3 Phases of Creating Construction Business Success
When faced with opportunities and challenges, people tend to rely on established systems to know what is right and wrong for them. We all have those systems, whether we realize it or not — the results of our brain’s innate wiring, education, and the societal and familial norms with which we were raised. Businesses, like people, rely on systems for their development, operations, and decision-making. Yet many construction companies’ systems lack a clear, underlying strategy. While this can work out, it sure leaves a lot to chance.
Think about it this way: When designing a structure, do you wander out to your yard, look around and ask yourself, “What can I build with all the stuff I have here?” Of course not. Yet, this is what most contracting company owners do daily with their businesses.
The less-than-ideal outcome of this lack of strategy is painfully clear: In 2022, the average contractor earned a net income of just 5% annually. However, a small group of companies consistently perform at around 3X+ the average.
What do these top 2% contractors have in common? Just as a construction project moves, step-by-step, through three main phases, well-built contracting businesses master key planning, execution, and evaluation principles that allow their businesses to thrive.
Phase One: Planning
No building can rise without a solid pre-construction plan. Similarly, no construction company can succeed long-term without a strategic business plan. Without such a plan, you’re functioning like a family who builds their house in a flood zone without trying to grade the property for ideal drainage and build on a deep pier foundation: You’re begging for disaster.
No business owner can control everything. But setting clear goals and gaining an objective view of your business’s strengths, weaknesses, opportunities, and threats can help you protect and grow your business despite inevitable challenges.
Set Your Goals
Where do you want to find yourself in business three years from now? What will be different and better than it is today? Your goals should meet three main criteria:
Meaning: Let’s say that you want to diversify the markets you serve. You need to know why you want to accomplish this goal, and your reason must matter enough that you’re willing to go all-in to make it a reality; otherwise, you’ll lose your drive when the going gets tough.
Specificity: Determine what achieving your goal will entail. For instance, to accomplish your diversification goal, you’ll need to create a three-year plan showing the target revenue growth and revenue diversity for each year of that plan. You will identify your clients in each new market sector and the size and type of projects you’ll perform.
Market Alignment: Before setting your goals, complete a market analysis and speak with your employees, customers, and allies to gauge the market’s interest in the kind of company you hope to become.
Determine Your SWOT: Strengths, Weaknesses, Opportunities, and Threats
Imagine if you walked into your organization for the first time today and the owner asked you to help get the business on track to meeting its goals. Looking at your business through “outsider” eyes enables you to see issues and opportunities you’ve been missing:
Look Inside: Explore key performance metrics and what they tell you about your business. For example, let’s assume the metrics say it’s taking you 15% longer to finish projects than planned. Based on some clues, you may hypothesize that project managers aren’t actively communicating about project schedules. Employee surveys, interviews, and observations are a great way to explore such hypotheses.
Look Outside: After looking inside the business, focus on the environment outside the company. A survey and interview process with customers can help you understand what matters most to them and how you stack up against the competition. Pull benchmarking data from around the industry to assess how your company compares to others. Research economic trends that may affect your current markets or lead you to consider new ones.
Phase Two: Execution
Over the course of construction, your main concerns revolve around ensuring the project meets schedule, budgetary, and quality expectations. Your operations encompass the departments within your business responsible for delivering on these necessities.
How can your company become operationally excellent? By focusing on your processes and measuring what matters.
Document, Refine, and Build your Core, Supporting, and Sub-Processes
Your organization performs specific tasks in pursuit of the same outcomes every day, week, and month. Have you clearly defined your organizational processes, and is your team performing these processes consistently? For most construction companies, the answer is no — and that’s a problem.
Imagine you are the plant manager at a Coca-Cola manufacturing and bottling plant, and one of your shift managers decides to deviate from the established production process. His change allows him to produce more than any other manager but finished product is less consistent than the standard — which may upset Coke’s customer base. HQ may ultimately decide that risk is minimal and and install the new process for the whole facility, but it is not OK for your plant to have inconsistent processes.
Of course, construction is more complex than bottling a soft drink. Still, this scenario underscores how critical consistent processes are to efficient business functioning.
