If you feel like your construction business has hit a wall you can’t quite break through, you’re not alone. 85% of all high-growth companies stall at some point, and of those that do, only a quarter recover.
Growth is exciting–it means you’re taking on more projects and gaining more opportunities to grow your bottom line. But growth also comes with plenty of risks. If you’re not scaling the right numbers and the right processes, you may end up flatlining, even if your top-line review looks good at first glance.
Healthy growth starts with a healthy foundation. And to build that foundation, you need to understand your business from the inside out. In our interview with Chad Prinkey, author of Well Built and Founder/CEO of Well Built Construction Consulting, he explains why businesses stall out and how you can lay a healthy foundation for growth.
Key Takeaways
- Growth without financial clarity will stall your progress at best, and move you backwards at worst. Laying a strong foundation first gives you the visibility you need to grow sustainably.
- Consider gross profit the “king” of your numbers. Tracking this across each job along with other leading indicators of success will help you stay on track and pivot as needed.
- Great talent is important, but it’s only one part of running a successful construction business. You need robust systems and SOPs to support what happens at the day-to-day level, so you can plan for the long term.
How to Lay the Financial Foundation for Growth
To set your business up for successful growth, you first need to get clarity on your finances. This means drilling down into what’s happening at every level, all the way from the field to your sales department. Are you turning a healthy profit project to project? If your only measure of profitability is checking your bank account every day, you may be stalling out and not even notice.
So what does a foundation built on financial clarity look like? “It’s clarity into every facet of your business so that you're able to monitor what is happening in the field, up into the project management role, up into pre-con and estimating, up into sales and business development,” Chad says. “If you don't have visibility into what's happening in each of those areas of your business, you really ought not to be doing much else until you gather clarity on that spot, because then you won't know what's broken.”
Everything doesn’t have to be working perfectly. You may need to make some serious tweaks to your estimating process, for instance. But by gaining that visibility, you can start to piece together what’s broken and see where the biggest risks to your business currently are.
In our interview with Chad, he made it clear that clarity comes from good tools, good measurements, and good communication. The most successful construction businesses not only have clarity into their numbers, but clarity into the right numbers.
What Metrics Should You Track?
Of course, getting visibility into every business function is a big task, so you’ll want to start with your north star metric–your gross profit.
“You need to know what your actual gross profit is on every project,” Chad says, “and you have to be able to compare that to your estimated gross profit. Gross profit as a percentage on projects and then on the whole will help you to understand if you're estimating correctly and make corrections there.”
Ideally, your gross profit will be on target both as a percentage of your revenue and as a dollar amount. If it’s not (and you’ve got your eyes on these numbers early enough), you’ll have a chance to take action and course-correct before things are too far gone.
Along with gross profit, keep an eye on lagging indicators like your net profit. This number represents everything you’ve done leading up to that point. It’s like stepping on a scale–once you’re on it, there’s nothing you can really do to change that number. But, by watching certain leading indicators, you’ll be able to make sure the number on the scale is the one you want to see.
So what leading indicators should you be tracking? It depends on the type and size of your construction business, but some of Chad’s favorite leading indicators to track are gross profit per hour and weekly estimating volume.
Gross profit per hour (both management and man-hours) doesn’t just tell you how much you’re making on a job, but tells you how much you’re making relative to the amount of resources you’ve applied to the job. This kind of data is essential to pricing jobs more aggressively or conservatively, instead of applying a blanket gross profit margin.
Your estimating volume per week represents the number of qualified estimates that met your target criteria. Some things to think about here:
- What are the things that lead us to do estimates?
- How many new discovery meetings are you holding on a monthly basis?
- How many existing client meetings are we holding?
If you set goals around these metrics and measure your progress toward them, it doesn’t matter if you don’t sell anything today. As long as you’re making progress on those goals, you can still call today a success.
How to Build Processes That Support Growth
When you lose control over gross profit, it’s easy to blame the estimating department, there are so many opportunities for mistakes to be made in estimation that operations is left to recover from. While the estimating process is certainly a common culprit, inefficient management is endemic in most small to mid-size construction companies. Chad says,
“It’s very common to see contractors succeed in growing revenue and fail in growing gross profit alongside revenue, but instead experience a dip in gross profit as they grow. Why? It’s often because they don't have standard operating procedures. They don't have robust systems that allow them to easily manage their work. I see a lot of contractors succeed in growing revenue while failing to grow their gross profit, all because they don’t have standard operating procedures (SOPs) and repeatable systems that allow them to easily manage work.”
A large number of contractors have this issue — if they grew right now, they’d create more problems than they’d solve because they don’t have the right processes in place.
Those companies that are ready to grow have a few things working for them:
- They have clearly documented SOPs for every critical business function.
- Those SOPs are integrated so well into their systems and tools that it’s almost impossible not to follow them.
- Each SOP is trained slowly and thoroughly, and understanding is confirmed.
- Companies have effective supervision systems in place to monitor adherence to these SOPs.
Great SOPs need a lot of details, but don’t be afraid to just start. You can always fill in the details later.
Chad also shared the “easy button” to SOPs, but cautions against using it. He says that if you already have excellent leadership, your lack of SOPs will be covered by that talent. The problem with this approach, aside from the cost of hiring that type of talent, is that the success of your business ends up resting on one person. If they decide to leave your company, you don’t retain any of the efficiencies that depended upon them.
You need great people to grow successfully, but your business can’t be dependent on just a few top-tier leaders. Your business should operate like a machine. If one part fails, you need to be able to replace it and keep moving. Put simply, if your most talented folks look like they have superpowers, document them well enough so they become something you can replicate without them.
Wrapping Up
Healthy, long-term growth doesn’t happen overnight. It’s the result of building a strong financial foundation over time. Start with clarity. Keep a sharp pulse on how your numbers and processes are serving you, and you’ll never fly blind again.