Why Contractors Succeed
Too many times we read about how and why contractors fail in business but very few times do we read about why they’re successful. Maybe it’s because “doom and gloom” articles typically generate more interest than those which speak of one’s success. After all, our society seems to love tearing people down more than they do building them up. Which is why, in this article, I’d like to highlight how and why contractors succeed. Of course this isn’t a surefire roadmap to success but a brief overview of what contractors are doing not only to survive but also thrive in the industry.
Stick With What You Know
Let’s start with the most obvious factor which is: Stick with what you know. Successful contractors are those who focus on their core competencies and rarely jump from one type of construction to another. For example: A successful paving company is one that generally focuses only on paving. A successful HVAC contractor is one that focuses primarily on heating, ventilation, and air conditioning. Why? Because they’re good at it and understand the intricacies of their chosen trade. How successful do you think the HVAC contractor would be at paving a parking lot or road? Not to say it couldn’t be done but it’s highly likely that the paving contractor could perform the road or parking lot work much more efficiently than the HVAC contractor. Successful contractors generally focus on what they do well.
Now let’s look at project size. Most successful contractors are the result of properly calculated risks when looking at a project’s size and scope. Let’s say a contractor’s largest project was $1 million but there’s an opportunity to bid on a $10 million project. Some would say the only difference between the $1 million and $10 million projects are mainly more materials and more labor. In theory, that could be correct. However, the successful contractor looks at this situation a little differently. The successful contractor realizes that the $10 million project is a huge risk which could lead to default. They understand the need for liquidity and cash flow is critical to the project’s success. They ask questions such as: Do we have a bank line in place to support immediate cash flow needs? Do we have enough personnel to complete the project within budget and the necessary time frame? What happens if we’re slow-paid? Will the cost of materials increase and do we have an escalator clause in our contract? Successful contractors realize that slow calculated growth is much less dangerous than “elephant hunting”.
Cash Flow is King
In the previous paragraph, we touched a little bit on the importance of cash flow. Managing cash flow is one of the most important factors in the success of a contractor. However, cash flow can be affected by more than just the availability of a bank line. A contractor must constantly monitor cash flow in order to operate efficiently and meet its short and long term cash needs. Factors such as bad obligee or owner, subcontractor failure or faulty workmanship, and many others all affect cash flow. Successful contractors must be aware of slow-paying or difficult owners and lackluster subcontractors. Fortunately, it doesn’t take long for bad experiences to circulate within the industry especially when the project requires a performance and payment bond.
Finally, successful contractors generally focus on one geographic area and expand into other geographical areas with caution. For example: A contractor has a successful track record when performing work in the Southeast US. Projects are completed on time, within budget, and are profitable. A large project then comes up for bid in the Northwest. The successful contractor will only pursue the project after it’s been carefully vetted. The lack of knowledge about the area including weather, soil conditions, mobilization, subcontractors, and municipalities/code compliance all present a large risk to the contractor. In most cases, the successful contractor will pass on the project or enter into a joint venture agreement with a local company in the Northwest to mitigate some of the risk attributed to the lack of knowledge. Only after completing several projects within the Northwest will the successful contractor attempt to acquire work on its own and pursue larger projects within the geographic area.
The preceding paragraphs offer only a few traits of successful contractors. Many more traits such as experienced management, continuity, and others exist. Furthermore, there are contractors who are successful despite making some of the mistakes listed above. The goal of this article is not to provide a fool-proof road to success but to stress those factors which have been material in helping other contractors along the way.