To ensure optimal business processes, take the following three steps:
Document: First, identify each core, supporting, and sub-processes you already have in place. Core processes include finding project opportunities, estimating and winning them, and planning and completing projects. Supporting processes include recruiting staff for core positions and training and upskilling them as needed. Sub-processes include steps you need to take to enact core or supporting processes. For example, you must run estimating software to estimate a job, perform takeoffs, contact subs and suppliers for pricing, and more.
Refine: Look for sub-optimal processes and process gaps and prioritize them. One subcontracting company I helped noticed that its projects consistently missed profit expectations. It had good estimating and field production processes but lacked consistent project management processes, so that became its top priority.
Build: The simplest approach to creating new processes is to see if anyone you trust and respect in the industry has ones you can adopt and adapt. Remember that your people will need training to ensure new ways of doing things become second nature.
Measure What Matters
The top reason contractors go out of business is continued negative cash flow. However, negative cash flow is only a symptom of a more fundamental problem: a lack of timely, clear financial information or failure to understand the swift corrective action necessary based on the information. To avoid these issues, prioritize these two financial functions:
Estimating: Successful estimating is a knife’s edge between winning too much low-margin work and winning too little work due to high pricing. The mission of the estimating function should be to develop an accurate projection of the actual costs you will incur to build a project and to do so in time to meet deadlines set by the customer. Nothing more or less will do. This accurate projection gives the business the information it needs to determine the appropriate GP target for the project.
Leading indicators: Have you ever pursued a weight-loss goal? What should we do if we want the number on our scale to change? We must address our life choices, chiefly diet and exercise choices. In this analogy, diet and exercise are leading indicators: the factors that lead to your target outcomes.
In the construction business, profitability hinges on closely monitoring leading indicators. These indicators include your gross profit margin, overhead costs, total revenue, project backlog and pipeline, and dozens of other specific metrics that may be uniquely relevant to your business. To achieve your desired net profit, for example, you’ll need to calculate the gross profit you need to cover your overhead budget, then stick to that budget each month while monitoring your project backlog and pipeline – and related revenue and resource projections – to ensure you’re staying on track.
Phase Three: Evaluation
Upon a project’s completion, well-built construction companies take the time to consider how things went and what could be improved going forward. Consistently evaluate the following:
Customer feedback: In the insular construction industry, you’ll go out of business without happy, repeat customers. The best measure of a customer’s satisfaction is the award of the next project. However, if you wait until the next award is due to get that feedback, it will be too late to impact the award’s outcome! So, proactively collect customer satisfaction feedback throughout your projects and try to improve their experience along the way.
After-action reviews: Institute after-action reviews (AAR) upon the completion of every project. Suppose field management tells your estimating team that a specific feature could not be built as estimated; you can capture that information and update the estimating tools to reflect this new data. Taking this AAR approach turns every project into an opportunity to improve.
Employee suggestions: While you want to strictly adhere to your processes, it pays to encourage innovative ideas. If a team member, ANY team member, has an idea for an improvement or innovation, hear them out. If the idea has merit, a test group should compare methods. Then, your company should adopt the best method, document it, train employees, and adjust supervisory structures to accommodate it.
In the construction industry, crafting a resilient, efficient, and profitable business requires precision, vision, and careful strategy — much like the building process itself. By applying strategic planning, execution, and evaluation principles to their businesses, construction professionals can build firms that are not only profitable but also resilient, efficient, and renowned for excellence.
This article has been previously featured in Construction Pros.
The Spark Notes:
People and businesses rely on established systems for making decisions, yet many construction companies lack a clear strategic framework, leaving much to chance.
With a solid business strategy, construction companies can avoid ending up like a family building a house in a flood zone, risking disaster due to poor planning.
Consider the top-performing 2% of contractors, consistently earning three times the average income. Their secret? A steadfast commitment to structured planning, execution, and evaluation principles, which has propelled them to the forefront of the industry.
Construction businesses can achieve long-term success and resilience by setting clear goals, conducting SWOT analysis, refining processes, and regularly evaluating performance.
