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Construction Business Best Practices Series… Step 1

April 24th, 2012 by

The following twelve posts were written by George Hedley, owner of Hedley Construction and HardHat Presentations. He has extensive knowledge in the construction industry and shares his wisdom to others in Construction Business Owner Magazine. Enjoy…

Imagine you owned or managed the perfect construction business.
What would it be like? In my perfect business, I would come into the office two or three days a week; check-in with my managers; review their projects and progress; give them some encouragement and direction; call a few loyal customers and take them to lunch; check on my real estate developments and investments; and make lots of money. Then, spend my free days golfing, sailing, traveling with my wife and all the other fun stuff I like to do! What do you think? Work a little and make a lot!

This is what I call an “On-Purpose…On-Target” business. Your business and your money works for you. You are an owner, not a hands-on, make-every-decision, over-worked and under-paid supervisor and worker.

What Do Business Owners Want?

I’ll tell you what I want-I want my business to give me what I want! I want my business to be:

 

  •     100 percent run by my management team
  •     A great place to work that attracts the best employees
  •     A company built on long time repeat loyal customers
  •     A business that makes double the industry average profit
  •     A company that grows my equity and building wealth
  •     An environment that creates lots of freedom and fun

 

What Do You Want?

You don’t want a business that barely makes it-struggles, has cash-flow problems, doesn’t allow you to have any time off and doesn’t build your net worth. It took me nearly twenty years in business to finally understand. My business is a tool to give me what I want-wealth. Wealth is money and what it does for you. Money gives you time, energy, freedom and funds to use as you want-to help others; to use for your family, your employees or your community. As a business owner, to achieve wealth, you have to build a business that works and eventually creates financial independence. Your money must work for you. You should not be working for enough money to stay alive. Wealth is freedom! It gives you choices and allows you to enjoy your business and personal life.

Most business owners never become “wealthy” because they don’t sit down and clearly write out what they want. But they do know they want something different than they are getting now! So, today you have an opportunity to figure out what you want and then build a business to deliver exactly what you desire.

The Purpose of Your Business is to Give You What You Want!

The purpose for your business is not to make you miserable, consume all your time, whine about your employees, hate your customers and have financial stress. Most construction business owners shoot for “MORE”-more sales, jobs, customers, profit or more of the same. “MORE” is what I call the “UN-TARGET”-wanting to be HUGE. The busier you get, the more uncomfortable you are as you get used to being stressed out. This business owner chases bad business, says “yes” too often, is too optimistic about the reality of their situation, and has no clear plan or goals.

Successful business owners know what they want and decide what’s important. Take a few moments to write what you want:

 

  •     Personal
  •     Business
  •     Financial
  •     Operational
  •     Customers, marketing and sales
  •     People and leadership
  •     Equity and wealth
  •     Freedom and fun

 

The Entrepreneur’s Journey

After graduating with a degree in engineering, I worked four years as a civil engineer and construction project manager. Like my father, I had the entrepreneurial spirit and wanted to be my own boss, but I had no clue how to run a business. In 1977, I decided that starting a construction company would be easy-bid cheap and stay busy! At twenty-seven years old, I had four years experience, $2,000 in the bank, just bought my first home and construction was in a recession. Perfect timing to start Hedley Construction! Besides, I already owned all the tools required to be a success in construction-a contractor’s license; a used orange Datsun pickup truck with 92,000 miles, a metal tool box and lumber rack; a golden lab retriever; a ten gallon ice chest; a big radio; a new hard hat with my name engraved on it; and a thirty foot contractor’s power lock tape measure.

Most entrepreneurs start their company without a written business plan. They have a dream to be their own boss and make it on their own. With determination and hard work, they hope to build a “perfect” business. But, most don’t have a written plan, management team, the capital or leadership skills to be successful. When I landed my first construction project, it went well because I was small and did everything myself. It is simple when you have no overhead, no employees, only one project to work on; you make all decisions, supervise all the work, make all the purchases, prepare all the bids and estimates and sign all the contracts.

