The Design Builder's Blog

5 Success Limiting Actions Contractors Should Avoid To Maximize Long Term Profitability

Having grown my own contracting business and worked with hundreds of business owners seeking to do the same I have come to recognize five specific things I think dramatically limit a business owner’s success and potential long term profitability.   If you plan to grow your construction business deciding how you will address these five actions can set you on path that is more likely to support your long term professional and personal levels of success. 

Not having an exit strategy

If you have no idea where you want to end up any path will take you there.   On the other hand if you think about where you want your business to be in 10 to 15 years, and what role you as the owner want to have then, it’s more likely the decisions you make along the way will support and maximize your ability to get there.   Consider going down the wrong path will eat up a lot of value time and money that could have been used to help grow your business and will reduce your potential retirement funds.

Hiring for today without thinking about tomorrow

Many contractors hire for today.  By that I mean they hire the help they think they need for the projects they have on the books and the current size of the business.   If you plan to grow your business these employees may not have the skills or desire to grow with the business.   If you think about how much you want to grow, the organizational charts you will need at different stages of growth, and the job descriptions for each position on the organizational charts, you can make better hiring decisions.   And, long term, you will have less employee turnover and therefore lower training related expenses over time as well.

Not setting goals and metrics

Letting your business grow without having measurable goals along the way can lead you and you’re your business down a path to mediocre results.  Without a goal for example for work produced and sold per month you won’t have an objective target to hold you and your employees to as business happens.   Without goals and metrics the business may just accept whatever level of performance happens by chance.  On the other hand, by having established goals that need to be answered to, if you come up short of your goal in one month the new goal for next month can be increased to make up for the shortfall and get you back on track.  Knowing you are behind on your goals you and your team can make alternate plans and the changes required to catch up.

Not establishing your target customers and project types.

Being the” Jack of All Trades” to everyone who calls your business may work for a self employed handyman or carpenter, but that’s not a good strategy if you want to be a construction business owner with a growing business.   Deciding your niches can help you streamline and personalize your business systems so they serve both your business as well as your customers in a consistent and reliable way.  For example becoming a Design/Builder may limit who will do business with you, but on the other hand making a commitment to that business delivery method you can develop a marketing and sales process that generates the qualified leads and sales you need and will help your business become known as a Design/Build expert in your desired target market area.  My own experience made it obvious to me that consumers are willing to pay more for experts than they typically will pay for a “Jack of all Trades”.

Not getting the professional help you and your business need

Successfully growing a residential construction business is not easy and takes time.   If you go it alone you will likely attend many sessions at the “Lumberyard School of Hard Knocks”.  That educational institution can be expensive, frustrating and may require you scrap a lot of what you have done in your business because it will no longer work well enough as you grow the business.  With the right professional help and guidance you can reduce the overall long term cost of your path to success and you can get there much faster.   Considering the principle of compounded interest, the more profit dollars you earn and keep each year along your path, the bigger your nest egg can be when you are finally ready to exit your business. 

A final thought

If you find and work with the right construction business coach and or mentor your investment of time and dollars working together can have tremendous ROI.  Just make sure he or she teaches you to fish so you and your business won’t become dependent on their assistance to stay in business. 

Let me know if you want my help.

Seven Reasons Why Most Contractors Will Never Be Able To Retire On Their Own Earnings

Here is a wakeup call prediction for contractors and for tax payers as well;

Most residential construction business owners will never be able to retire.  They will have to work until they die or are too old to work anymore.  If they don’t or can’t work until they die, then they will have to get on the government dole so they can get housing and food to keep them alive. 

The same is actually true for most Americans.  According to an article on the Money Morning web sitecurrently retired Americans have less than $25,000 or less in savings and investments, and 31% have less than $1,000.  It’s sad to me to think though that construction business owners, after years of owning and running a business, won’t have enough money or investments accumulated so they can support themselves and their significant other during retirement.

Here is another scary fact found in that same Money Morning article.  47%, of current retirees were forced to retire early, mainly because of disabilities, poor health, or the loss of a job and the inability to get a new one.

