Why do some contractors underperform? In the annual financial survey of my business coaching clients, over 85% of the net profit results were well above the industry averages in 2021. According to annual surveys of commercial contractors, the average net profit margins earned over the last three years (not including Paycheck Protection Program (PPP) revenue or loan money) can be found in Figure 1.
Unfortunately, there were a few who experienced less than industry average results last year. Why? I believe some contractors achieved poor results because of the PPP money infusion most people received in 2020. This influx of funds lulled poor-performing contractors to sleep, as they didn’t have to work as hard to grow, expand, hire, improve or earn high profits. Along with their windfall of cash, they also didn’t make any decisions to improve, invest in their future or upgrade.
Then, in 2021, feeling richer than expected, some contractors experienced a lapse in standard judgement. They took on jobs too large to handle or hired subcontractors who couldn’t keep up with the workload. Some bought new equipment they didn’t need or chose to go dark on their marketing initiatives. Every one of these underperforming companies delayed decisions to invest in continuous improvement, postponing what they needed to do to remain profitable.
Get Back on Track
Whatever the reasons are for achieving poor results, many contractors are taking a hard look at where they are now. Some contractors who think they’ve grown have actually gone backward in annual revenue adjusted for inflation. When you consider inflation and factor in price increases for materials over the last several years, growing at 10% annually is negative growth because construction costs have risen 20% or more over the last five years.
Staying at the same annual revenue and profit levels is a net loss. Net positive growth is required to improve. The problems? Today, overhead is higher, field employees cost more than previous years and old bid rates don’t work for field production. Winning jobs based on low bids is now tougher with tighter margins, even in good markets.
To produce results, you now must get back on the profit-producing trail. It’s time to not only face reality, but also change, improve, innovate, disrupt the status quo to get to the next level. To hit your profit and revenue goals, you need:
- A clear vision of where your company is going and a defined strategy for how it will get there.
- An updated monthly financial business plan with targets and goals for revenue, overhead, profit and job costs.
- Standard systems which are enforced, monitored and utilized by all.
- A talent development and recruitment program that provides training, opportunities for growth, respect, appreciation and quality culture.
- Professional full-charge managers who hold people accountable to achieve results and meet deadlines.
- Supervisors and foremen who are 100% responsible and capable to complete projects safely, on time and on budget.
- Clearly defined and enforced job descriptions with clear chains of command and levels of authority.
- Good customers who negotiate on price.
- Fully integrated accounting, estimating, project management and job cost tracking software.
A full-charge controller who understands generally accepted accounting principles, provides tight financial management, produces weekly job cost production scorecards for field foreman and implements controls.
To start improving and get headed in the direction of increased profits, contractors must invest in drafting and updating strategic business and financial plans by defining areas of improvements, building strategies, setting goals, and outlining a clear course of action for the next one to five years.
Just Do It
When you say you want to improve and never start, you aren’t improving. When you say you’re “trying” to improve, you aren’t actually making the effort. Unfortunately, many contractors are stuck in a rut, all the while complaining but never doing enough to improve their current company conditions. They’ve hovered around the same level of success, business size, number of crews and minimum profits for years without any solid attempts at improving. Change is painful, and require commitment and investment. But no pain, no gain, and no risk, no return. Stuck contractors talk a good game but never make real commitments to implement significant changes or improvements.
Ditch the Excuses
These stuck contractors offer up a plethora of excuses for their inability to make decisions. I hear the same story year after year from underperforming contractors who boldly proclaim their plans to improve, grow and make some big decisions to progress their companies to a higher level. All this is, of course, mostly just talk, and their companies continue to stay the same, producing flat revenue and low profits.
You’ll never achieve the results you want, build a successful company or gain financial freedom by doing what you’ve always done. Your business is currently designed to deliver the results you’re currently achieving.
Each decision you make toward improvement carries both pros and cons. There’s no perfect or guaranteed decision or right decision. A perfect scenario will never appear.
Make More Decisions
Leading contractors don’t postpone making necessary decisions to contribute to the improvement and future success of their company. They’re willing to make decisions and take educated risks. What about you? Do you:
- Hire the best and pay top dollar, even though you don’t want to overpay?
- Install cutting-edge technology, even though it’s difficult to learn and costs more than $200 per month?
- Fire underperformers fast, even though they’ll be difficult to replace, and the process will disrupt your workflow?
- Invest in business coaching, consulting and strategic planning, even if you’re not sure it’s worth the money?
- Intentionally seek better customers, even if it means having to get out and meet new people?
- Stop bidding against low-priced competitors and seek higher-paying project types?
- Promote your best foreman to project manager, even though it means replacing him?
- Hold regular company meetings, even though they take time away from the actual work?
- Invest in training, even though it costs you both time and money?
- Hold people accountable to perform your standard systems without exceptions?
- Make important decisions to improve and invest in your company’s future, without postponing or delay?
For industry leaders who don’t postpone important decisions, the future is unlimited. As a business owner, many of your know what to do. It’s time to make the decisions that need to be made to step up to the next level of success.