It’s a story that plays out all the time: Construction companies get a little too big for their britches and stop treating their employees well, so those employees run off and become subcontractors.
It seems like a good idea at first, after all, isn’t it nice to be your own boss for once? But then the realities of running a business hit. And in ten years’ time, 73.6% of these businesses fail.
It’s not that these folks aren’t good at what they do. The problem is, most contractors don’t have a clear financial model to guide growth. And if you don’t have that, you’ll either end up stuck in the same revenue cycle or out of business.
So how can you make sure you win the construction profitability game? Every successful subcontractor I know has mastered five things.
This is their playbook on how to grow a subcontractor business to $15M and beyond.
🎥 Watch the full interview with Josh.
Key Takeaways
Before I became a fractional CFO, I worked for several billion-dollar subcontractors who worked under some of the biggest GCs in the country. I’ve seen a lot, and while I haven’t done everything, I’ve worked on over 150 projects ranging from $150k to $300M. And in that time, I’ve seen exactly what works and what doesn’t.
I’ve been condensing these lessons down into one replicable framework for small subcontractors. If you can nail these five pillars of construction profitability, you can absolutely scale your business to $15M+ revenue in the next decade.
Let’s start with the thing every contractor needs: work.
You can’t build what you don’t win, and you can’t win what you don’t see coming. A lot of the subcontractors I talk to are in a vicious race to the bottom, submitting bid after bid on platforms like BuildingConnected, where every project gets an average of twelve bids per subcontractor. If you’re only looking in places like these, it’s unlikely you’ll end up winning good work, let alone at a profit you deserve.
This is where I encourage subcontractors to take a fresh look at their business pipeline. Ask yourself these questions:
If you want to be doing consistent, profitable work, focus on only bidding projects that are a good fit for your specific skills and availability. Don’t be afraid to tap into your existing network either to find those jobs. This is how you build the kind of referral network that will serve your business time and time again.
Once you’ve found work that meets this criteria, it’s time to build an estimate. Think of this pillar as setting your business plan for however long the project is. If the job is supposed to take one year, how much will it cost to continue operating your business in that time?
The most important part of winning the work is having a solid bidding process in place. Historical data is a helpful reference when you’re refining your bid, but it shouldn’t be the bible you base your estimates on. If you’re only using historic project data to inform your bids, you’re asking for financial trouble. Labor and material costs are always fluctuating, especially as your business grows year over year. The best use of historical data, in my opinion, is using it to see how long similar jobs took in the past. For example, if you estimated an electrical job in the past would take three months but you completed it in two, you now know that you can cut labor time on similar projects in the future.
Now that you’ve got a solid bid, how do you negotiate good payment terms, especially when you’re not in direct contact with the owner? I always recommend going for Net 45 or Pay When Paid, whichever is shortest. This puts a timer on the GC. If you’re not paid when agreed upon, you’re in the clear to follow up (and send legal notices if needed). If payments stop, you’re ready to stop work and file a lien.
You’re at the jobsite, so now the question is, how will you make sure everything goes according to the contract? From following up on change orders to staying ahead of all of the little idiosyncrasies that come with communicating across the project, there are plenty of moving parts that can either help you increase profits, or bankrupt your company.
Too many subcontractors get stuck trying to reactively deal with issues as they come up. But when you’re on the job, you can’t afford to be fighting little fires every day. This is why successful subcontractors are proactive from day one. They get ahead of problems by creating standard operating procedures (SOPs) and holding weekly PM-Superintendent meetings. This keeps installations consistently high-quality and ensures project handoffs are as seamless as possible.
Once you’ve mastered the first three pillars, it’s only natural to start thinking about expanding your business. I talk to a lot of business owners at this stage who are ready to take on more work, but are struggling to fund what they already have going on. I always tell them the same thing: If you can’t float the job, you can’t finish the job.
This is where getting a handle on your job costing and WIP reporting is crucial. Instead of relying on gut feeling, these reports tell you whether a job is on track and whether you’re billing properly. So many owners think they’re making money (and should be!), but instead they’re losing because the data just isn’t right. Here’s an example: A subcontractor bids a job with a 50% profit margin, but that project is a year over schedule. This is where you start to hemorrhage cash. If we can dial in the data though, we can take it to the bank and get your business better rates to fund the work.
Another piece of the funding puzzle is simply planning ahead. When you get a new contract, check out your Schedule of Values and plan out how you can front load some of your costs. This alone goes a long way in solving month-to-month cash problems. You can also recognize revenue, profit, and contingency earlier in the project so you can stay overbilled at a healthy 6%.
Lastly, let’s talk about financing. Borrowing money can help bridge funding gaps, but that money’s not free, and every client costs differently. A GC that pays Net 30 for instance may cost less because of the inflation on the money as you’re waiting for it vs. a GC that pays Net 90. Once you know how much financing will cost on a particular job, you can go back to your estimate and adjust accordingly.
This is where I always get pushback, because no one ever thinks people will pay more. But here’s the thing: People don’t care about a low price (at least the people you want to work for). They care about getting the job done on time. Even in low-bid industries like public works, those folks still have to complete builds on time. It’s up to you to stick to the pricing you know works for your business, and let the others weed themselves out.
What does it take to protect the profit you’ve earned? Usually at the end of a job, you’re hit with a ton of backcharges. Something was “missed” in the contract, or there’s a report you didn’t remember to turn in. Either way, it’s always something. This is where knowing your contract, insurance, and a bit of legal know-how can make a big difference.
If there’s one thing I want every subcontractor to know, it’s this: Don’t just sign a contract, read it! Everything could seem great on the surface when you submit a proposal, but when you get the final contract back, things could look very different. This is because hardly anyone communicates on the GC side between the PM and the estimator to say, “Hey, this is what’s included and what’s not”. Inevitably then, PMs include scope that wasn’t in your proposal, and now you’re saddled with an extra $50k in costs you weren’t prepared for (and most likely crappy payment terms too).
One of the best ways to protect your hard-earned profit is to know your contract inside and out. And if a GC has extra standards, make sure that’s included in your price.
There are a million ways to run your business (and there are a million ways to lose it too). Even if you’re not hurting today, taking the time to optimize your operations will make sure you’re not playing the guessing game with your profitability. If you can master these five pillars, you’ll have the room you need to grow, experiment, and focus on what you do best–turning around great work.
Watch Josh's full series on becoming a profitable subcontractor here.