by George Hedley
My wife and I get up every morning around 6 am, start the coffee, and together we read the Los Angeles Times and USA Today. Last week I was traveling to the CONSTRUCT 2009 show in Indianapolis later that morning, so I didn’t have time to read every news section I wanted to. But I did read one newspaper article which made me think about the typical construction company trying to do business in today’s tough and slower economy.
In California, total unemployment is predicted to reach twelve percent or more in 2010. Construction unemployment is almost double that sad statistic. But the monthly statistics which got me thinking even more, were construction permits issued in the State. Commercial construction permit dollar volume was down 66% and residential permit dollar volume was down 75% since the peak years of 2005 through 2007. This is a horrible situation if you are a contractor in California trying to keep your doors open and make a profit.
At several large construction conventions I have spoken at this past year, I have repeatedly heard shocking and similar sales figures from national companies who supply construction materials like cement, drywall, light fixtures, and lumber. Your state might not be in as bad of shape as California, but it does make you think about your business model going forward.
What type of company would you own?
If you were not in the construction business, what type of company would you want to start, buy, or own? Would it be dependent on the Federal government or your State to produce enough budget money to insure there was plenty of work for your company to bid on? Or would it be dependent on potential customers to ask you to bid plans and specifications against an unlimited number of competitors – qualified or not? Or would it be a business where you were awarded contracts based on the lowest possible price, regardless of your capacity, reputation, service, quality, or workmanship. Would it be a business where you do all the work and don’t get paid for weeks after you finish? Would it be a business where you do a great job and then the next contract is awarded based on the lowest bidder? Or would it be a business where you do a great job for a customer and then they may not have another job for you to bid on for a few years, if ever?
Being a contractor is a hard way to make an easy living. Or not! Most observers think contractors make a minimum of ten percent net profit and have all the freedom in the world. But the reality of our business is that as you may build a better and better company, you are really at the mercy of the market and customers to create opportunities to generate your revenue potential. In other words you don’t create your own future. You are at the mercy of others to decide to build and then give you an opportunity to present a proposal.
Build a better donut?
Let’s look at the donut business as a comparison to construction. If you make the same donuts as every other corner donut shop, you are at the mercy of potential customers to stop by and buy your donuts when they decide they want one or are in the neighborhood. If you don’t improve your donuts, you can only improve your revenue by offering better customer service, increase your marketing, or lowering your price. This is similar to the construction business. But if you build a better donut, both your revenue stream and bottom-line will improve as customers flock to enjoy your unique and special donuts. When this happens, you can raise your prices and afford to offer better service and customized unique donuts which will attract even more customers.
So the question for contractors who rely on their customers to create revenue opportunities and then get work by being the low bidder is - what are the alternatives? A down market forces construction company owners to look at many options they didn’t need to consider during busy times. Some have tried to move from residential construction to public works only to find bid lists growing to as many as twenty or thirty bidders. Others have tried to move from bidding on retail and commercial projects to public works as well. As most have found out, this strategy is not working. So now what?
It’s not just about the donuts!
Back to the donut business. How could a donut shop increase their steady stream of ongoing and reliable revenue regardless of the economy? When the economy moves up or down, what kind of customers will continue to bring in orders to the donut shop? Successful donut shops don’t rely on customers to show up at their door. While unprofitable donuts shops sit and wait for their customers to show up at their door.
I hold two day Profit-Builder Circle Academies every few months. Many of them are held at my office in California. When I hold them, I always drop by the local donut shop a few blocks away to pick up several dozen muffins, donuts, and refreshments for the group. Never has the shopkeeper asked me for my name, contact information, or what the event was I was buying donuts for. They also never look very busy as I have never had to wait in line.
Companies can’t survive selling one donut at a time!
