WHy contractors. Take Bad Jobs

Transcription

1 WHy contractors Take Bad Jobs

2 The Truth About Why Contractors Take Bad Jobs It happens. Always has. Always will. It s part of a contractor s life. Sometimes it s a surprise, sometimes you saw it coming and some contractors may have never even known that it happened. Loser jobs. So what makes a job a loser? Complexity? Outside your wheelhouse? Incomplete plans? Difficult client? All of those issues can cause loser jobs. However, for purposes of this paper we are going to define a loser job as any job that did not make a fair profit. Most contractors will never achieve their professional dreams by focusing on revenue alone. To do so will usually result in an excessive workload and high stress based on employing competitive pricing strategies that yield only break-even or near break-even results. Instead, a better strategy for the vast majority of small contractors (under $12 million per year in revenues) is to focus on increasing the return (bottom line) on the profit-making assets they now have or that they can build quickly and easily. Loser jobs are Kryptonite to the strategy of making more on the assets you have or can easily attain. Whether you actually lose money on a loser job or just don t hit your target return on the assets you have, those jobs will reduce your profits. Simply put: loser jobs rob you of very real personal income. Here are some reasons why contractors have too many loser jobs. 1. THE BUSINESS MODEL IS OFTEN WRONG OR INCONSISTENT. Most contractors do not have a scalable business model; without which there are very real challenges to growing from a small contractor into a large contractor. Technically the sky is the limit and all of that, but realistically winning the game by getting big is neither a reasonable nor preferable formula for most contractors. When growing from small to large to create real wealth in a reasonable time frame the business owner must have the resources, stable business processes, controls and measurements as well as large-company business training. Without all of this and more the contractor will be unable to move effectively through the dramatic business changes of growing to be a big business. After about 6 million dollars per year for remodeling revenue or about 12 million dollars for custom home building, for example, business takes on a different character. The distance between the contractor s passion and knowledge base expands exponentially. The owner of a large business will spend more time with the Human Resources Vice President than dealing directly with clients and on-site construction management. Running a big construction business is like running any business the product matters less while the daily business operational management matters more. Below those revenue levels a contractor can still create true wealth but must do so with a balance of being a builder, business management and lifestyle preservation. This balanced model is what we find that the great ASPIRE INSTITUTE 2 WHY CONTRACTORS TAKE BAD JOBS

3 majority of our contractor clients are after. To achieve this balance a contractor must learn to optimize profits on existing assets, rather than simply trying to do more projects. 2. PRICING STRATEGY. The contracting industry uses fixed multipliers of cost to determine price. By any professional business test this is not the best pricing strategy for what we do. Fixedmarkup pricing is primarily a strategy for retail and commodity pricing. Fixed markup (whether applied to Stipulated Sum, Time and Materials or Cost Plus contracts) is not the best fit to a complex service business like ours. The impact of fixed markup is that the only path left to the contractor to make more money is to increase revenue, projects and workload which is increasing the bottom line the hard way. There are several ways to increase bottom line by managing margins, changing job mix, differentiating your business and plugging profit leaks. There is even a method that creates a substantial bottom-line lift without raising prices, lowering costs or expenses, or increasing revenues! By using traditional industry-fixed markup pricing the contractor is left with blind spots, not only causing them to miss opportunities to lift the bottom line but also blinds them to land mines that create low, no or negative profits. This is why most contractors build into their pricing at least 10% for profit but rarely, if ever, maintain that profit target; even in the most robust construction economy. 3. GREAT BUILDERS = GREAT BUSINESS OPERATORS? NOT SO MUCH (USUALLY). Contractors are generally masters of their craft but not so much masters of their business. Many contractors have a limited understanding of business which results in an oversimplified understanding of how profit is actually created. Specifically, many contractors assume that their financial success is directly proportionate to their total revenue. In fact, the very wide variation in Average Gross Margin (the percentage of revenue remaining after paying for all costs of delivering the project) means the Average Gross Margin has a far larger impact on profitability than revenue. This lack of business understanding creates an intense focus by builders on winning projects rather than working to generate the highest Gross Profit Dollars (the number of dollars left over from revenue after paying for all costs of delivering the project). This somewhat misplaced energy to win projects without an understanding of exactly how profit is generated contributes heavily to the likelihood that a contractor will have more than their fair share of low-profit or loser jobs. To develop a deeper understanding of how to lift your profits the right way please consider going to our website or calling us at and downloading or asking us to mail you a free copy of our in-depth contractors white paper called Where Profit Really Comes From. Or go to our field educational event calendar at to see if there is a workshop of the same title near you. ASPIRE INSTITUTE 3 WHY CONTRACTORS TAKE BAD JOBS

