Designing Your Business the Way You Would a Building

Imagine sitting down to design a building. First, you’d ask yourself what function that building had to perform. Once you knew the building’s purpose, you’d determine a budget, draw up plans, select materials, and specify them in the design. What you wouldn’t do is look around your yard and ask yourself, “What can I build with all the stuff I have here?” and expect that to pan out. Yet, this is what most contracting company owners do with their businesses each day.

Construction is a relatively low-profit margin industry compared to others. In 2022, the contractor earned a net income of just 5% annually. However, a small group of companies consistently perform at around 3X+ the average profit statistics.

What do these top 2% contractors have in common? They craft their businesses like a well-built structure, leveraging operating principles that consistently lead to increased efficiency, innovation and profits.

Laying the Groundwork: The Case for Operational Excellence

Just as no building can stand without a solid foundation, nothing you do as a construction company matters as much as your ability to produce a project that meets schedule, budgetary, and quality expectations. Your operations encompass the departments within your business responsible for delivering on these necessities.

If you’re an operationally excellent contractor, you have no problem retaining clients and winning your next project. You have certainty about the financial side of projects and the confidence to price aggressively when needed because the risk of failure is low. You’re not worried about meeting the budget or schedule for the work you are pursuing or performing. You expect to beat both.

How can your company become operationally excellent? Start with your processes.

Consistent, Effective Processes: The Blueprint for Efficiency

Picture this: You are the plant manager at a Coca-Cola manufacturing and bottling plant. Your job is to ensure a consistent soft drink is made, bottled, and made ready to ship. To deliver on these objectives, you ensure every step of production and packaging is down to an iron-clad process.

Now, let’s imagine one of your shift managers deviates from the process and tries to improve production volume. His finished product is less consistent than the standard, but he’s producing more than any other manager. How do you handle the issue?

First, you mandate that he return to the official processes and destroy the inconsistent products. Then, you may see if HQ is interested in the volume-boosting techniques your Shift Manager demonstrated. HQ might embrace the change, installing a new process for the whole facility, or they might not. Either way, it is not okay 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.

Defining your Core, Supporting, and Sub-Processes

Your organization performs certain tasks in pursuit of the same outcomes every day, week, and month. 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, to estimate a job, you must run estimating software, perform takeoffs, contact subs and suppliers for pricing, and more.

Have you clearly defined your organizational processes, and is your team performing these processes consistently? For most construction companies, the answer is no.

Start with the processes you already have but don’t have documented. First, lay out your core, supporting, and sub-processes, then identify each process for which you already clearly know how you want things done. Once you’ve documented all the processes you already have in place, it’s time to identify those that need to be built and prioritize them. One subcontracting company I helped noticed their projects consistently missing profit expectations. They had good estimating and field production processes but lacked consistent project management processes. So, that’s where they started.

To build new processes, the simplest and often best approach is to see if anyone you trust and respect in the industry has processes you can adopt and adapt. Remember that the processes you’re documenting and creating will directly affect your employees daily, so engage key team members in the areas of their expertise along the way.

Training and Skill Development

Efficiency in the field and office depends not solely on processes but also on the people executing them. Any processes not being performed consistently across your workforce or that are entirely new will come with a learning curve. People need training to ensure new ways of doing things become second nature.

Training is a multi-step activity. It involves demonstrating the need for the new process; offering an overview of the process; describing and illustrating each step in detail; question-and-answer time; and practice. Training should happen regularly and involve all relevant team members, not just new hires or those who have yet to perform the process.

Innovation: Maximizing Operations

Just as modern construction techniques aim to streamline building processes – getting more done faster, cheaper or with less effort – contractors must continuously seek ways to simplify – and thus, maximize – their operations.

Technology can significantly aid in this endeavor. For example, implementing smart tools can help confirm company wide process compliance while making tasks less labor-intensive and more accurate​​. For example, you might create a material stocking checklist in your project management software that guides your foreman in that process and automatically generates reports – saving your employees from needing to make time for that task.

While keeping abreast of technological developments and strategically implementing them is wise, your workforce is your greatest resource for innovative excellence.

The Feedback Loop

Well-built construction companies maintain strict adherence to their processes, but they also 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. An open-minded approach to innovation will improve your business, show your employees you value their input and make them feel more engaged in process execution.

Innovation in construction often results from field experiences. For example, to ensure estimates truly reflect the cost of building your projects, you must share lessons learned from project management and the field back to estimating so they can update their approach to reflect reality better. You can do this by instituting after-action reviews (AAR) upon 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.

Profit: The Keystone of Sustainability

A building that lacks structural integrity won’t stand the test of time. Similarly, no construction business can survive if its financial foundation is poor.

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. The underlying issue is a lack of timely, clear financial information or failure to understand the swift corrective action necessary based on the information.

Measuring What Matters

Have you ever pursued a weight-loss goal? When you step on your scale, the number shown is what’s known as a lagging indicator: a result of decisions made up to that point in time. 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.

Building and sticking to a budget and learning to make accurate revenue and resource projections can seem daunting, but the power these actions provide for consistently steering the business to financial success is unparalleled. Making informed business decisions based on accurate data and leading indicators ensures your company will go the distance – and thrive.

This article has been previously featured in ASA Foundation. 

The Spark Notes: 

• Designing a construction business, like a well-built structure, starts with a clear purpose and detailed planning. Many contractors, however, neglect this approach, leading to inefficiencies and lower profits.

• The construction industry generally has low profit margins, but the top 2% of contractors consistently outperform by focusing on operational excellence, efficient processes, and continuous innovation.

• Establishing consistent, effective processes is crucial. Contractors should document their core, supporting, and sub-processes, ensuring all team members are trained to follow these procedures, which leads to reliable project outcomes and financial stability.

• Profitability and sustainability in construction depend on monitoring key financial indicators and making informed decisions based on accurate data, much like monitoring leading indicators in a fitness regime to achieve desired results.