How to Avoid Failure When You Own a Contracting Business
In Start Your Own Construction and Contracting Business, the staff of Entrepreneur explain how you can get started in the construction and contracting industry. Whether you’re interested in building homes or prefer contracting the services needed to get the job done, this guide will help you determine what type of construction or contracting business is right for you. In this edited excerpt, the authors reveal a few of the key areas contractors should focus on to protect against business failure.
The exact number of business failures among contracting companies is difficult to quantify, and it’s even more difficult to know the reasons for failure. A general consensus is that roughly one half of all contracting businesses fail to survive more than five years, which isn’t unlike other businesses. Once they reach the five-year anniversary, however, chances for continued success are higher.
Failures generally fall into several categories. Among the most prevalent causes for business failures (listed in order of occurrence) are:
Very rapid growth not accompanied by a similar increase in resources. If a business expands too quickly, it often cannot keep up with demand. Quality of work suffers because inexperienced or unskilled workers are hired and put to work with little or no training. Shortages of equipment also plague companies that grow too fast; when several work crews must share one piece of equipment, productivity and efficiency suffer, along with chances for profit.
Financial issues. Improper budgeting and estimating, lack of cost controls, poor cash flow, and inadequate project management spell doom for many new businesses. Contractors must have more than creativity and technical skills to succeed in the competitive contracting environment.
Poor oversight and control at the upper management and project management levels. When key staffers leave the company, they are often replaced by personnel who are either incapable of doing the work or are poorly trained. When the general economy is doing very well, the pool of skilled laborers shrinks, placing more strain on newer businesses.
Other factors beyond the control of the owner. Economic downturns, high inflation, shortages of materials, or the dreaded “client from hell” can cause serious damage even when a contracting business seems to be running smoothly.
On the other hand, successful contractors share many similar characteristics. While there’s no single formula for success, good contractors combine most of the following assets to establish an environment where success is expected, and usually achieved:
- Good training for new employees
- Good relationships with subcontractors
- Competitive wages and benefits with excellent incentives
- Low employee turnover
- Excellent management of financial resources and cash flow
- Cost controls
- Accurate job estimating
- Happy customers, employees and/or subcontractors
- Excellent communications with customers, employees, and subcontractors
- Hands-on project management
- Manageable debt
- Ability of owners and managers to identify potential problems before they get out of hand
- A cohesive and reasonable business plan
- Staying on top of changes in the industry from new rules and regulations to the latest in tools and technology.
Understanding exactly what angers clients the most about contractors and their services is invaluable. Substandard workmanship is near the top of the list of client complaints. Clients expect the companies they hire to have skilled professionals, so if the work performed is unsatisfactory, trouble is right around the corner.
Often, contractors work inside a client’s home, disrupting normal family life. These clients become very agitated if the work doesn’t begin as promised or takes much longer to complete than expected. Contractors can make life easier for all if they implement a reasonable scheduling system and teach their employees to be respectful of the client.
Little angers a client more than a contractor increasing the price of the project after work has been started. To avoid this problem, contractors must plan projects accurately so that all needed materials are accounted for. When it becomes necessary to make changes, the client must be informed in writing and must agree to both the physical alterations as well as changes in the cost of the project. Never change a rate without informing the client in advance that the cost may be higher than anticipated.
Most clients consider their homes to be their castles. Therefore, many of them become extremely upset when contractors don’t clean up the job site both during the project and when work is completed. Failure to clean up on a daily basis can give the client an impression that the contractor is performing shoddy work. While many people mention first impressions as an important factor when evaluating someone, the truth is that the final impression a contractor leaves when they finally depart the job site is more likely to be the dominant and lasting impression.
How to handle client complaints
Few contracting jobs are 100 percent trouble free. Many times the problem, such as a weather delay, isn’t the fault of the contractor. However, all complaints must be addressed and dealt with carefully. The best rule of thumb is to approach every complaint with the attitude that the customer is always right (even if it’s not true).
Problem resolution must be the highest priority for a contracting company. Clients appreciate it when a contractor works with them instead of against them to resolve a dispute or misunderstanding. The following guidelines will help resolve complaints:
- Be courteous, and listen carefully to what the client has to say.
- Don’t argue with the client.
- Don’t make excuses.
- Resolve problems quickly.
- Remember the importance of good client relationships.
- Be reasonable even when the problem may not be your fault.
- Make written notes of discussions.
The ultimate goal should be to resolve disputes quickly and to the satisfaction of both parties. Contractors who stand behind their work even when they’re not at fault reap huge rewards over the long term. Reputations are made by happy clients, and additional profits are made from their recommendations of your business. This isn’t to say that a contractor should comply with the client’s demand on each and every issue, but if the cost of resolving a problem is less than the expected long-term benefit, it makes good sense to spend the time or money to satisfy the client.
The best-run businesses can be severely hurt by unreliable suppliers or subcontractors. An efficient operation can easily become derailed if the materials needed to complete projects aren’t available when promised. The same is true when working with subcontractors: They must be reliable and complete their portion of the project both on time and within budget.
The best way to avoid problems with suppliers and subcontractors is to have an excellent communication system in place. While email can facilitate the ordering process, new business owners should personally meet with their suppliers’ representatives. By getting to know your salesperson, you’ll be able to shortcut problems or bottlenecks and avoid unnecessary delays in implementing your projects.
The old adage “You get what you pay for” is often very true when considering which supplier to use or which subcontractor to hire. While your own work force might be top notch, your image will likely suffer if the materials or subcontractors you use are below average. You need to research suppliers in your area. Networking with other contractors, sometimes through associations, can be beneficial when gathering information about suppliers. Even as competitors, you can both benefit either by ordering in greater quantity, which will be a bigger order for the supplier and may also result in better rates from the supplier as a means of saying thank you for the referral.
While there are many benefits to hiring a specialist to complete a portion of a property development project, caution is necessary. If the subcontractor is unqualified, the problems obviously offset the benefits. When hiring several subcontractors, the general contractor must have the ability to coordinate the work of these various individuals. The general contractor who hires the subcontractors must understand the responsibilities of each sub and how each fits into the overall construction sequence. For example, it is no use to schedule the asphalt contractor to install the driveway if the excavating contractor has not completed the rough grading.
Of foremost importance is hiring a subcontractor who’s extremely reliable and able to meet the schedule established for the project. Because timing is usually crucial to a successful project, subcontractors must be able to complete their work in a timely manner. And because the best subcontractors are usually in great demand, a general contractor cannot risk losing the services of one sub because of the inefficiency of another. In addition, subcontractors must be able to meet the quality standards of the project set by the client, architect, and general contractor. While high-quality work is always expected of subcontractors, high-end projects with large budgets demand more skill and detail than low-budget projects. Subcontractors must understand what is expected of them and set their schedules accordingly.