Recently Rob McKinney, director of business development for eSUB, and Steve Coughran, founder and CEO of Coltivar, hosted a webinar to help construction executives overcome their construction business challenges. Here are some of the highlights of that webinar.
Many construction businesses have survived all the challenges in recent years. But how are they performing under today’s conditions? Coltivar, a strategy execution software developer, conducted some research into this. Here’s what it found.
- 80% of contractors don’t know their labor and burden costs for field employees or they don’t adjust them as labor costs rise. This has significant implications for their business. For example, let’s say you’re a specialty contractor with 100 field employees that produce 200,000 labor hours per year. If your labor costs are off by $1 per hour, you’ve lost $200,000!
- 70% of contractors don’t know their annual overhead budget, and if they do, they typically don’t update it. One way to correct this is to use rolling forecasts that are continually updated.
- 61% of contractors don’t review their financial forecast or budget monthly. Knowing where you are budget-wise gives you time to steer another course if you don’t like your company’s direction.
- 77% don’t include free cash flow in their forecasts. It may be easier to create a profit and loss forecast, but profit doesn’t tell you what you need to know about your cash flow. Your budget may show a profit, but if your money is tied up in accounts receivable, you could still have trouble covering your accounts payable and making payroll. Understanding your cash flow is key.
- 65% of employees don’t understand or align with their company’s strategic priorities.
Playing to play: A recipe for disaster
Research from Coltivar and the Construction Financial Management Association showed that too many contractors play to play, staying in business when they have zero economic profit.
These companies often use temporary measures such as drawing on their credit lines and paying it down when they get paid. It may also play games with its accounts payable and accounts receivable, taking jobs at cost or even below cost to keep the checks coming in.
Although companies caught in this downward cycle may be working hard, they’re just scraping by. They aren’t making a profit and adding economic value to their companies. This can happen in billion-dollar companies as well as mid-sized and small companies.
Contractors in this situation need to take action to turn their companies around. But not just any action. Too many contractors try to fix their company’s profitability problems by increasing their work volume and decreasing their fixed costs. That doesn’t work. Increasing volume also increases risk, such as working with new project owners on new kinds of projects.
What works is doubling down on the things you can control, like decreasing variable costs related to the job. You can impact your bottom line in several ways: digitizing your processes so you have real-time information, increasing productivity, negotiating better pricing on materials, increasing your throughput, and increasing your price. Just be sure that if you increase your price, you increase the value to your customer!
Contractors’ problems unfold in three phases
Knowing how problems typically unfold on the business side can help you mitigate them before they take you down the road to insolvency.
Phase 1, the strategic crisis. Something occurs that disrupts the way a specialty contractor competes in the marketplace. You’ve all experienced this recently with the Covid pandemic. Another example would be when a GC that hires your company for all its jobs goes belly-up, and you have to develop new relationships. Whatever the cause of the disruption, you must create a new, effective strategy. If you don’t, you’ll end up in Phase 2.
Phase 2, the profitability crisis. In this phase, your margins are eroding. As a specialty contractor, you have little, in any, cushion on your margins. If you don’t get back on track, this will turn into Phase 3.
Phase 3, the liquidity crisis. Now you can’t make payroll and you’re late paying the bills. You need to capitalize on low-hanging fruit to keep the business afloat quickly. If you do nothing, or your efforts fail, your company becomes insolvent.
That doesn’t have to be the case. Having a solid strategy for combatting rising competition, increasing efficiency and productivity and improving your financial performance will improve your recovery changes.
Transformation: Emerging stronger in the face of disruption
Transformation requires a new way of thinking and doing business. Remember, a good strategy drives profits, it’s not about generating profits. Profits are the result of your strategy.
The old way of doing things emphasizes:
- A profit-driven strategy focused on the top-line and indiscriminate cost-cutting across the organization
- Managing costs through tighter budgets and more controls
- Reactively making decisions based on intuition and biases rather than the facts
The new way, and the way that will transform your organization, looks like this:
- A people-driven strategy focuses on being flexible, agile and unique
- Reinventing the business model to eliminate activities that don’t add value
- Leveraging real-time data to make proactive decisions that will achieve meaningful results
- Empowering employees by giving them access to technology and training
Three key areas of transformation to focus on in 2021
Don’t know where to start? Take a hint from the construction leaders and focus on these three key areas.
- Create a new business strategy. Construction leaders realize how they’ve been competing in the past no longer works, so they’re changing their business strategies. Here’s how to begin. Start by defining where and how your company will compete in the marketplace. Focus on a shared vision, market focus and position, competitive behavior, resources, and returns. Then implement those strategies by defining initiatives and actions and the measured results you want to achieve.
- Focus on the customer experience. Take a tip from Amazon and place external customers (clients) and internal customers (employees) at your business model’s center. For example, when you submit a bid, is it a convenient format for clients? Are you supplying employees with up-to-date communication tools versus antiquated paper communication?
- Invest in digitization and technology. Your technology has to support your business strategy, so take time to find the kind of technology that will get you where you want to go. Then, invest in employee training so your employees can utilize it effectively. For example, a paper timecard tells you how many hours an employee worked on Monday, but it doesn’t track what he did for those hours.
Transforming your business in 2021 will require work and letting go of your current business model and your traditional approaches to running your business. But it’s worth it. These figures should provide some inspiration!
- Successful transformations can improve operational efficiency by 40 percent. What would that mean for your company?
- Successful transformations can boost profits by 20% to 30%.
- 85% of organizations that have successfully transformed their business models have also grown market share.
As you can see from the webinar highlights, the advantages of a successful transformation are real. It will drive value to your bottom line, and it will pay for itself many times over.