WHY RESIDENTIAL BUILDING COMPANIES GET IN TROUBLE?
By Marti Amos
Why is it that we see so many residential building companies fall over or get in financial difficulty and struggle while working hard but going round in circles? What's the difference between success versus merely keeping your head above water?
Well, after 15 years of helping building company owners and over 5,000 people through courses and one-on-one training, we've boiled it down to these core points. Have a look at these to see if these are danger signs for your building company.
#1: Builder vs Business Owner. You might be great at building houses, but do you know how to grow a building company? You need to learn the core business skills that set you up for success across marketing, sales, pricing, financials, systems on-site, systems in the office, and then leadership of yourself, your team and your business. As Lance Irving from Irving Builders in Christchurch says, “You're taught how to be a great carpenter, but have you learnt the right skills to be a great business owner of a building company?”
#2: Risk mitigation. Brendan one of our members had a $105,000 insurance claim denied because one of his guy's nailed the weatherboards in the middle and they started to curl. But he didn't have the right insurance in place (see the ‘Working on’ Vs ‘Accidental’ Clause). You too might just be one step away from serious financial difficulty. Work out what the biggest risks to your business are, then mitigate the big ones.
#3: Working IN versus working ON. I've yet to see a successful building company owner grow a successful business while working full-time on the tools. There's too much to cover in terms of pricing, project management, managing the team, marketing, sales and everything else that goes into it. You need to leverage yourself up out of the day-to-day, delegate the $20 an hour work, build the right structures and systems for your people to follow; then hire, train and inspect what you expect.
#4: No systemised marketing. So many builders lurch from feast to famine. If you rely solely on word of mouth that’s great, but hope is never a great strategy on which to base the future of your business. Install a systemised marketing process that brings in the right type of leads, that are educated, nurtured and who choose you as their preferred builder for the biggest investment of their life.
#5: Managing the business. You need to manage the business effectively. Inspect what you expect, have KPIs (Key Performance Indicators) and KPAs (Key Performance Actions) in place, because you don't get what you expect or what you deserve, you get what you tolerate.
#6: Winging it. As Einstein says, “Insanity is doing the same thing over and over again and expecting a different result.” Rather than learn by trial and error, follow a proven framework and master the four core areas of your business marketing, sales, pricing and numbers, and then systems on-site and in the office.
#7: No contracts in place. You need contracts in place to protect yourself with clients, sub-trades, contractors and employees. Avoid entering into contracts that are going to tie up your profit with retentions, like the Institute of Architects ones.
#8: Not knowing your numbers. Business is a number's game and numbers tell us what's working well and what you need to improve and master. You need to know your minimum target and gross profit margin percentage (at least 20%). It’s hard to make a good profit if you're below that. You need to know how to improve your cashflow and how to structure your contracts. (e.g. invoice weekly instead of milestones. Members of ours do this by discussing in-depth with the bank the pm schedule, material and dates) You need to understand your KPIs and you need to know your financials and the difference between mark-up and margin, the difference between profit and cashflow and the different levers and strategies to improve each of those areas.
#9: Back costing – not knowing how to change and improve your numbers. Do you know the core ways to improve your key numbers? Do you know how to improve your average dollar sale? Do you know how to improve your gross margin? Your conversion rate? Productivity on-site? It's quite simple. Pick the biggest area of opportunity and focus on improving this over the next 90 days. You'll see significantly improved results.
#10: A low gross margin (this should really be #1 if it’s low). Anything less than 20% then it’s hard work to make a decent profit, and anything less than 15% means you're going to struggle with profit and likely cashflow.
#11: Relying on word of mouth. Word of mouth is great, but it should be the cream on top. Hoping someone will give you a job is never a great strategy. Make sure you have something in place that maximises that word of mouth, like The Professional Builder 1% referral system, so you can bring in those extra jobs.
#12: Focus on labour hours. You need to focus on controlling the labour hours. Manage your Work in Progress. Forecast versus actual. Your guys must fill in their labour hours each day to show what they're working on. You also need a good process for capturing all the variations, covering off materials being used so there's not too much wastage on materials.
#13: Know and show your numbers. Inspect what you expect. You don't get in business what you deserve or what you expect, but what you tolerate. So, visibility, KPIs, KPAs in your toolbox meetings and in your construction meetings will help massively to stay on top of the numbers. Get your weekly toolbox agenda here
#14: Standing still. If you stand still on the train tracks you'll get run over. As you grow your business you need to learn different skills to climb the next level of the builder's ladder. Delegate to elevate. Stop doing the $20/hr tasks. Put systems in place for people to follow, processes for them to make sure they're doing the right thing, step by step. You can't just abdicate. You need good systems for good people to follow because you can't rely on great people all of the time. What happens if they decide to leave? Get the freedom finder here that will help identify what should happen.
# 15: Mindset. What stories do you tell yourself that are keeping you stuck? I can't charge X amount here? Or, I need to be on-site? Or I can't find any good builders? Every result you have in your life and business is a direct result of your mindset, thoughts, beliefs and actions. Surround yourself with winners and people on the same journey. Improve your skills and knowledge. Take massive action in the right areas so you can fast-track your way to success.
#16: 80/20. Work harder on smarter things. Those things that are proven to get you a result and impact your time and profit. Follow what’s working right now and follow a plan that has worked for others who have been there before and solved the challenges you might currently face.
2: Hiring builders,
3: Price jobs correctly,
4: Increasing your gross margin.
So next time in part two I’ll give you some of the specific solutions that you can use in your buildering company to accelerate results.
The Professional Builder has been helping building company owners throughout New Zealand, Australia and Canada to systemise their building companies and build a professional building company that gives them true wealth: both more money and more time. We've got 11 in our team, five business coaches with building company owners as well, a community of over 200 building company owners to help you fast-track your results.
Founder – The Professional Builder
P.S – Want a FREE guide ‘151 Ways to Improve your profitability'?