Let me offer just a few reasons why I am so sure most contractors may never be able to retire:

1. In many of my seminars I ask contractors to raise their hands if they are on the path they need to be, financially, so they can retire.   It’s rare that 10% of attendees raise their hands.  I also think many assume they will be OK and raise their hands.
2. Most contractors don’t charge enough to properly run their businesses and pay themselves for their efforts.   They seem satisfied with earning just enough to stay afloat in business and in their personal lives.  In fact, when they take into account the number of hours they work each year, most admit they earn less per hour than most of their employees.  Some even admit they make less per year than their carpenters.  I know a good number of them, probably out of embarrassment; don’t admit their financial short comings.
3. A good number of construction business owners don’t make enough money to support their families.   In fact for a good number of them, because their wives have jobs and therefore provide the family’s health insurance, they are able to keep their business doors open and pretend everything is just fine. 
4. Only about 20% of construction business owners know the true cost of being in business.   Of the other 80% a majority may be able to estimate project costs accurately, counting very stick and brick, but then they are guessing on the real break even burdened cost of estimated labor hours and also use the wild ass guess method (WAG) when it comes to the markup they use to cover overhead and profit to price their jobs.
5. In addition to using the WAG to price jobs, most contractors have no idea how overhead and profit works.   As Melanie Hodgdon points out in her Remodeling magazine article titled “Four Ways Hopeful Thinking Can Ruin You”, many contractors say “Yeah, that job was a mess, but at least I didn’t lose money on it."   The sad reality in this assumption is that the job didn’t cost more than they sold it for, but they didn’t earn any money to cover their overhead and or any profit.  So in reality they did lose money and there will be no profit on that job to save for retirement.
6. Most construction business owners I speak with haven’t done any retirement planning.  In fact 56% of American workers haven’t bothered to figure how much they’ll need to retire comfortably either. (Source: Employee Benefit Research Institute) How then could these contractors even know how much money they will need to retire and when they can actually retire?   For these contractors I am pretty confident they won’t have what they need.
7. The last and my final reason (although there are plenty more) most contractors will never be able to retire is because they see themselves as contractors instead of business owners.   It’s a simple fact to recognize that when a business sells at the right price it earns a profit.  But when the business owner straps on his tool belt he is only earning a wage. 

So, what should contractors in this position do?

Here is a short list:

• If earning a wage isn’t earning you enough to retire on, you might want to learn how to become a real business owner.
• If you are using the WAG method to price jobs you might want to advance your math skills and or find someone who will do the math for you.
• If you have been selling on price to get work you might want to invest in some professional marketing and sales skills.
• If you won’t do anything about these challenges you might want to look into how to apply for government assistance now so you’re ready to do so when your body eventually gives out.

5 Ways to Take Your Remodeling Business From Less To More

It’s real easy as a construction or remodeling business owner to get burned out as you try to keep up with everything.   This is particularly true now that the remodeling market is picking up.  After downsizing to stay in business, and putting in lots of extra effort and hours to make a profit during the recession, many business owners are once again trying to grow their businesses.  However many of them are still using the "do more with less" mentality they used during the recession.  Maintaining this mentality as they seek to grow will definitely add to the burnout they are already experiencing.

For a good number of these business owners doing more with less may have made sense as sales shrunk and overhead expenses had to be cut back.   To clarify things the idea was to do more of what you were already ready doing with less.  Now that the economy seems to be improving if you want to do more business than you have been doing you'll need to do and add more inside your business to support that growth, not less.

Five things remodeling business owners can do to take their businesses from less to more:

Get serious about your management style

If you have lost focus or lack the discipline to put business systems in place and stick to them it’s time to commit to and practice new attitudes and behaviors.  Before you grow your business consider the adequacy of your financial system to predict and measure results.  Do you have a formal marketing plan to guide you or are you winging your marketing?   Do you have well thought out job descriptions you can use to recruit, qualify and hold new hires accountable to?  Have you established benchmarks for the performance of your business systems?  If you don’t have or do these things what example are you setting and what type of employees will join and or stay with your business?

Don’t spread yourself too thin

If you plan to grow your business it and your employees will need your attention and guidance.   If your focus is being watered down by other outside activities like a second business, community activities, politics or even involvement at your church; the leadership and oversight needed at your business may be compromised.   There’s nothing wrong with being involved in outside activities, but make sure you put qualified middle management and business metrics in place first.

Be sure to think and act like a professional

A growing business that wants to attract and keep good employees needs to act professional.   This means having a proactive and strategic marketing plan in writing.  It means preparing a financial operating budget and staying within it.  It means investing in training and mentoring your employees to be the future leaders your business will need.  It means creating a profit sharing strategy and or compensation strategies based on performance. It also means operating legally and safely.

