Do small construction companies have the desire to grow?
It’s a question I’ve been pondering for the last 9 months while working with a client to implement a more strategic minded approach into his small but reputable construction business. Starting the project, I was full of passion, optimism, and energy as I anticipated leveraging my leadership experiences from other industries to drive immediate improvements. Months later I have come to some eye-opening realizations regarding the strategic readiness for this fascinating group of entrepreneurs.
I have spent countless hours reviewing old contracts, purchasing agreements, determining collection processes and helping to do job site work (carpentry, concrete, equipment mobilization) in an effort to better understand the company I represent and other contractors, their position in the industry, their challenges, and possible ‘solution-able’ outcomes.
My observations are many and span the entire playbook of business management. However, I’d like to focus on the few which correlate directly to the desires of most small contractors I’ve had the pleasure of interacting with. Simply, their most pressing wants are getting more steady work (growing), finding quality resources to do the additional work and ultimately clearing more profit or as a colleague of mine once uttered “as much profit as possible and not a penny less.”
Finding the right work
What I’ve seen, as a newly budding consultant, is most small contractors focus on their current limited relationships with mid to large general contracting firms scratching for a larger share of wallet. During slow periods, small contractors employ a “cast a wider net” approach to winning work which usually results in little or no profit. Their tool of choice for managing sales growth? A notebook, or legal pad, that contains a series of seemingly random thoughts for growth. I’ve asked “why not a more robust strategy to track your progress?” or “how are others helping you secure new projects?” The most common response is “not worth the time to learn” or an excuse for not having the right resources internally to manage/grow customer relationships.
Finding quality help
The approach? A simplistic serendipitous strategy of relying on past relationships and internal referrals for experienced tradesmen or tradesmen in training (laborers). The most advanced approach I’ve encountered is a generic posting on Craigslist with minimal detail. The worst is a reliance on day-to-day subcontract work that exposes the business owner to a litany of legal risks due lack of rock solid agreements. Again, I ask the same probing questions of adopting new innovative approaches which are met with polite hesitation.
A crucial long-term success metric for any entrepreneurial small business owner. Shockingly, most rely on generic accounting software that tracks historical trends in to determine if a project will be profitable. The remaining use the homegrown approach of remembering costs from past jobs and jotting notes on their beloved legal pads to calculate profit. With such an important metric I fail to grasp why most small contractors resist developing well thought out project plans and communicating key metrics that will influence success. Sales funnel health, collections risk assessment, estimating accuracy, operational efficiency (time on target) and customer probability of repurchase (net promoter) are all crucial to growing and succeeding in every industry. Unfortunately, these key metrics are absent or poorly documented by small construction contractors.
Frustrated with my seeming inability to influence fundamental changes I began to broaden my exposure to the plight of the small contractor via industry news and podcasts. After consuming hours of great information, it now strikes me that my initial enthusiasm of how business improvements could influence growth doesn’t quite address the true immediate needs of the small construction contractor.
What’s really going on?
Research shows that while some of the areas listed above contribute to the plight of small construction companies, a great article, written by Scott Wolfe Jr., CEO of zlien.com and founder of the Construction Payment Blog, outlines a more deeply impactful phenomenon of seemingly one-sided relationships between small contractors and larger general contracting firms. A lack of “contractual balance” forces small contractors to secure capital through non-traditional high-interest hard money loans, introduces payment challenges with owners/general contractors and the ever present abstract perception of quality and job completion definitions. These issues contribute to a small owners willingness to grow or even invest in their own business. In a sense, the circumstances outlined above are driving a short-term immediacy approach to small contractor operations.
What’s the answer?
While I’m not of the opinion that a single silver bullet exists it is clear that small contractors must have a more proactive approach to protecting their cash flow needs. As pointed out in the article above Lien Rights, Surety Bonds, and Risk Qualification processes must be leveraged to get a small contractors ‘check’ moved to the front of the payment line. Getting cash flow healthy will go a long way to relieving anxiety ultimately affording an opportunity to implement strategies that will influence more sales, improve operational efficiency, control costs, and address trade/business skill deficits.
A company has two kinds of problems: 1. Not enough revenue. 2. Every other kind of problem. — Bob Brennan, CEO at Veracode
For me, it will be focusing on how I can help my client improve cash flow by implementing approaches that improve the company’s contractual risk and influence a more predictable and stable cash flow position.
After that? I’ll keep you posted…