It’s the start of a new year which is usually seen as a new beginning, a chance to start over. I often start the year with a reminder to check your business practices, and this year I think it’s more important than ever to get on top of and make sure you have your business in order.
I often talk about the need to have a financial cushion. I call it an Operating Capital Reserve Account, and it should have enough funds to get you through several months of a tough spell. If you haven’t started one, today’s the day. You can read success stories here from those who had an account when troubles hit.
There are a few other basics that you need to be in the habit of doing so that when tough times arrive, you have the skills you need to survive and your business has a name and reputation that make it easier to sell jobs.
Accurate Estimating
You need to accurately estimate your jobs. The only way you’ll know if your estimates are accurate is by comparing actual costs against estimated costs on every job you estimate. That’s how you’ll find your error factor, and with that, you can do two things:
- Adjust your next estimates by that error factor. If you know that your average error factor is seven percent, add seven percent to your estimated costs. As your estimates improve, reduce your error factor accordingly.
- Know where your skills are weak so you can know what needs improvement. Our estimating book and online class have helped many contractors get their error factor under two percent. We know a few companies who’ve averaged a less than one percent error factor for the last two years. The goal, of course, is a zero percent error factor, but under two percent is acceptable.
Estimates are almost always lower than the actual cost; very few estimators overestimate the cost of a project. If you have an error factor of four to six percent, which isn’t unusual, you’re spending much of what should be profit paying for job costs.
Look at what that means in real life. If your company sells and builds $500K/year with a markup of 1.50, your job costs are about $333,500 per year. ($333,500 x 1.50 = $500,250) You’re estimating about $333,500 worth of work over the year.
Let’s say your error factor is 5%. Five percent of $333,500 is $16,675. That’s $16,675 in additional job costs not accounted for in the estimate. $16,675 that wasn’t anticipated when you quoted the job. If your profit goal is 8%, your profit should have been $40K, but instead it was $23,325 because your company paid $16,675 extra to build jobs.
That’s for a company selling $500K/year. If you’re selling $2M/year with a 5% error factor, you lost $66,700 by underestimating jobs, and your profit went from $160,000 to $93,300.
Does that get your attention? Get in the habit of job costing so you can know and reduce your error factor, increasing profitability. If you don’t have a program that makes job costing easy, our Job Costing software will do it for you. When your error factor is low, every job is more apt to be profitable. When you’re profitable, it’s easier to survive when times get tough.
Sharpen Your Sales Skills
Hone your sales skills. You don’t want to be driving around giving out bids; that doesn’t work unless your goal is to be the cheapest price on the job, and we know what that means. It means not making a profit.
Practice asking the four basic questions, getting answers, and moving on to a design agreement. Get a commitment before you do any plans, estimating or providing free advice.
The best way to practice your skills is on your family. Ask them to roleplay with you as you work through different scenarios, figuring out what to say and how to say it in your own words. We discuss this in our book, Profitable Sales; A Contractor’s Guide. If you don’t have it, buy it. If you have it, read it again.
Your Reputation Matters
Build your business in your community by marketing. Now is the time to beef up your marketing and make your name known. Too many contractors depend on referrals when the market is strong, and that’s a mistake. Referrals are great, but they should be the icing on the cake, not the meat-and-potatoes of your marketing efforts. When times get tough, referrals dry up and you’ll have a tougher time attracting leads.
A well-designed website will bring you those leads. Work on your website and make sure you can be found by those in your community who are looking for you. Use truck signs and job signs where possible, hand out business cards, be a presence in your community.
Focus
Become the best at what you do in your market. When asked why he thought that the Chicago Bulls basketball team set a record for total wins in one year, Michael Jordan said, “We make every possession count.” When you own a construction-related business, you make every possession count when you:
- Return every phone call you get the same day or by 9 am the next day.
- Show up for every appointment and on time.
- Do exactly what you tell your customers you are going to do.
- Send hand written thank you cards to those who’ve purchased from you or have helped you.
- Keep in contact with all your old customers at least once each quarter.
- Work on and build your referral network at every opportunity.
- Hand out one business card each day to someone new.
- Dress, speak and conduct yourself in a professional manner, always, in every setting. That includes online.
I sincerely hope we’re a long way away from the next downturn. But I’ve been around the construction industry long enough to know that it isn’t always rosy. I don’t know what’s ahead but there are a lot of negative indicators. When bad times hit, construction is one of the early victims.
We can’t control the national economy; we can control our own economy.
The knowledge and experience Michael Stone gained in his 60+ years in construction has helped thousands of contractors improve their businesses and their lives. He is the author of the books Markup & Profit Revisited, Profitable Sales, and Estimating Construction Profitably, and is available for one-on-one consultations as needed.
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