Develop organizational charts, career paths and improve your recruiting process

If you think it’s expensive to train your employees only to have them leave and go elsewhere, think of how expensive it will be if you don’t train your employees and they stay.   If you plan to invest in training your employees make sure you can share your business plan with them.   Your business plan should show how you plan to expand your organizational chart and the opportunities they have if they are willing to grow with the business.  Your goal should be to offer opportunities that are mutually beneficial to the employee as well as the company.

If you want to step back make sure your business and the new leader are ready first

Before you as the leader can step away from your business the business needs to have a new leader already in place.   Many business owners are forced back into leading and managing their businesses because the person they hired to do so did not have adequate leadership skills and or wasn’t yet seen as the leader by the other employees.   Don’t make this mistake at your business.  Before you step away make sure there is a successful transition of leadership from you to the new leader; in the eyes of the employees as well as your customers.  Also, make sure you have a way to measure the performance of the business and the leader before you pull away.   Again I suggest you have this in place and confirm it is working before you transition out of your office and your roles at the business.

Should You Work With a Business Coach or With a Mentor?

I'd like to offer you something to think about if you are considering a business coach to help you with your business.  It’s something I learned by trying out several coaches when I owned my remodeling business. What I learned was that there are completely different reasons and purposes for working with a business coach versus a mentor.   

I definitely wish I knew this before I hired my first coach!

A few considerations about choosing a coach for your construction business

Many coaches can help a variety of business types in different industries. For example I worked with a business coach many years back who had never owned or worked in a remodeling business, but that guy sure knew how to help me assess and improve my marketing.  With his help we accomplished my goal of changing my business’ customer and job types so I could increase my margins.   On the other hand I worked with another coach to help me with improving my business’ financial system.  He was a smart guy, and knew his accounting, but I eventually figured out he had no exposure or experience with how a small construction business needs to do accurate job costing.   After a lot of lost time and money I found a new coach to work with who had remodeling industry experience and the difference was night and day.

One more consideration when choosing a coach is his or her past experience and level of success.   Unfortunately there are many coaches who became coaches after their own businesses failed or after they got let go by the business they worked for due to their poor performance.  Some of them may have learned from their mistakes and can still be good coaches.  However I suggest that someone who had a successful business and or a successful business leadership history is already a proven entity.  

Maybe what you actually need is a mentor

If you want help with your business systems and performance a coach is probably your best solution.  The right coach will be supportive and motivational.  However if it is you, the person, who needs help, a mentor might be a better option to work with.  
First, a mentor should be someone who has already done and was successful at what you are trying to do with your business.  Because the mentor has already personally experienced similar challenges and rose above them, the mentor already knows what you are and will be going through.  A mentor understands and knows how to anticipate the real emotional impacts the business owner will experience.   Having been a contractor as well, a construction industry mentor will probably have the exact experiences needed to help you.

Second, the right mentor will be empathetic, not sympathetic.  By that I mean the mentor will not take on your problems for you, rather he or she will help you wrap your head around what you need to think about and do so you can solve them yourself.  And, the right mentor will help you anticipate the emotional and personal challenges you might experience making the changes.  One example might be helping you figure out how to appropriately tell a long term employee you have to let him go for poor performance, without hurting his feelings more than needed and or triggering a law suit.   Another might be how to diplomatically deal with an irate client after your roofing sub’s tarp blew off in a thunderstorm last night and ruined every ceiling in the house (happened to me).  Essentially, it’s the mentor’s role is to socialize the mentee into his or her role and help avoid learning from the lumberyard school of hard knocks.  

If you’re looking for help from an expert I suggest you consider which would work better for you and your business, a coach or a mentor, before you decide on how to go forward.

One last thought: Maybe you want both in one person

Also, consider that there are some out there who can serve both purposes, at the same time.  I recommend you consider a coach who also has real life and successful experience as a construction business owner.  A mentor can warn you in advance about what it will be like to live through and implement the changes you want to make, while at the same time help you with actually creating and implementing new ways of doing business.  By working with one person who can help you in both areas, the odds for success are much higher, the results will likely happen faster, and you can avoid a lot of sleepless nights worrying about what is happening and how you feel about things. 
Hope that helps!

Guest Blogger: Peter Schneider, Peter Schneider Builder Contracor, Inc. has 20+ years experience and knowledge of residential custom building managing each project hands-on. He's been featured in national trade magazines and local publications and he's served on the Board of Directors of the Fairfield County Home Builders Association.  Peter offered this guest blog topic after reading my blog article titled: "Are You Less Of A Contractor If You Sub Everything Out?" I think Peter's message is a valuable one for contractors to consider.

