Residential construction “Business” or is it?
For the minority in the residential construction business, they are a business first and a just happen to make money as a residential contractor, for most the opposite is true.
When I started out in large commercial contracting the adage of the firm was “we are a business first and just happen to make our money in the business of contracting” This struck home for me, newly out of college and excited to be working for the largest contractors in the Washington DC Metro market. First, we were a business! We were in this to earn money with a profit to permit expansion, promotional opportunities and pay for such thing as bonuses, and benefits. It worked for me and I had the opportunity to build nice big buildings.
The concept of being a business first has always stayed with me, however, I find it to be a concept lacking in many businesses and especially in residential contracting. Many small businesses are born as an extension of what we love to do, the great cook opens a restaurant, the stylist opens a hair salon and the carpenter becomes a contractor. It is, what seems like, a natural progression, especially here, be an entrepreneur, open your own business and realize the American dream. Of course, you can do it; the boss does everything wrong, you know better and can do it better, so go for it. Perfect, the problem usually starts on day one without realization. You made a massive career change you are no longer a carpenter you are a business owner; other people do the carpentry for you now. Your skill set in the field will provide an excellent background for sales and production, you have knowledge of the materials, know all the local subs so estimating will be sharp and tight. Then, what do you do, for most guys they sign up some work, put on their tool belt and go build stuff, because that is what they do and know how to do well. Oops, that is not your job any longer, but this may continue for years or even their entire career. So, what about the business? That work is done at 5 AM, after, 6 until dinner and after the kids go to bed. Weekends too are spent on sales, billing and paying the subs, mixed in with soccer and baseball with the kids.
Looking at this closer, what have you really done? You Quit your job, lost your benefits and then took on a second job to sign up work so you can continue to do the job you had as a carpenter. This must work you keep telling yourself, work hard, it will grow, and I will get that desk and office I deserve. It may, but statistics say you have less than seven years to make that happen since that is the average lifespan of a remodeling business. By then, burn out set in, or divorce wipes out the finances or money just runs out, but why, with all your hard work! You never gave up your day job, for your career change so your new career never had the opportunity to flourish. Add to that, the business “stuff” just got in the way of what you really loved doing. Accounting, marketing, sales this stuff you must do, you do not do it well and despise it while you are doing it. Does this in any way sound like a formula for success? If you raised your prices to pay yourself for the business time you are giving away for free, then the struggle might have been worth it and the dream a chance for reality. However, in your defense, your competition has the exact same business model you have, the second job with little or no pay. So, when you raise your price to compensate the work dries up because ultimately the client is buying price, not service. Add a downturn in the economy, a poor paying client, or a big call back issue and the business is dead. The model only works for a short period of time and in a good economy. Plenty of work and easy money.
From the client standpoint, bear in mind this is whom you are hiring since it probably represents 90% of the contractors doing business. Let’s look at this from your side. You are going to start a remodel or construct a custom home. This is a small business for you, which you will perform as a part-time job, knowing nothing about building, you will most likely make two critical hires for knowledge into the business you are starting, that you don’t have; an architect and a contractor. Knowing nothing about building your hiring skill set here is also limited.
Is the picture as to why construction projects can go so wrong becoming clearer?
So, you make these two hires, most likely the architect to bid and then select a contractor usually after an arduous budget struggle. Either way, you are moving the process along, you sign a contract that references a set of drawings you do not fully understand and hand over a large deposit to get the materials ordered and the project started. Now, what just happened? Let’s look back, the contractor you just handed a large sum of your hard-earned money to has no business skills, they may be a great carpenter and builder but far too often, they now feel rich! And what you just bought was the contractor's new boat or the siding bill from the last project he needs to wrap up. The architect was hired for design and may or may not still be part of the picture, the focus has shifted to construction, but you as the client, small business owner, oversee business management, a business you still know nothing about. The contractor is the prime player and is really in charge, but he has his interest in mind, yours to some extent, but not fully.
Big picture, we now have two small business being run by folks who either have no business experience or no knowledge of the business they are running,
Your construction project is not a business model with a formula for success
It will most likely get completed, but you can see now why, in most cases, it is not fun or easy and clients say they would never do it again. It should not be this way, it should be just the opposite, but the entire process is built on an opportunity to fail not succeed and it does not take much to pull this fragile business model apart.
Not to be one to point out the ills without a solution, let’s take a quick minute.
CONTRACTOR: If this is you, first recognize you have made a career change and embrace it, study, learn and become great at it. Think of what it would take for someone in another industry to become the great carpenter you are, now you have to become that great business owner.
CLIENT: Enter this process with open eyes, you are taking on an adventure you know nothing about, seek out help, a full or part-time owner’s rep, depending on project size, can guide you through the process or at least point out the crevasse before you go over. A construction consultant is an insurance policy and guide with the experience you need.
The last solution is a new business model of Collaborative Construction, the great carpenter/contractor joins a group of like-minded builders who provide the business services they lack and have no interest in, sales and building of the business remains the same but the aspects of marketing, accounting, etc. are hired out in the same manner as any subcontractor on a project. Now you can focus on what you love and get even better at it. The client wins as the group, with a cohesive business structure, provides the business management to make sure contracts, finances, insurance, etc. are all well managed.
The Pantheon Construction Group it he business model for contractors and the contracting solution for Clients.
For more information Contact Duane@PantheonCGI.com