We talk enough about product and tool failures, and we all cringe at the concept of “operator error”. But in reality, many contractors actually fail in business. Some contracting companies circle the drain for years before realizing – only too late – that it didn’t work.
Often, problems result from negative contractor growth: doing worse as you grow.
In order to grow responsibly, a contractor must identify his or her company’s strengths and weaknesses. From this, it is possible to determine what types of work are the most profitable and what types of customers are the best fit for the business. When you discover and build around what your company does best, you are working from the core of your business. This is the healthiest position to grow from.
This puts a contractor in the position of making good decisions about how to market in a way that will improve and sustain the core of the business for the long term. Especially for those who have been in business for less than 10 years, it becomes very important to build and identify these core strengths, enhance them and then build around this core by integrating complementary new services to meet long term goals.
Most contractors in their first few years tend to do residential repaint work, so that becomes what they do and know best. Sooner or later, larger opportunities pop up, such as a small commercial project, painting for a real estate agent in homes being bought/sold, or homeowner association maintenance work. The contractor may price these opportunities on the low side – either by mistake, or enthusiasm or just lack of knowledge about the new market.
Take a reasonably priced residential contractor and put him to bat against a commercial project manager, a hard shopping homeowner’s association or a group of realtors, and our contractor has just entered the school of hard knocks. These are groups that know how to get what they want at the price they want. They promise volume and work flow, but demand aggressive pricing and scheduling.
Of course, our hungry contractor can be hoodwinked into wanting to please every customer in every situation or fall victim to the lure of increased workload, which he interprets as immediate growth. Let’s call our contractor “Larry”.
Case Study: Larry’s Painting
The ability to do a decent paint job and keep his pricing reasonable are all that Larry needs to expand from residential interior repaints to small commercial, HOA or real estate agent paint jobs. Larry’s average sale for residential repaints has been $1800, and Larry is hustling to a 20% net profit margin with just one helper, Carl. Larry and Carl can complete two residential repaints per week, yielding an average of $720 in profit per week, or a nifty $25,920 per year in profits. Gross sales are $129,600 over the first two years in business. But the workload keeps Larry and Carl fully busy for only nine months out of 12.
Carl doesn’t mind, because he loves to snowmobile in the winter, and he can make enough in the nine working months to spend the other three collecting unemployment and hitting the trails. After careful consideration and analysis of the numbers, Larry realizes that he can’t do it this way forever. He decides to ditch the residential model and go for some real growth.
It’s becoming too competitive and too hard to sell while being in the field all day, and it is not keeping the company busy year round. He begins negotiating contracts with the commmercial, HOA and realtor markets. He is confident that sales can double through these opportunities, and push the annual volume to the quarter million mark — a milestone. Additionally, he realizes he won’t have to spend as much on marketing, advertising and doing estimates. He sees a built in work flow with each new account.
Time to Grow
Larry meets with Carl to explain Carl’s new opportunity. Larry will pay an extra $1 an hour and keep Carl working year round. Larry’s plan is that when the volume of work doubles, he can add two more painters and pull himself out of the bucket and into an owner’s role.
The three new markets offer an immediate increase in workload, so Larry hires another painter, Doug. Increased demands on Larry’s time coordinating the larger volume of work leave him painting only half the time, but he is able to check in with his painters each day. He gives Carl a raise, promoting him to a lead painter position with more responsibilities. Larry finds in the first month that in order to keep his new clients happy, get paid and keep his guys moving onto the next job, he does need to spend time tweaking and punch listing the jobs Carl and Doug are doing.
It quickly becomes necessary to set up another company truck, complete with gear, insurance, gas card and maintenance expenses. He also discovers that the commercial projects can be completed faster by implementing spraying. The new accounts also involve exterior work, which requires the purchase of extension ladders and a pressure washer.
Because Larry isn’t painting with Carl and Doug as much, the jobs begin to take more than 40 hours per week to complete and stay on schedule. Larry hopes that the overtime isn’t creating too much of a payroll burden and impacting profits, but he isn’t sure, and he does need to complete projects on time to keep clients happy. The paint store bills are coming in quite a bit higher, but Larry figures this is just the cost of doing more business. Larry understands that Carl is learning on the fly how to do non-interior work that the new accounts require. With the time he has available, Larry does his best to train the guys, and he believes the investment of his time will pay off in the near future.
After his first year with this new model, Larry’s bookkeeper/wife informs him that sales have increased from $129,600 to $270,000!! The average sale is now $3600 – twice what it had been in the residential repaint years. Everything had doubled, just as Larry predicted. They were busy 50 weeks of the year instead of just 36, as predicted.
However, materials doubled, payroll doubled, gas and truck maintenance doubled, as well as cell phones. Larry figures out that because of his absence on the job 8 hours a day, and in spite of the fact that he knows his guys worked really hard, net profit plummeted from 20% to 9%, resulting in a net profit of $24,300 for the year. The previous year’s profit had been $25,920 with he and Carl working just 9 months.
In the end, more people did more work to make less money. Sound good?
How Could This Have Gone Better?
Larry was drawn to bigger numbers and larger projects, which caused him to abandon his profitable niche and customer base in residential painting. Many contractors face this crossroad early in their business. After a few years of being unable to grow, contractors often abandon what they have already built.
Larry would have been far better off to retain the customer base he had built, and gradually implement the new markets. Even if he hadn’t marketed much, Larry already had a presence and reputation in residential that would have resulted in sales.
A better plan would have been to leave Carl responsible for the existing residential work, with Larry implementing the new accounts using Doug as an apprentice in training. If Carl could have single handedly completed half the work ($64,800) that he and Larry used to complete together ($129,600), even at a lower margin (say, 15% instead of 20%), that would have netted Larry’s Painting $9,720 in a year. And if Larry had run the new work at a higher margin (say 15% instead of 9%), then Larry’s Painting could have grossed $334,800 with an overall net of $50,220.
The difference would have been in better defining and managing the roles of Larry, Carl and Doug. This is where committing to your core and making decisions based on real numbers can make a huge difference. Decisions made based on ego, gut feeling or impulse can backfire.
While Larry’s Painting was small prior to its growth attempt, its strength was that Carl had two years of training directly under Larry, focused specifically on residential interior repaint work. Larry had two years invested in that market, with a good reputation for quality work and a very respectable profit margin. It would have made sense to grow it into a year round business, with the potential to add a painter or two to service the newly implemented markets.
Larry could have given Carl the same raise, truck and responsibilities, only better suited to Carl’s strengths, the company core. Carl was not ready to supervise another painter, or run larger more aggressive projects in markets he had never seen. But he likely could have efficiently completed a good bunch of residential interior work without much supervision, freeing up Larry to build the new segments and build around the residential core.
Larry could have trained Doug to be the go to guy in the new account demographics within a year or two. Down the road, both Carl and Doug could be in charge of their respective divisions and running small crews. Larry would be overseeing both, while networking to build more residential and commercial relationships.
How do We Avoid This?
Sometimes, if contractors aren’t satisfied with how they are doing, they are quick to look for a place where the grass must be greener. Most of us run small to medium sized companies and cannot be all things to all people.
The best we can do is find our strengths and build on them, while eliminating our weaknesses one by one. As small businesses, each move we make – whether hiring one new employee, or taking on one new account – can have a large impact on our businesses.
That impact can be positive or negative, and success is driven by our ability to make informed decisions. Knowing your business in its current stage, setting goals based on core strengths, and making reality based decisions by learning from your history are some great places to start.