Imagine that you are just starting your own construction company and someone tells you that you will work harder than you ever did and make less money. Plus, all of your company and personal assets will be at risk every day.
According to the Associated Builders and Contractors Confidence Index, that is the reality construction company owners face today. In its September survey, 64.3 percent of respondents said they expect sales to increase or be unchanged, yet 76.6 percent expect profit margins to decrease or be unchanged. That contrasts with the September 2019 survey, where 47.1 percent of respondents expected flat or decreasing profit margins. Increasing revenues while decreasing profit is a treacherous path that can lead to catastrophic results. The outlook for profitability promises to impact the industry for well into 2021 and beyond. The time to take aggressive, proactive measures to counteract that trend is now.
Avoiding the more-work, less-profit scenario is a challenge, but it is one that can be accomplished through an active, aggressive approach to enhancing your company’s ability to reach peak financial performance, maximize company value and optimize financial returns to shareholders. You can take calculated, strategic steps to ensure your company will outperform your competition:
Assess where you stand compared to your peers. You should know where you stand in your marketplace and be able to identify your areas of strength and weakness. Identifying your strengths will help you find areas where you hold competitive advantages you can use to outperform your competition. It may be as simple as a working capital position that keeps you from having to cover the cost of borrowing against a line of credit or a leverage model that provides cost savings. Identifying weaknesses could result in productivity even greater than knowing your strengths. Taking proactive steps to improve processes and controls can be the key to improving your bottom line. For example, if your benchmarking study shows your company lags your competition in return on assets, maybe you have too much invested in assets, like equipment, and should be shedding some of that. You can identify where you can make improvements by monitoring these areas and implementing new procedures to improve these measurements. Organizations do better and generate higher margins when they focus on the areas they need to improve while they use their strengths as a competitive advantage.
Know your sweet spot. Identify the characteristics of your work that most effectively use your assets to create the most profitable returns. You might perform well on jobs that price out at over $5 million but not so well in jobs where the estimate is for less. You might do well in Ohio but you haven’t been profitable in West Virginia. One crew might prove profitable and another not. Your analysis will help you identify the type of customer, size and locations of jobs, and project managers that will produce the most profitable results. This step could be the most vital of all of the proactive procedures your company can put into place. The wrong type of work can produce deceptive results: top-line growth while the bottom line slowly erodes. Monitoring your projects regularly and using the information to identify the jobs that deliver maximum returns will help you find more of the work your company performs profitably. As well, the more focused you are on your sweet spot, the better you’ll be at pricing and estimating. Every company has a “sweet spot’ and knowing yours is vital to your success. It is particularly critical in times of increasing sales volume to ensure you are focusing on your most profitable jobs.
Train your project management team. Construction companies spend more money than companies in any other industry training their employees. They focus on skills and safety. But training doesn’t end there. The project management team controls your jobs and plays a large role in their success or failure. Investing time into this type of training will produce a project management team that not only knows how to get a job done but also knows how to do so in a manner that maximizes return. Scope creep is a common problem, where additional work and materials requested at the worksite get done but don’t get billed. Companies benefit substantially by investing in training that teaches project management how to deal with such issues as scope creep, which gives them the tools they need to drive the activities that improve return on the jobs they are responsible for managing. Your project management team, the people most responsible for the success or failure of a project, should be trained to execute their work in a way that will maximize company profits.
Analyze your overhead costs. Overhead is a large part of your costs. All successful contractors have a firm grasp on their direct costs: materials, subcontractors and labor hours. But what about insurance, equipment repairs and maintenance, deprecation and other overhead costs that can be the difference between profit and loss? One bad job can cancel out a year of hard work. If you devote time to fully understanding the costs that make up your overhead, you will be able to bid jobs more effectively, thereby increasing profits.
Know how your general and administrative costs are trending and why. What are your office expenses? Many are fixed costs and more predictable and constant, but even small upward trends in these costs over the years can erode razor-thin profits. This section of a contractor’s income statement is an area where many contractors believe spending to be out of their control. Identifying the areas of concern—Are the office wages you pay consistent with your current needs? Do you review employee benefits costs at renewal times?—is the first step in taking action to control these costs? Once these areas are identified, specific plans can be put into place that will allow a company to regain control and ensure that the expenses are necessary and helping to promote profitability. Successful contractors keep their eye on these costs and understand how small changes in those areas can affect their bottom lines.
Align your culture with your company goals. It is critical to allocate resources to ensure your company has a culture that promotes the activities that will produce successful results. The culture of an organization has a deep, lasting impact on their success. Is communication open and honest, and does it encourage good relationships between management and field personnel? Have you considered sharing financial information with employees that might encourage them to be more concerned about profitability and efficiency? Devoting time and energy to ensuring your company has the right culture in place is a necessary step to profitability and one that many times is overlooked. Companies that take the time to focus on enhancing their culture have greater success and less turnover than those that don’t.
These are challenging times. Construction companies are facing more obstacles to their success than ever. Be aggressive. Attack the status quo. Solidify the financial standing of your company. And buck the trend of working harder for less money.