Construction Firms

What Business Are You In?

At first glance this may seem a rather silly question. You may say, "If there is one thing I'm sure of, it's what business I'm in." But wait. Look further into the question. Suppose you say, "I build houses." Are you a speculative or custom builder? Are you a remodeler? Are you a subcontractor? Can you schedule a complete job and make money? Defining your business clearly and tailoring your business plan to your definition will help increase your profits.

Marketing

Your marketing objective is to find enough jobs at the right times to provide a steady flow of income for your business. Start by coordinating your jobs to eliminate the down time between them. An individual who cannot come up with enough ideas to keep a crew working 12 months a year may not be ready to run a construction business.

Where Is Your Market?

Describe your market area in terms of customer profile (age, education, income, etc.) and geography. A customer profile will help you focus your advertising to reach your potential customers. For example, if you are a custom builder, you may decide to build homes in the $100,000-250,000 price range. This would mean that your customers will have incomes in the middle- to upper-middle-class ranges. You may also decide you can earn a profit by building these homes within a radius of 30 miles from your office. Describe your market using the following characteristics: product, types of customers, location of customers. Also, it's important to know the types of jobs you are NOT willing to do.

Now that you have described what you want in terms of customer profile and location, what is it about your operation that will make these people want to buy your product or service? For instance, quality work, competitive prices, guaranteed completion dates, effective advertising, unique design, etc., may set your business apart from competitors.

Advertising

You have described what you're marketing (your product or service), who is going to buy it and why they're going to buy it. Now you must decide the best way to let your prospective customers know about your product.

Jot down key words and ideas that your customers should remember about your product or service. This will help you to create effective advertising.

What form of advertising should you choose? Ask the local media (newspapers, radio and television stations and direct mail printers) for information about their services and results they offer. For many in the construction industry, the only effective method of advertising is referrals. What drives your decision should be centered on how each targeted customer group finds out about construction firms when considering building.

How you spend advertising money is your decision, but don't fall into the trap that snares many small business managers. They consider themselves experts on advertising copy and media selection without any experience in these areas. Be sure to seek professional advice and compare what different advertisers offer.

Competition

Competition in the construction industry often results in low profit margins. However, if you are just starting or are a relatively small firm, you may not be at a disadvantage. Often smaller firms can compete with bigger outfits because of lower overhead expenses. For example, your office may be in your home, or you may be able to work right out of your truck, saving the expense of a field office.

Competition is largely based on prices, although quality and efficiency are factors also considered by potential customers. Poor financial planners have a high failure rate. For this reason, plan carefully, particularly in the areas of estimating and bidding. Build profit into your bids. Knowing when to turn down a job is often just as important as landing a job. When bidding, consider how long it may take to get paid and whether you have the cash flow to pay your bills while waiting for your money.

In order to measure your competition, answer the following questions.

  • Who will be your major competitors?
  • How will you compete against them?

Sales Strategy

The market for the construction industry is unique in many ways. It depends on such variables as the state of the economy, local employment stability, the seasonal quality of the work, labor relations, good subcontractors and interest rates.

Also, as a contractor, you are unavoidably dependent on others, such as customers or financial institutions, for payment, and on other contractors for performance of their work. Investigate the normal industry practice in your area concerning average time to collect for work done. Don't forget that you may have the right to file a lien against the property for non-payment, but ONLY IF YOU DO SO IN A TIMELY MANNER. Consult your attorney.

Estimating

Whether an owner-manager in the construction business succeeds i.e., makes a profit depends to a great extent on bidding practices. Therefore, you must make careful and complete estimates.

Many successful contractors attribute their success to their estimating procedures. Before submitting a bid, they calculate all job costs by dividing the job into work units and pieces of material, and then assigning a cost to each item. The total of these costs will be the direct construction cost. They also estimate the indirect costs of a job, such as overhead expenses, the costs of maintaining the office, trucks, license fees, etc. The estimate should also include any interest charges on borrowed money, insurance fees, surety bond premiums, travel expenses, advertising costs, office salaries, lawyer's fees, etc. These must also be paid out of gross income.

Trade associations, as one of their services, often provide members with a package of business forms. The "cost estimate form" is usually included in this package. The obvious advantage of these forms is that they are specifically designed for a particular trade.

Regardless of what cost estimate form you use, it should include headings for activity, material, labor, subcontracts and estimated cost. It also should have areas for direct construction costs, indirect construction costs, overhead and profit. In addition, a column for the actual cost compared to the estimated cost of a specific work item will allow you to evaluate the profitability of a job after it is completed. This will show you where your estimates were high or low, and enable you to adjust future bids on similar projects. This column will also be necessary when it comes time for your financial accounting. Software programs have been developed that help with estimating and tracking actual versus bid expenses ("Quickbooks" for example).

Bidding

Your decision to bid or not to bid on a particular job should be determined by several factors. First, do you have the capacity to complete the job on schedule and according to the specifications? Beware of over-extending yourself out of business. You must operate within your known capabilities. On any job, you must follow all the details of the work yourself, or find competent supervision. Your reputation and ability to land future jobs is at stake.