As your business grows, you work more hours. Cash-flow becomes tighter and you have no extra time. You start getting out of control as your business controls you. You finally give in and hire the most “experienced” people you can find-your relatives! Next your finances get out of control, so you hire a bookkeeper. But, since you don’t know anything about accounting, you are at her mercy and hope she doesn’t bother you with the numbers, or find out you aren’t making any money.

The challenges continue to mount-cheap competition, getting paid, unhappy customers, finding trained employees and making a profit. There are too many details, you get bogged down and only have enough time to put out fires. You have to make all the decisions for everyone and keep trying to do it all yourself. You are now officially over-worked and under-paid. If your business goal was to be busy-you’ve made it! It’s amazing how busy you can be, being low bidder and selling price. Everyone likes you when you’re busy-your banker, suppliers, subcontractors and employees. Everyone except your family and friends, and yourself!

You try hiring managers who can run your company for you without problems, stress and you being hands-on. But, you can’t let go. You can’t find any good people who are accountable, responsible or will work as hard and as smart as you. People now become a big problem, not the solution. Your business isn’t working. You’re totally stressed out and frustrated, your life is out of balance, your business is out-of-control and your company controls every waking moment. Your business is now “Off-Purpose and Off-Target!”

The Entrepreneurial Decision

At first, it’s just you. It’s simple when you do all the work. You do a great job, so you get some referrals and more work. You hire people to do the work. You’re now in management. Management isn’t fun when you become the complaint department. What should you do next? You have three choices:

 

  1.     Go back to doing it all yourself
  2.     Sit and wait for “it” to change
  3.     Work different!

To build an ‘On-Purpose…On-Target!” business, you can’t shrink your company and you can’t sit and wait for something to happen. Your only choice is to change the way you work. It might seem easier to change your employees, customers, subcontractors or suppliers. But to get what you want, you’ve got to make the big change and change yourself. Change the way you think, do business, manage, prioritize, work, lead and change how you work and live your life.

The year was 1985 when I finally made a decision to get my business to work for me and without me. I would have to change and implement new ways to run my business. I dedicated four hours a week to working “on” my business. You can, too. Commit to get organized, systemized and in-control. Work on setting goals, create budgets and fix things which always go wrong by installing operational systems. Worked with your key managers and delegate nearly everything to them. Set up check and balances for every department and focus on helping your key managers become the best they can be.

If you were to buy another company, what would you want to know about it? You would ask to see their financials, customer logs, receivables, assets and liabilities and study their competition. I have been in business since 1977, and the number one thing I would want to know before considering buying a company is “does the business work?” or “do I have to do the work?” I would only want to buy a company that works without the owner doing the work.

Do You Own a Job?

The problem with most entrepreneurial companies is the owner plays too big a role in every day operations. Without the owner’s constant attention and involvement, the company doesn’t work and wouldn’t exist. Do you own a business that works without you doing all the work? Do you own a job or a company?

Imagine your business is “On- Purpose…On-Target” and meets your personal objectives. To achieve that goal, you’ll have to start working on your business to reap the ultimate benefits of business ownership-time, fun, freedom, equity and wealth.

Your current results in profits, people, stress, time and freedom are the number one indicator of your priorities and your attention to customer service, quality workmanship, financial reporting, operational systems, marketing and sales systems, motivating people and visionary leadership. When you’re not getting what you want from your business, there’s something wrong. It’s not your people, subcontractors, suppliers, competition, or customers. It’s you! Your bottom-line results are the number one indicator of your abilities as the leader of your company.

The Answer is You!

Not enough sales? Perhaps your sales systems stink. Not enough repeat customers? Perhaps your customer service stinks. Selling low price? Perhaps you’re not any better than your competition. Not enough profit? Perhaps your organizational systems stink. Perhaps you don’t know the difference between an income statement and a balance sheet. Perhaps your priorities aren’t on people, finances, overhead controls, cash flow or the bottom-line. Or perhaps you don’t set goals, know how to run a business or think you’re the problem. Only you are responsible for you, are accountable for you, can make you get what you want and can do what’s necessary to meet your goals.

