How to Become a High-Margin Contractor

If I followed you around at work for a day, what would I observe as your primary focus? Would you spend time calling subcontractors or suppliers, scheduling crews, making sure materials are 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 toward achieving your overall goals? Most construction business owners and managers work hard on tasks and never focus on what truly helps to make their companies better. Before you start doing the many day-to-day activities it takes to run your construction business, ask yourself, “What should my top daily priorities be to grow my business and increase our profit margins?” Would shifting your daily focus 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, leaving you free to take care of the big-picture strategic issues.

Are You a Money-Maker or a Money-Saver?

Money-savers focus on getting work done for the cheapest price, maximizing field crew efficiency, reducing costs at every level, hiring inexpensive labor, providing the minimum acceptable service required by contract and running their businesses with too few people. Money-makers focus on seeking profitable sales, developing loyal customers, implementing written standardized systems, building a responsible management team, finding higher-margin work alongside less competition and investing in better ways to build their businesses. What are your day-to-day priorities? 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 and systems, and in finding perfect customers? Is your priority doing research to increase the value of your company, such as 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 making between 2 and 4 percent pretax net profit. Why? They don’t know their numbers, 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 building projects. Additionally, most contractors continually bid on projects that require minimal prequalification requirements. 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 the low price. This strategy of winning enough low-margin, high-competition work to stay busy will keep you poor, limiting positive cash flow and the ability to grow your company. In contrast, the top high-margin contractors see a 5 to 10 percent or higher net profit. 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 open bid against long bidder lists. They focus on securing customers who value expertise, qualifications, technical skills, engineering knowledge, professional foremen and supervisors, screened and qualified field workers, safety records, training programs, performance ratings, reputation, financial strength and the capacity to complete difficult and/or timely projects. High-margin contractors focus on finding projects in which their expertise and track record will set them apart from the competition. They develop loyalty by building personal trusted relationships with their customers, spending time with them and working to meet their goals.

Decide What You Want

Determine 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. What does a perfect business 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, write four headings across the top of a piece of paper: company, operations, business development and financial. Under each of these headings, make a list of what you want to achieve during the next year or beyond. Include anything you want to fix, improve, update, implement or accomplish to move toward a high-margin business. Below the “company” heading, include your desire to set overall company goals, build a management team, and find responsible employees—things that will give you control over your future. Below the “operations” heading, list the project management and field work systems you want to fix or develop. When completing the “business development” column, consider what type of customers you want to acquire to increase profit margins, develop customer loyalty and bid against less competition. Also decide how you will market to potential customers and develop a sales plan to achieve your goals. Below 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 became wealthy 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 efforts 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. After they collect receivables, pay bills and give themselves a puny paycheck from the leftovers, these money-saving contractors make a small profit margin, if any, which is unacceptable for the energies and hours invested. It’s time to ask yourself more about what your focus is and where will you spend your time in your business. Are you a high-margin money-maker? Do you set and track goals, fix what doesn’t work, develop a great team, track your numbers, develop written systems and go after customers and markets where you can actually make major profits margins? Or do you continue to put out fires, take on too much, chase cheap work and make little money to achieve your long-term goals?