are willing to do business with you and are treated as valuable clients by your managers and employees. Profitable revenue comes from very satisfied, loyal customers who are willing to pay a little more for excellent service from your professional managers and crews.

Strong business owners want to create an organized, management-run business, have loyal customers, make a profit, create wealth and own a business that works without them doing all of the work. To achieve these goals, the first thing you need to do is revolutionize how you think about your role and priorities. Your current company is running, and you have people employed to help you get the work done. Your job is not to do all of the work. Your job is to manage the business, provide leadership, maximize profits, seek high-margin projects, loyal customers, set your company apart from the competition and grow your business.

Successful business owners learned long ago that micromanaging people and processes don't result in more profit. Profit is the result of staying focused on company growth. To make this happen, you must know and track your numbers! Dedicate time to create financial targets, track them and do everything possible to hit your goals. The average construction business only makes between 2 and 4 percent pre-tax net profit. That is not enough to grow your business and reach your long-term goals. In contrast, best-in-class contractors make 5 to 10 percent net profit or more. Not focusing on financial matters will keep you from having enough net cash flow to grow your company.

Dakota Builder's Money Problems

Michael owns a construction company in South Dakota. He noted that there were too many cheap competitors bidding against him. He contacted me, complained about customers always asking for lower prices and said he needed help. He also said, "I can't win enough work at my old mark-up rates, so I lowered prices another 5 percent to try and get more jobs." His lower prices still weren't attracting enough new work. I asked Michael a few simple questions:

  • What is the fixed overhead cost of keeping your business open?
  • What is the break-even sales revenue you need at rates you can get?
  • What is your average job size?
  • How many jobs do you bid versus win monthly?
  • Do you know how many crew hours it takes to install your work per quantity?

He had no clue. Michael didn't know his job costs or track his numbers. His wife took care of the books and he took care of construction, including estimating and bidding, scheduling crews, ordering materials, dealing with customers and chasing money. Odds are, his wife didn't know the answers to those questions either, as neither of them ever discussed big financial matters in any serious or regular manner. "How can I help if you don't have any idea what it costs to keep your business open or do the work?" I said. He said he would call me back with the answers. I never heard from him again.

Focus on the Big Stuff First

To build a profitable construction business, your focus must be on your top-line and bottom-line numbers. You must know how much sales and markup you need and your labor costs per unit of work. You have to track job costs, collect your money and be sure you are making a profit. You cannot rely on someone else or a bookkeeper to care about your money more than you do.

You are in business to make a profit. You can have someone else pay your bills, send out invoices, prepare financial reports and do accounting, but the owner or president must know and track the numbers daily, weekly and monthly, not just once a year when you meet with your accountant.

TOP 2 REASONS TO OWN A COMPANY

  1. Make high profits and gain return on investment for the risk taken.
  2. Enjoy the freedom and benefits of owning a profitable, organized business.