Bonding

Bonding companies work with construction companies to ensure that the construction firm fully commits to the terms of its contract. Usually bonding companies base their fees for bonds on a percentage of the contract price. For example, if you have a $100,000 contract and your bonding company charges 10 percent of the contract price, you will pay $10,000 for bonds.

There are three main types of bonds. Bid bonds assure that the successful bidder is prepared to perform the work according to the terms of the contract. Performance bonds assure completion of the job according to plans and specifications. Payment bonds assure anyone dealing with the bonded contractor that he or she will be paid.

The effect of being a bonded contractor is evident in the area of competition. The customer, by requiring that the contractor be bonded, is more or less assured of adequate completion of the job. Therefore, customers are more likely to compare contractors on the basis of price.

With the widespread use of bonding requirements, the competition generated often leads the inexperienced contractor to submit bids that are unrealistically low. One or two such mistakes can spell bankruptcy.

Being a bonded contractor is a good advertising point. Another advantage is that banks are often more lenient toward bonded contractors.

Will you need bonding: often, occasionally, or seldom?

Where will you get your bond?

What will the terms be?

Bonding companies usually require the contractor to have proven experience and the financial capability to complete a project. Meeting these requirements can be a real stumbling block to a new construction firm.

The U.S. Small Business Administration (SBA) has a surety bond program designed to help small and emerging contractors who might previously have been unable to get bonding. Applications for this assistance are available from any SBA field office.

Planning The Work

Once your marketing efforts result in jobs, the problem becomes one of production. How will you plan the work so that the job gets done on time?

No matter how you plan the work, your plan should help you maintain your production schedule and adjust production to meet changing conditions, such as bad weather.

As you plan your work schedule, keep in mind the timing of starts and the timing of the various steps in the construction of your projects. Don't forget to consider the size and nature of each job also. With sufficient help and supervisory personnel, you can engage in your maximum number of projects.

The work schedule should show the various operations in sequence and assign a working day and calendar day to each. Several operations may be in progress simultaneously. A glance at your work schedule will let you know if work is progressing on time. Many companies offer commercial scheduling boards designed for this purpose.

Below is a partial work schedule to demonstrate how yours may be set up. Note that there is a column that can be filled in with either a solid mark or an "X" to indicate either partial or completed work. When you look at a particular calendar day, an "X" next to it would indicate that you're on schedule. An open square indicates a delay. Here, then, is a convenient way to spot delays so you can take corrective action.

Working Day Calendar
Activity Start Finish Day Complete
1. Layout 1 1 15 X
2. Foundation forms 1 2 16 X
3. Foundation pour 3 3 19 /
(/ - indicates ½ complete)

You should save your work schedules as a basis for future estimates. For example, if you are estimating a job similar to one you've done before, you'll already have information on the steps of production, what materials you'll need and when, how long the job will take and any peculiarities that may affect job completion. When you consider all these things, you'll be more likely to submit an accurate bid.

Careful records can also indicate how many workers you will need. If the work falls behind schedule, you may need to bring more workers to the job to complete it on time. In this way, you will avoid a possibly larger financial loss from paying a penalty for late work (if that is called for in your contract). Also, records will indicate any changes needed in the organizational structure of your firm.

Getting The Work Done

If your firm is going to run efficiently, you will need organization because, as your company grows, you will not be able to do all the work. You have to delegate work, responsibility and authority. An organizational chart is a useful device for accomplishing this, as it clearly shows who is responsible for the major activities of your business.

If the nature of the job changes after being awarded the contact, make certain to obtain SIGNED "change orders" indicating the nature of the change requested and the additional cost. Without a valid change order, you may not be paid.

Personnel Requirements

  • Will you carry a permanent crew or hire workers as the need arises?
  • Will you use union or nonunion labor?
  • How many workers will you need?
  • What hourly rate will you pay?
  • What will fringe benefits cost?
  • Will you supervise the work yourself or hire a foreman?
  • If you hire a foreman, what will his or her salary be?
  • Will you need clerical help?
  • What will it cost?

Equipment Requirements

  • What special equipment will you need (assuming your work force will supply its own hand tools)?
  • Can you rent it instead of buying?
  • Will you need an office or use your home?
  • If you will need an office, what will the rent, utilities and other expenses cost?

Put Your Plan Into Dollars

The basic unit of financial management in the construction business is the job. The financial aspects of the job must be planned as carefully as the construction work necessary to do the job. The payment for each job must cover the direct and indirect construction costs as well as the allocated share of overhead.

Accounting requirements will vary from company to company and from trade to trade. Your accountant will help you set up the accounting system that will best meet your needs. However, you must make the overall plans yourself. You must develop the goals necessary to guide and manage your business. This overview will prove invaluable in establishing a good working relationship with your banker (or other lender) and your bonding company.

Control and Feedback

To make your plan work you will need feedback at the various stages of your management process i.e., when planning, directing and controlling the job as well as adequate financing. The management controls you set up should supply the information you need to keep your operation "on the money."

During the planning stage, you will need to calculate your bid carefully. To direct a job, you will need your job cost analysis to make sure that the job is going to make a profit. To control the job, you must organize your employees' work schedules. Personal follow up ensures efficient performance by your personnel.

Last Updated: June 2005