When’s Your Wake-Up Call?

You are accountable for how you spend your time, manage, lead, delegate, trust people and train your employees. I finally realized to get the results I wanted in my company, I would have to make some big changes. But it’s hard to change the way you always works. Eventually you’ve got to stop saying things like “trust me, everything is ok” or “someday soon I’ll finally get is right!” or “I know my company will work when I get that new estimator or project manager or when we get paid on the big job.” When is your wake-up call?

Get In the Opportunity Business

As I looked at my business, I saw that we were commercial general contractors, selling construction services against too many competitors at too low a profit margin. It seemed all my customers were buying low price. Again, what business are you in? Are you in the construction business or are you in the opportunity business-looking for opportunities to be different than your competition, add more value, provide more services, make double the industry average profits,

develop strategic alliances, leverage your relationships, joint venture, build a great place to work, grow your equity, build wealth or seek investments that don’t require hands-on management?

To get what you want and be “On-Purpose…On-Target,” you’ll have to change the way you think about your business. The natural tendency is to continue doing things the same way, work hard, stay busy and try to force it to happen. But remember the purpose for your business is to give you what you want-above average profits, increased equity, new opportunities, wealth and freedom as your business works without you!

To make this happen, I changed our business model from a general contractor to a company that seeks wealth building opportunities and investments. We started asking our customers to joint venture with us on their development projects. We began finding equity and financing sources to build real estate projects for our own account. I brought on a partner who was knowledgeable in new markets. I gave up our bad customers who shopped price. We changed our business goals from more sales volume and increasing our profit margin to growing our equity, building wealth and creating more time to enjoy the benefits of our investments.

Take the First Step

What will you do different to get what you want? You can get your business to work. Envision what you want and how you can get your business to work without you. Decide what you’ll have to do with your people, customers, project types, money and time. An “On-Purpose…On-Target” business meets your business and personal goals. Step one is to figure out exactly what you want. Then you can make the changes necessary to make it happen. We will explore Step 2-Build a Profitable Business-in the next article of this series. For now, take the first step and make a detailed list of what a perfect business would be for you.

Competitive Advantage

April 4th, 2012 by

The following article is a good read I found on enr.com. Take a look…

 

I recently overheard a contractor bragging about how he could gain a cost advantage over his competition. It caught my attention, so I listened.

It seems that in his bidding practices, the contractor priced materials and equipment that were not approved in the specifications. To avoid giving away the bidding advantage to his competitors, the contractor decided not to request these items to be approved in the bidding period. After he was designated the low bidder, the contractor planned to press for the materials to be substituted for the specified items.

A few things come to mind. First, this contractor was not bidding on the project scope the owner wanted. If you assume the owner is knowledgeable, the materials and equipment were selected for a specific reason. Therefore, the bid without approved substitutions is subverting the owner’s intent and the designers’ specifications.

Second, there is customarily a provision in the bid documents stating that substitution requests must be submitted prior to the bid so that the materials can be evaluated. If a substitute is determined to be an equivalent, then all bidders are notified. This tactic allows the competition to bid based on the same knowledge and enables the owner to decide on the best pricing or most suitable contractor based on the same scope of work.

Companies that use the bid approach about which the contractor boasted will cost the owner more money in the long run. Bidders that short-circuit the specifications are taking something of value from the owner. If the owner wants to use Product X to meet Specification Y, that is the owner’s decision.

If contractors want a substitute product to be considered, there is a mechanism to get that done; however, shrinking bid periods, pride of authorship and other factors cause project members to ignore the mechanism. In fact, many owners don’t realize the bid period is the most cost-effective time to allow for substitutions. When the mechanism is used, the contractor can re-approach, after the bid, the designer and owner about the substitution.