Successful donut shops do business different than most of their competitors. They go out and seek regular accounts which will guarantee their doors stay open in any economy. They don’t just rely on their reputation, repeat customers, and their advertisements to work. They make business happen. They seek customers who order a steady number of donuts every day, week, or month. They call on churches to get their weekly Sunday morning business. They call on local markets, coffee shops, restaurants and schools to get their daily orders. They call on charities, business groups, and other organizations who have daily or monthly breakfast meetings. In other words, the key to building a successful donut business is more than making good donuts. It’s about selling, going out, and getting regular accounts.
When you study good donut shops, they are really two different businesses in one. One department builds good donuts, serves them in an excellent environment, has good people manage the process, and charges a competitive fair price. But successful donut shops also have a second important department that steadies their revenue and increases the bottom-line. They have several ongoing accounts who deliver ongoing steady revenue every month to them.
Contracting is not just about construction!
Now the same question for contractors I asked earlier. How can construction companies increase their steady stream of ongoing reliable sales income regardless of the economy? What type of ongoing revenue can your company, employees, infrastructure, technical skills, reputation, equipment, knowledge, customer base, experience, or potential generate? Attendees of my two day Profit-Builder Circles come to learn how to get their business to work the way they want them to and then take them to the next level. As I look back over the hundreds of past attendees, the business owners who are the most successful are the ones who have two types of contracts, revenue sources, customers, and business models. They do both lump sum contracting work plus have a significant amount of their revenue come from steady ongoing service accounts.
These successful contractors don’t rely solely on bidding single jobs, one at a time, to generate most of their revenue. When you mainly rely on bidding or negotiating work to win contracts, your business becomes ‘fast and furious.’ Your business is either hot or cold, fast paced or dead, busy or slow, and you cant’ control your workload and your revenue isn’t steady or reliable.
‘Slow & steady’ business keeps your crews busy as the workload keeps on coming regularly over and over every month. You can count on a steady flow of work as annual service contracts provide ongoing revenue. With steady regular service accounts, you can plan your schedule, workload, and cash-flow.
Multiple types of income, contracts, and revenue sources compliment each other. This business model allows these type of companies who do both bid and service work, to become very efficient, generate steady workflow for their employees, and create wealth for the owners. But they require two different types of management, sales efforts, cost accounting, customer service, employee training, professional standards, and marketing efforts.
Steve is an electrical contractor who has two separate companies that work together. He has a new construction division that bids to general contractors and does commercial projects, large shopping centers, and office buildings. He has ten steady general contractor customers who typically give his company enough work to make a small profit during good times.
As an offshoot to his contracting company, Steve started an electrical service company several years ago that installs, services, and maintains back-up power generators for homeowners, commercial facilities, industrial plants, hospitals, government buildings, and offices. This company seeks annual contracts for all service work required to keep customer’s buildings electrified during power failures. This specialty service work includes design, engineering, preparing studies, permitting, new installation, repairs, maintenance, testing, fueling, implementing technology, and ongoing monitoring work to insure the generators will work when needed. This service business has grown as he has focused on acquiring new customers, providing excellent customer service, regular weekly employee training, and lots of sales and marketing to attract potential customers.
Slow and steady wins!
Generating slow and steady business is an answer to improving your company’s future. Especially in light of the current economy. Slow and steady business is not dependent on new construction to generate work for your crews and keep your doors open. In Steve’s case, his customers can’t afford to shut down during a power outage and will pay for the service his company provides. What type of slow and steady service business can you start or acquire to generate ongoing steady work and revenue for your company? Consider one of these following service business models to add and compliment your revenue sources:
- Plant piping and repairs
- Industrial electrical service and maintenance
- Exterior building cleaning and sealing
- Full service plumbing, electrical, and mechanical
- Roof maintenance and repairs
- Site cleanup, road service, and river bed maintenance
- Landscaping, tree trimming, lawn service, weed killing and flower
- Snow plowing, Christmas lights installation, and light bulb service
Jim goes slow and steady!
Jim’s business is typical for small to medium general contractors. He specializes in new construction of commercial buildings, remodels, renovations, and interior improvements. His job sizes run from $50,000 to $700,000 and does $5,000,000 in annual revenue in this type of work. But his competition is growing and his customers are asking for lower prices. He is at a point where he couldn’t make enough profit to make it worthwhile.