4 4. EGO. STOP ME BEFORE I SELL AGAIN! We find that many of our contractor clients take pride in not only workmanship but also their sales ability. We often hear claims of winning 90% of the presentations they make used as evidence of success. Trying to win every deal is not healthy, and always leads to too-high of a percentage of loser jobs. There is no correct conversion rate between sales presentations and closed deals. It s not a question of can you win the job but also should you win that job. The correct close rate is highly dependent on the leads followed. Most contractors tend to operate in a reactive-sales mode; that is, they follow the leads and referrals that come their way. Often their marketing efforts present a generalized picture of the contractor s business focus and the leads that follow are equally generalized. In this most common mode, a contractor should not win more than 50% of the leads followed; the other half goes away because of being a poor fit either for the customer or for the contractor. Close rate is also directly impacted by contractor pricing and related policies. Contractors that don t charge properly can buy business resulting in break-even or loser jobs. A contractor needs to exercise discipline in the sales process, always evaluating the fit of the potential job to the contractor s business model and goals. In addition, a contractor must rethink their marketing efforts. Contractors need to target their marketing efforts to proactively acquire leads that fit their business and margin targets. Most contractors need a greater number of leads of a more targeted nature than they currently generate to allow the contractor to be far more selective in the jobs taken. 5. INCORRECT COMPENSATION PLANS. With contractors that have a salesperson who is not part of ownership, the compensation plan provided to the sales person nearly always contributes to taking bad deals. Compensation based partially or totally on revenue generation is always a mistake. Instead, provide a compensation plan that uses Gross Margin Dollars collected (that is revenue left after paying all of the costs to deliver the job) as the variable component. Make the salesperson understand that part of the pricing process so they see how Gross Margin Dollars are created and how that directly controls their earnings. When the company s Gross Profit Dollars are the variable in a compensation plan then the company and that employee are in perfect alignment of goals. A contractor s profits are indirectly related to revenue but are directly and precisely related to Gross Profit Dollars retained. On a revenue-based compensation plan the sales person can sell you into bankruptcy. 6. KEEPING YOUR PEOPLE BUSY AND/OR KEEPING YOUR SUBS LOYAL. This happens and sometimes it s the right thing to do. Taking a break-even job but keeping your crew busy or keeping your position with your subs can be better than turning that job down. However, it is never a good thing because you should not be in that position. It means your marketing or sales efforts aren t giving you legitimate high margin jobs to do instead. You need to fix the cause of being in that position in the first place, rather than continue to take weak or bad jobs. ASPIRE INSTITUTE 4 WHY CONTRACTORS TAKE BAD JOBS

5 In The Final Analysis... Ending up with low- or no-margin jobs will always happen. Every contractor can reduce the number of loser jobs, whether they only average one every couple years or a couple bad ones every year. Sometimes, if the contractor isn t focused on the numbers of their business they may never even know which deals were losers, which broke even and which made money. Why we do too many loser deals comes down to two root causes. These two root causes become clear by asking this question: If you have 10 good, high-margin (and therefore high-profit) jobs available to you and 10 poor, low-margin (and therefore low- or no-profit) jobs and had a capacity limit of 10 projects per year, would you take any of the loser jobs? Of course not. We end up taking loser jobs either because we don t believe we have enough good jobs available or we don t have enough understanding of how business works to actually determine which are good jobs and which are not. Let s look at these two business dynamics and we will see that every reason listed above for taking loser jobs can be addressed by doing better in these two areas. Not Having Alternatives Sometimes we take a loser or potential loser job because we don t have other, better work available. This is a marketing problem. It s not just the lead generation part of marketing but Marketing with a capital M: the part of marketing that controls what kinds of leads come our way and how to increase the number of winner leads while not wasting our time or our money with the loser leads. This will require a more proactive approach to marketing and most likely a refreshed approach to the sales process. At Aspire almost every client that comes into our Business Mastery program has been approaching marketing as nothing more than lead generation. They react to business opportunities that pass by them in the form of leads, rather than proactively targeting the client profiles that will allow them to optimize their profit and avoid loser jobs. Optimizing profit is more about margins, business models, job mix and plugging the profit leaks than it is about charging more or doing more projects. Referrals are sometimes overvalued by contractors. Referrals are wonderful, no question about that. Often however, contractors feel they have won the marketing war when they are able to stay busy on referrals alone. The problem there is that the contractor becomes forced into a totally reactive mode. You lose the ability to target your jobs for the highest margin/highest profit jobs. It s difficult to turn down repeat or referral business; more so in the more personal venue of remodeling but in commercial and new builds too. ASPIRE INSTITUTE 5 WHY CONTRACTORS TAKE BAD JOBS