Contractors; Know Who You Are, Then Build a Contracting Business That Works For You

Upon a little reflection I’ve realized there are a lot of ways to organize a contracting business, none of which are the “gold standard” and all of which either purposely or inadvertently express the personality of the owner.  At your inner core are you a manager or a craftsman? Are you a little of both? Are you neither?  Generally, I’ve noticed successful people have figured out who they are and how they add value to the equation.  Then they’ve set up a business system to capitalize on their strengths.  

If you are good with your hands, and want to be left alone to do your work, you probably will be a good one-man show type of contractor who can keep busy working for a few General Contractors. I work with carpenters, tile guys and drywall tapers that operate like this – most of whom survived the 7 year long down-turn OK.

If you can teach others a trade like framing, painting, drywall, etc, you can assemble a crew that will make you a nice profit, but you will need someone to run the “business” end of things, at your direction, leaving you free to estimate and sell and manage production. Profitably managing direct employees is a job unto itself and in my opinion is only appropriate when you have a crew that specializes in one type of work.

If you are excited about putting a team of specialized professional craftsmen together to construct a series of varied job types where organization & management are key elements of production & profitability, you’re a good fit for a general contractor operation. A GC set up is generally best for larger jobs like a custom home, a larger addition, or a whole house remodel job. Sometimes smaller jobs that require a higher level of craftsmanship like a special faux finish on walls, or custom built in cabinetry, or precision stone work are best left to the specialist sub contractor.  Higher end bath remodels are also a good fit for a GC with a loyal team of trade contractors. You absolutely must develop a team that you work with regularly so you can be assured of consistent quality and integration between trades.

For me, I’ve noticed the comparatively greater value of leveraging my time providing work opportunities for, and coordinating the activity of other professionals. 

There are inescapable sales, marketing and overhead costs of running a business not directly associated with performing your revenue producing activity. A good GC-Sub relationship takes this into account, or at least I like to think it does in my case.

All I Want For Christmas Is A Real Business Management System Software

Its Christmas time and I like to get presents.  Being surprised is always nice.  But when you get what you asked for it can be even better.   If Santa is listening here’s my request:

“I wish that someday the residential construction industry will have a true single solution business management software system”

I know some companies claim to have a full or complete system, but I have yet to find one that really does.  Most handle the front or back end of the business, but I have yet to find one where the front end supports the back end.

Santa, please give these specifications to your elves

• First, the product would be one system, not a bunch of systems and or disparate apps.
• I’m looking for a system that actually does include everything a remodeling or construction business needs from cradle to grave for each prospect, customer and project. 
• It needs to be web based so the entire team can have access to it whenever they need to; office and field staff.
• It would be designed and built by a company that actually understands how a remodeling business should be run, and includes best practices that will be adopted; not adapted by the users.  
• I want to be able to assign tasks and duties to employees, prospects and customers, and I want to be able to track and verify whether things are getting done and done in a timely manner.
• I want a system that helps me see and know things are under control so I don’t need to always take over control of things.
• It would include the ability and the requirement to do things like first creating a financial budget.  Then it would use the budget information to calculate and automatically apply the markup the business needs to use to reach its overhead and profit requirements.
• It would include the ability to create a strategic and measurable marketing strategy including the ability to schedule and assign fulfillment of marketing tactics included in my plan and budget.
• The system would tell me if the marketing tactics being used are actuality providing the intended ROI. 
• The system would include a dash board of the key metrics the business needs to keep and eye on to know if things are on track or not;  against the business’ plan for things like budget, marketing goals and sales goals.
• A system that would help me implement and manage a profit sharing program that is accurate and fair to both the employees and the business.
• Estimated costs for labor hours added to an estimate will automatically be based on the true burdened labor costs for the business using it, based on that budget that was entered.
• When time cards are entered into the financial module the actual burdened labor rate of the employee who did the work will be reflected in the job cost reports.
• A system that can provide true apples to apples comparison of estimated to actual job costs and estimated to actual overhead costs.
• One that includes an estimating system that actually generates an accurate materials list I can order with, as well as detailed work orders for employees and subs.
• One that warns you how much money you will lose, or alternately, how much more volume you need to sell and produce, when sales staff may be tempted to drop the price below what the system says is the recommended selling price.  
• One that helps make sure my company, my employees and my subs are complying with the RRP Rule and relevant OSHA requirements.
• It would come with training that goes beyond just how to use the software.  The training I am imagining would include clarity on the “HOW” and the “WHY” the best practices included within the system work and contribute to a successful business.