Jim called me and asked what should he do? I asked who his customers were. He had built local several stores for national retail chains. I asked what he did for these companies on an ongoing basis. He hadn’t pursued service work as it took too much time and his company had stayed fairly busy building new construction projects. I suggested he go see these companies and offer a complete full service package to them.
Jim listened and implemented. Within a few weeks, he set up a separate company with a different name. He put a manager in charge, added an in-house customer service coordinator, a marketing manager, and a full time salesperson. Fast forward three years later. His company now has four to five service crews busy seven days a week and often working nights to accommodate these retail businesses. His service company provides anything retail store customers need: emergency glass repair, overnight painting, quick repairs, clean-up, installation of new fixtures, electrical, plumbing work, flooring, doors, heating or cooling maintenance, trash removal, or remodeling. After only three years, Jim’s service company generates over $2,500,000 in annual revenue and significantly more to his gross profit than his new construction company does.
Do your customers want more?
Joseph owns a residential landscape company doing new installations for homeowners. He mainly works on referrals from custom home-builders, architects, and past customers. Sometimes his company is busy and other times he waits for the phone to ring. By chance he was asked to do some hauling for one of his contractor customers. In the past he didn’t pursue this type of business because is was a nuisance and disrupted his operations. But this got him thinking about how he could expand his revenue sources.
Joseph decided to set up a new division that focuses on service work. He moved his chief estimator into the role of division manager to build the customer base, added a service manager, and put a bookkeeper in charge of managing the accounts. He started by asking his customers what other type of services they needed on an ongoing basis. His homeowner customers trusted his company, liked their work, and actually wanted his company to provide more ongoing maintenance for them as well. They asked for weekly lawn and garden service, annual weed removal, yearly tree-trimming, winterization service, and annual irrigation repairs. Some of his customers owned pools and also wanted his company to do their pool service, maintenance, and repairs. Some customers had young children and wanted swing sets and playground equipment installed. Some wanted new barbeques installed, fencing added, stables for their horses built, cages for their pets, and patio covers added. Some customers asked him if he installed annual holiday lights as well. Some customers even wanted his company to offer debris and junk removal and hauling. WOW! All that business and Joseph hadn’t even thought about providing it for his customers.
Start slow and build steady!
As you contemplate the future of your company, what are your choices? Would you rather own a fast and furious company 100 percent dependent on acquiring new contracts, one at a time, if and when your customers decide to build something, and when you are the low bidder? Or would you like your company to have a slow and steady division with an ongoing revenue stream, and regular service customers to help you weather the ups and down of the new construction business?
When you have a slow and steady company you also have an asset you can sell. Service companies with annual contracts are more valuable than construction companies. The average construction company sells for 3 to 5 times net earnings before interest and taxes (EBIT). The average service company sells for double that amount.
Start a service division now. Determine your goals and implementation plan. Hire a manager to run the division for you. Setup your office to succeed with a dedicated service manager, accounting manager, and sales person responsible for the success of the division. Your job is to provide direction, vision, and hold your managers accountable for achieving the results you want.
So, what ever happened to the donut shop mentioned earlier? Last week I drove by and they were closed. The owner never understood what business he was in, what it took to keep the doors open, and how to add more recurring customers by doing more than the competition. What about you? What are you waiting for? Go make it happen! Slow and steady beats fast and furious every time!
ABOUT THE AUTHOR
George Hedley is the best-selling author of “Get Your Business to Work!” As an entrepreneur, popular speaker and business coach, he helps business owners build profitable companies. E-mail: firstname.lastname@example.org to request your free copy of “$ure $trategies To $urvive A $lowdown!” or sign up for his free monthly e-newsletter. To hire George, attend his “Profit-Builder Circle” academy or be a part of an “Executive Roundtable Group” call 800-851-8553 or visit www.hardhatpresentations.com.
George Hedley HARDHAT Presentations
Email: email@example.com website: www.hardhatpresentations.com
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