Why Do Contractors and Construction Businesses Fail
Building a successful contracting business is no simple enterprise. There are many challenges along the way, licenses to obtain, high costs of equipment, and most importantly, mastery of a trade which by itself can take years outside of the other difficulties in running a business. However, even when your business is well established and running, there are still pitfalls to watch out for. ORB Solutions has identified 3 key factors that, either alone or in close relation with each other, we consistently see destroy contractors’ aspirations and drag their businesses down.
Lack of Quality Labor and Craftmanship
The labor pool for construction companies and tradesmen is in severe shortage. According to a recent news release from Associated Builders and Contractors, it is estimated that there will be a shortage of over 650,000+ workers in 2022. This lack of available labor makes finding seasoned and experienced craftsmen to hire even more difficult. Many contracting companies are forced to take on less experienced individuals as apprentices and train up their competencies. However, due to the difficult nature of the work, there is often high turnover and this training investment can be a gamble in any situation.
Employees who aren’t properly trained, in the absence of policies, procedures, and supervision will inevitably make mistakes. Depending on the size and scale of mistakes and the scope of the project, these mistakes can cause significant damage to your reputation and pocketbook. Even if a job is priced for perfection initially, if you are forced to redo that job, the additional cost burden can quickly move you into the red. The real kicker is that even if the mistake is due to negligence and laziness and you were to fire that employee on the spot, you still have to pay them for their time and make things right in the eyes of the customer.
The burden of quality control and craftsmanship ultimately lies with the owner. While some mistakes are unavoidable, how can you mitigate the frequency and impact of these costly mistakes:
- Develop Stricter Hiring Criteria – Ask the right questions and avoid red flags
- Hire Preemptively – Don’t react to a labor shortage, get ahead of it
- Fire Quickly – Don’t let bad eggs fester and demoralize the team
- Train New Employees on the Job – Be open to questions
- Check-In on your Jobs – Not just at the end of the project
- Implement Tools, Policies, and Procedures – Create structure and systems
- Establish Incentives – People do better when they have a goal to work towards
- Focus On A Few Types of Jobs – Consistency and practice are key for mastery
Implementing some or preferably all of the above steps will ensure your team is ready for the challenges they face and you avoid costly mistakes and negligent employee practices that eat away at the bottom line.
Poor Money Management
While mistakes and undisciplined labor can cut into profits and put your business in the red, failure to properly manage your money can get you there even faster. Contractors must ensure that each dollar they spend is laid out to directly get them to their next dollar. While a multimillion-dollar contracting outfit might have the capital to deploy into fancy bells and whistles, small to medium-sized contractors must focus their capital outlays!
Overspending on Overhead
Everyone wants a nice new truck and the highest-end tools and technology imaginable. However, if for example, that new truck doesn’t offer tremendous utility above and beyond a used truck a few years earlier, it’s probably not a sound investment. If the new truck was $35,000 and a used version a few years older was $27,000, even if you have to theoretically spend more on maintenance sooner, you can put that extra $8000 to work for you right now. How many leads can $8000 in ad spend to drive to get you more work on the schedule if you aren’t booked solid? You could spend $8000 to hire a trailer runner for 2-3 months to put more time back on your calendar and focus on sales and process efficiency. For every dollar you spend, you should always try to consider the potential return on investment from an alternative choice.
Missing the Mark Consistently on Estimating
Nothing can burn your business faster than doing work that loses you money. Companies with a large workforce that aren’t subcontractors often try to sharpen their pencils when their calendars get light. However, if and when they miss items on an estimate, this can quickly send them into the red. It’s ok to take nonideal work to fill the time of your crew and get you through between large projects sometimes, any revenue-producing job is likely better than paying your crew to sit around with their hands in their pockets.
You need to invest time on the tail end of your jobs to understand where your numbers landed and how much profit you truly realized vs your estimate. If you missed the material cost by 10% and the job took 5 days when you estimated 3 days, this is information you NEED to know. Document the reasons why things went awry so you can incorporate them into the next similar job estimate.
Failure to Collect on Completed Work
Clearly outline the scope in your contract, and document every change order. Client disputes over scope are the most common reasons we see for large sums of money to go uncollected. Every day you let this money go uncollected is hurting your bottom line because a dollar in hand today is always worth more than a dollar in hand tomorrow. Don’t fall into the trap of letting money go uncollected. If the scope is contested, try to settle the arrangement amicably with a discount. Not every job goes smoothly, but you can’t allow it to eat up more time than it needs to. There will be plenty more opportunities to make money elsewhere. Do the right thing, close jobs quickly and completely, and move on to the next job.
Lack of Sales and Marketing Effort to Drive Consistent Work
Hold Your Sales Team Accountable
Set goals and track their activity. A dedicated salesperson at a $50,000-year salary without shared project management responsibility should be bringing in at the very least 1 job a week or they aren’t earning their keep. If you have a dedicated salesman, ensure you can see the number of calls and appointments they are bringing for you each week.
If you are the owner as well as the sole salesperson for your business, try to invest extra in your marketing campaign if you don’t have the time to prospect. Paid digital advertisements work best for generating immediate leads. You have to wear multiple hats but ensuring you have another job lined up for your crews to roll into is a basic requirement for success in the trades.
Invest in Your Marketing
You should outlay at least 3-5% of your total revenue for marketing at a minimum. At ORB Solutions we have heard every excuse under the sun. The simple truth is that successful businesses prioritize reinvestment to grow their top line first. You can build it into your estimates, just make sure it is there. When times are good and business is plentiful, you can still target, market, and select work that brings you the highest margin. Sales might be the tip of the spear but marketing gives you the target to aim for.
If your business works and has sustained itself solely on referrals, we salute you. Providing world-class service to the point where people will talk about it is increasingly rare nowadays. You should still invest in your marketing program. If that glowing testimonial has a 100% close rate from one person to the next, imagine what it can do for your business when you market it to thousands of potential clients.
Pulling It All Together
In conclusion, there are a lot of pitfalls to look out for as a contractor, but in the presence of good leadership and attention to detail, no one single incident, job, or project will smite your business down. It’s the systemic deficiencies that will destroy you and hamper your growth. As long as you take the time to properly evaluate all the important elements of your business and look to improve in these key aforementioned areas, success will find you. Slow down, look at the numbers, and strive for intentional growth.
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