6 If you have been competing on price rather than value then word of mouth may not be a great source of leads, bringing you too many price-oriented candidates that can turn into loser jobs. An all-reactive, lead- and referral-response model also offers very little ability to insulate yourself from the damage to you and your business from the next down economic cycle. Reactive forms of business acquisition such as referrals must be balanced with proactive and targeted sources of business acquisition. Developing a robust proactive marketing outreach program is neither difficult nor expensive and will more than offset any cost or effort by the increase in margins and therefore in bottom-line profits. However, doing this effectively will require new and different tools for your business toolbox than are probably in there now. It s difficult sometimes for contractors to grasp this because of the old, you-don t-know-what-youdon t-know problem. Most contractors just don t have marketing training. Complicating things even more is that there is a significant amount of misinformation out there, even from industry experts, about effective marketing for contractors. There are several effective, underutilized marketing techniques available to support the shift to a proactive, targeted marketing program that have been proven to be effective many times over. The Business Side Of The Business Contractors certainly know how to build and they usually know well the job-site problems associated with project management. However, most contractors have little or no actual business training. Instead contractors usually work according to on-the-job training and by copying the way others have done it. Unfortunately, the ways others have done it usually result in unacceptably low margins and profits, getting hit too hard by economic cycles, no good path to retirement and generally causing contractors to work too hard for too long for too little. Understanding the role of construction management based on Gross Margins and the superior role of Gross Profit Dollars over revenue are two areas where contractors commonly lack depth that result in taking on too many loser jobs. Most contractors could stack all of their last 12 months worth of jobs in priority order of profitability. Armed with that information contractors can identify patterns of characteristics that determine how each project should work out from a profit standpoint. Unfortunately, these characteristics are often not obvious from a more casual look at a potential project. The other area where lack of business depth causes contractors to take loser jobs is the oversimplification of marketing strategy and execution. Too often marketing is just seen as that thing that generates enough leads to keep busy. This narrow view of marketing is the primary source of too many loser jobs. In addition to causing contractors to take too many bad or weak jobs, the lack of healthy alternatives and the lack of business knowledge also ensures that contractors will always feel the full negative impact of down economic cycles. It means that contractors will work too hard during the up cycles without anywhere near to enjoying the profit potential of the go-go times. To learn more about how to insulate your business from the inevitable fluctuation of economic cycles please consider downloading or ordering our white paper for contractors titled How to Beat The Boom Bust Cycle from our website call us at ASPIRE INSTITUTE 6 WHY CONTRACTORS TAKE BAD JOBS

7 8998 or check our events calendar for an event near you at If a contractor s average job size is $100K and two loser jobs each year out of ten jobs can be replaced by winner jobs, the positive bottom-line impact to the contractor will be greater than the profit earned on the other eight jobs! It should be enough incremental profit to buy a new rig and a boat or a nice wedding for your daughter with plenty left over for a romantic vacation for you and your spouse now that the kids are gone, or to hire someone to handle parts of the business you don t like doing. The Aspire Institute is a business training, consulting, coaching firm focused entirely on making construction industry contractors more prosperous. We provide affordable field educational events in many locations. Please visit our website to learn more about current educational events available in your area. We offer contractors participation in a structured program that both helps make changes to your business to generate greater profits more easily, insulate you from the impact of the inevitable changes in the economy and to make your business easier to operate. We also help our clients with exit and succession planning as well as virtually every aspect of contractor business. We offer a collection of White Papers for contractors, all at no charge or obligation. The collection includes Aspire To Hire: The Aspire Institute Hiring Kit, How Contractor Profits Are Actually Generated, Why Contractors Take Bad Jobs, and Beating The Boom And Bust Cycles, and can be found on our website at ASPIRE INSTITUTE 7 WHY CONTRACTORS TAKE BAD JOBS

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