Cheating on the specified materials and quality of work is not a competitive advantage. It’s cheating.

Competitive advantage resides in the means and methods used to achieve the results the owner and architect or engineer have set out in the plans and specifications. Generally speaking, the contractors—and their estimators and project management personnel—are the most knowledgeable people regarding the means and methods on any given project.

During the bid period, if a competitive advantage develops, the smart contractor will price out the customary or conventional process and evaluate it against a so-called unconventional process. If there is a savings to be had, the pricing structure and the contractor’s bid can reflect this. The contractor may take half the cost difference as a “risk-reward” amount to add back to its profit margin.

 

SHORT

In my bidding, I have been “beat'” by others using this type of competitive advantage. In one case, the successful bidder used a work week with fewer overtime hours than the number we had anticipated. The successful bidder saved on direct labor cost for each hour and gained in overall productivity. The owner received the same project, specified at a lower cost, than the other bidders would have provided. This competitive advantage comes from innovation, and innovation comes from experience and creative, critical thinking.

Unfortunately, the bid-period mechanism relies on all parties knowing their responsibilities. Not that long ago, contractors had staff estimators and bid managers who knew how to evaluate all subcontractor bids for all disciplines. Estimators knew their obligations by reading the plans and specifications, and management listened. Designers knew how to draw the details of the project, not just refer to a code. Owners knew about the construction process or had a construction manager who did, and construction managers knew how to develop bid packages and proper bidding methods to get the best bids.

From owner to designer to contractor to subcontractor to vendor to everyone else, the whole industry needs to remember that innovation is just a by-product of experience and knowledge. Perhaps innovations are just rediscovered good business practices.

Don L. Short II is president of The Tempest Company, which provides estimating, scheduling, project controls, consulting and expert services, including arbitration services. He can be reached at donshort@tempestcompany.com.

Know Your SWOT!

March 28th, 2012 by

The key to survival—whether it be in the “real” world or the business world—is to know your SWOT (Strengths, Weaknesses, Opportunities, and Threats).

According to the U.S. Small Business Association, roughly 50% of all businesses fail within their first year. There is no shortage of “Top Ten Reasons Why Businesses Fail” lists so I won’t go into that here, and I’m sure you could name many of the main culprits—poor management, lack of capitol, insufficient marketing, flawed business plan, etc.—without having to run a search or buy a “How to Succeed in Business” book. What I will talk about is how to avoid the common (and sometimes harder to find) missteps, mistakes, and missed-the-boat opportunities that can determine if your company sinks or swims.

If you’re one of the “lucky” ones who makes it to Day 366, don’t think for a nanosecond that you’re out of the water and are now one of Darwin’s success stories. Far from it. The truth is, your battle for survival has just begun. You’ve figured out how to stand on your own two legs, but now you need to learn how to not get knocked down.

“In the struggle for survival, the fittest win out at the expense of their rivals because they succeed in adapting themselves best to their environment.” ~Charles Darwin

No matter how unique, innovative, creative, or “original” your product, there will always be competition that is vying for your customers. And you know what—that’s a good thing. Competition triggers our will to exist and reminds us that it is truly survival of the fittest.

The key to survival—whether it be in the “real” world or the business world—is to have as much information as possible. Not only about your opponent, but about yourself. That’s where SWOT comes in.

SWOT is an acronym (another handy tool created by man to boost efficiency and increase curability) that stands for Strengths, Weaknesses, Opportunities, Threats.

SWOT provides the guidelines for critically assessing what you’re doing right, what you’re doing wrong, who or what can take you down, and what you can do to get—and stay—ahead of the pack.

And it’s not just Darwin who subscribes to this theory.

