Partly cloudy with a chance of profit
December 1, 2009
First the good news: McGraw-Hill Construction reports the construction industry’s future is looking a bit sunnier.
The group is expecting an 11 percent increase in starts in 2010.
The bad news is there are still some storms ahead. The future gains may not be enough to make up for the losses felt in 2009. McGraw-Hill analysts also said they believe that once everything is done, the construction industry will have seen an approximate 25 percent loss in construction work since the highs of 2007.
While the construction industry may have a light rebound next year, contractors still need to make smart decisions. Snips spoke with some industry veterans to find out what they think contractors need to do to prepare for next year.
Improve efficiencyJim Flynn said 2009 has been one of the most financially stormy years in some time.
“It’s obviously been a grim year for contractors in general,” he said.
Flynn is the president and CEO of Maxwell Systems, a construction software company that offers products to help contractors integrate their businesses to improve efficiency. Flynn said that efficiency and a “tight eye on costs and bidding is the preeminent challenge for 2010.”
While some analysts are seeing a bit of a reprieve for the construction industry in 2010, Flynn said that it would be foolish for contractors to think there will be an abundance of work. This means that contractors need to be as efficient as possible when it comes to generating bids.
“In years past, a contractor may have been one in five contractors bidding on a job. Now it is more like one in 30,” said Flynn.
With this in mind, contractors need to generate bids quickly, but also efficiently. They can no longer just bid a job hoping that they charged enough. Many contractors may go into the bidding process with lowball offers just to get the job. But this can be dangerous for their business going forward.
Previously, contractors could bid a job and not be completely accurate on the cost, Flynn explained. They could bid a job with high profit margins and use that profit to absorb any change-order-related costs.
Today “you don’t have much fluff room,” he said.
Tenants and building owners make changes to plans all the time. With a good software system, contractors can identify these changes quickly and help other trades on the building project get on the same page.
And speaking of other trades, Flynn said that sheet metal and HVAC contractors would be wise to establish relationships with general contractors. Setting up good relationships can help many mechanical contractors find future work.
Good contractors don’t wait “for bids to come to your door,” he added.
NetworkCreating working relationships with contractors, architects and other trades is a great way to survive, according to George “Billy” Austin. Austin is a principal with Shultz Engineering Group in Charlotte, N.C., and chairman of the contractor task group for the American Society of Heating, Refrigerating and Air-Conditioning Engineers.
He said that 2009 was a bad year for companies that did work for retail and office buildings.
However, “we are seeing signs that there is some activity coming back,” he said.
To take advantage of some of this new activity, Austin advises contractors to form strategic relationships.
“Talk to architects and general contractors and see if you can work as a team,” he said.
But besides forming relationships with architects and other trades, he suggests getting to know building owners. More specifically, he advises that contractors contact building owners to find out what their needs are.
“This is the way to be more aggressive instead of waiting for designs,” he said.
Austin said he believes contractors can be successful by going to building owners and showing them how they can improve the efficiency of their existing buildings and cut utility costs.
One way to do this is to show them some of the incentive programs that are available through local utilities. Austin explained that many utility companies are offering rebates and financial incentives if building owners can cut back on their energy use.
Austin said that with most of these programs, the building owner can go to a utility’s Web site and find out what incentives are available. Some of these incentives may be for replacing lights, adding a more efficient air-conditioning system or installing variable-frequency drives.
“The money then comes to the building owner once the savings have been verified,” Austin said. He also explained that if a contractor can show building owners where they can save and take advantage of rebates, chances are they will use the contractor’s firm for the work.
As chairman of an ASHRAE task force, Austin said that industry associations are one of the best ways to network with other contractors. He encourages contractors to get involved with their ASHRAE chapter or the U.S. Green Building Council. These associations help contractors to “see what is going on and be prepared,” Austin said.
MarketingNetworking is also a major part of a business’ marketing approach, at least according to John O’Connor.
O’Connor is a business coach for the Quality Service Contractors, an affiliated service group of the Plumbing-Heating-Cooling Contractors National Association.
Like Austin, O’Connor encourages contractors to get out of the office and market their businesses. He recommends going to your region’s central business districts and meeting with the owners of each company there. After that, send mailers reminding them of the services you can provide. Keep in contact with them on a regular basis whether they use your services or not.
O’Connor explained that the building owners may not know you, but from frequent visits and letters, they will feel like they already have a relationship with you. This will make them more comfortable to do business when work needs to be done.
This is just one type of advertising that O’Connor likes to call “gorilla-type advertising.” He explained that it isn’t enough for contractors to just rely on the old methods of advertising. With the amount of competition in the marketplace, he said contractors should have their faces out in public, whether this is meeting business owners at their company or going to trade shows.
But O’Connor said that contractors shouldn’t abandon the old ways of advertising, which includes using the Yellow Pages, and advertising on television and in print. It just means that contractors need to be smarter about it. That means knowing how much money you are spending on each form of advertising and how much business it brings in.
If a contractor sends out a direct mail piece, O’Connor said that the contractor needs to know how much money was spent sending out the mailer and how many leads it generated. This will give the contractor an idea of what advertising is working and which ones need to be tweaked.
FinancialsIt’s not just in advertising that contractors need to know where the money is going.
Jim Hamilton, business coach with the independent contractor group Nexstar, said that 2009 “has been a wake-up call for everybody.” With this in mind, contractors need to know their financials next year. He said that knowing the numbers is always important, but going forward everyone in the company needs to be on the same page.
As a business coach, Hamilton visits contractors and their companies on a regular basis. He explained that he likes to ask various people at the company what the day’s goal is. If he asks 20 people that question, sometimes he gets 20 different answers.
Hamilton said that means the company has “20 people with an oar going in different directions.”
And if employees can’t answer the question about the day’s goal, it usually means that the business owner has not done a good job of setting up expectations.
Some contractors are great when it comes to planning and executing technical fieldwork, but they have difficulty in plotting out their financial success. To be successful in 2010, Hamilton said that contractors need to look at their financials. This means looking at sales and profit from years past and comparing them to the current year. This will help them understand where they have been with the business and where they want to go.
This is also important when it comes to charging for jobs. Hamilton said contractors need to know what to charge on a job so that they are correctly paying for labor and overhead.
2010 still looks tight for contractors, but over the next several years, Hamilton said he believes that business will start coming back. Contractors just need to weather the storm clouds and make it through the year, he added.
He explained that consumers were also hit hard in 2009, which meant that many of them held off on replacement work. But sooner or later, old heating and cooling systems will have to be replaced. Consumers can only delay for so long and the demand for new equipment will come back.
“You need to be in business when it comes back,” said Hamilton. “Demand will come back.”
To stay in business through 2010, Hamilton suggests that contractors take any jobs they can get, even if they only break even on them. Don’t take any jobs that will cost the company money, but take the ones that will secure your business to be profitable in 2011 and beyond.
For reprints of this article, contact Jill DeVries at (248) 244-1726 or e-mail firstname.lastname@example.org.