Santa, If you like my specs so far let me know, I can keep going…

Many may say that I’m dreaming, asking for the impossible...

I disagree. 

I truly believe it can be done if the right company and the right experts work together to make it happen.    

So Santa, if you really want to make me happy this Christmas please make sure I find the system under the tree on Christmas morning.   If your elves don’t have the skills or knowledge to put it all together have them give me a call.   I’ve got the specifications and best practices part under control.  If you have elves who can design the software and write the code together we could get it done in time for Christmas next year and make a lot of construction business owners very happy!

Feel free to use the comments area below if you want to add to the list.  Only contractors who have been nice though!

This is the first blog article in the "All I want for Christmas" series here at the Design/Builders Blog.

If you would like to contribute a guest blog for the Design/Builders Blog email Shawn with your suggest topic.

3 Financial Myths That Compromise a Contractor's Long Term Success

Here is my list of the top three myths I see that compromise a contractor's ability to achieve long term financial success.  These areas definitely affect a contractor ability to profitably grow a business, as well as the contractor’s personal financial health, including retirement funding.

I must be competitive with my pricing

In my opinion when any business seeks to be competitive it typically becomes a commodity.  By that I mean the buying public looks at that business and or it’s offering as being the same as their other choices.   When consumers see a product or service as a commodity they ultimately make their choice between available options based on price.   By trying to remain competitive contractors playing in this sandbox become bidders in a reverse auction where the loser is the one who wins. 

To prove my point, ask any contractor who sells their services through a bidding process if they will have the money they need to comfortably retire at 65 without working again.  There will be some exceptions, but I bet the majority will tell you their plan is to work until they die.  What would their significant other say about that plan?

Also, keep in mind that nine out of every ten contractors will eventually fail.   By being competitive contractors are most likely joining the ranks of contractors who will eventually fail.   Rather than compete, why not differentiate your business?   Check out an article I wrote on this subject for Remodeling Magazine

I can't raise my prices; I'm already the most expensive contractor in my market.

I hear this one all the time from contractors.  Most of the time it comes from contractors who have no idea of their true cost of doing business and guess at what markup to use.  This is referred to as the WAG method, or the "Wild Ass Guess" method.  Based on the fact that they are guessing at what price they should charge I would also suggest they are guessing about being the highest price in their market.   Did they do or hire someone else to do market research to back up their claims?  I doubt it. 

When I ask how they know they are the most expensive most contractors tell me their prospects are the source of their assumptions.   For those using their prospects' feedback to determine their price point in the marketplace remember, buyers are liars.   The 11th commandment states that you can lie to a sales person and still go to heaven!

One of my contractor coaching clients told me he was the most expensive in his market and would not be able to sell anything if he raised his prices.    After I helped him do his first business budget and determine the markup he needed to use to cover his true overhead costs and make a profit, he went out that night and closed a deal at his new higher pricing.  Check out this article I wrote for remodeling magazine about the benefits of having confidence in you numbers.

I can only charge what the market will bear

Now, if a contractor has done market research, for his or her local market, this may be true.   Savvy contractors, those who know what price they need to charge, will sell at higher prices up to the point that a majority of protects stop buying.  I would consider this to be true market research.  However, these business not only know how to determine the true costs of doing business, they also typically have professional marketing programs to help them get in front of specific prospects and they employ professionally trained salespeople who know how to sell.

Contractors using the WAG method to price their work also typically do not have a strategic marketing plan.  Without targeting a specific market of customer types, how can a business owner know what price point the market will bear?  Without professional sales skills, how would a contractor know if the reason for not selling at higher prices is due to the market or to his/her selling skills?

Also, what market are they referring to; the one they are proactively pursuing or the one that randomly ends up knocking on their door?  Are they using professionally trained sales people or are they using order takers?   One way to differentiate between sales people and order takers is that sales people present their solutions in person.  Order takers typically hit send.   If you use the hit send method I don’t think that counts as a valid way to test what the market will bear.

Want to be able to charge more for what you do? 

Check out this blog about why some contractors can raise their prices but most can’t.

Looking to target specific customers and work types?

Check out this all day Marketing and Sales Workshop