Strengths

“He who knows others is wise. He who knows himself is enlightened.” ~ Lao Tzu

In most cases bragging is looked upon as a bad thing. For this exercise it is highly encouraged. It’s important you have a clear recognition of the places where you and your business excel, but not just to give yourself a pat on the back. It’s crucial that you are aware of what you do best. Pediatricians don’t perform heart transplants, Shaquille O’Neal doesn’t shoot three pointers, and Quentin Tarantino doesn’t make G-rated movies. Why? Because they all know what they can do well and play to their strengths.

Key “Strength” Questions

  • What’s the best part of what I do, and what do I do best?
  • Why do people engage with my product?
  • What gives me the greatest sense of accomplishment?

Weaknesses

“Our strength grows out of our weaknesses.” ~ Ralph Waldo Emerson

Bad news—you’re not perfect. Good news—that means you can always improve. Better news—the worse you are at something, the more room for improvement! This isn’t a “glass half full” perspective, it’s just the reality of things. Negatives can be turned into positives, but first you need to figure out what they are. Before you start making your list of shortcomings, make sure you’ve got your old pal Honesty by your side and kick Humility out to the curb. There’s no room for excuses, partiality, and beating around the bush. Without a 100% forthright and straightforward audit, you’ll never be able to optimize your business, and more importantly, survive.

Key “Weakness” Questions

  • What can I do better?
  • In what areas do I receive the most complaints (from consumers or employees)?
  • Am I spending money on something that isn’t necessary?

    Opportunities

  • “In the middle of difficulty lies opportunity.”  ~ Albert Einstein

    Don’t get too discouraged now that you’ve unearthed all the not-so-good things you do. Weaknesses are often what give opportunities the reason to come knock on your door in the first place. One definition of opportunity is “a good position, chance, or prospect, as for advancement or success.” No matter who you are or what you do, there are always opportunities for you to succeed—the trick is to find and take advantage of them.

    Key “Opportunity” Questions

    • Is there a particular demographic or market that would like my product that I’m not reaching?
    • What direction are consumer trends moving, and can I get ahead of the curve?
    • Can I capitalize on any of my competitions shortcomings?

    Threats

    “As a goalkeeper you need to be good at organising the people in front of you and motivating them. You need to see what’s going on and react to the threats. Just like a good manager in business.” ~ Peter Shilton

    Who would have thought that a World Cup soccer goalie from England would provide such sound advise for CEO’s? Like a penalty kick from Leo Messi, he couldn’t be more dead on. There is another acronym you should remember which will help you to asses your greatest threats and make sure you have the means to thwart them off—RPI:

    1. Recognize the threat

    2. Plan a course of action

    3. Implement your plan

    Seems like common sense but you’d be amazed at how many businesses cease to exist because they failed to take the necessary time to follow these steps.

    Key “Threat” Questions

    • What “shelf life” do I have for my product to be relevant?
    • What are the main factors causing my cart abandonement(or churn rate, or negative feedback)?
    • Is there another company with a similar product that could potentially draw customers away from me?

    Now that you have tools to abstract the information, the next step is to hunker down and get it. There’s no right or wrong way to compile the data, but the most simple and effective way is with a SWOT 2×2 Matrix:

      Good Bad
     Now STRENGTH WEAKNESS
    Later OPPORTUNITY THREAT

    There are alternative ways to label your boxes, however I would advise against the common practice of substituting “Now” with “Internal” and “Later” with “External”, as those variables do not allow you to seek out opportunities (i.e. team building) and threats(i.e. high employee turnover) within your own company. You can also find a wealth of best practices and templates online—here is one from businessballs.com that I find particularly beneficial.

    Of course once you’ve got your SWOT all figured out, the next step is to take action upon your findings to ensure you continue to stay afloat. Although there may be some choppy waters ahead, you’d be amazed at how much easier that task will be once you’ve got your course mapped out. And if you don’t believe me, just ask the Father of Modern Science:

    “All truths are easy to understand once they are discovered; the point is to discover them.” ~Galileo

    Please feel free to share some of your own findings and questions that have come from implementing a SWOT analysis with your business or personal life.

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