An improving economy is often a precursor to a rise in contractor default. Why is this the case? For starters, in the excitement of building a bigger backlog contractors are often unprepared to support an increased workload with the existing resources. Uncontrolled growth often jeopardizes the efficiency of existing systems and can disrupt once successful workflow, and thereby cause overspending throughout the organization. A common statement from contractors is: “I did much more work but made way less money.” What’s the reason?
Growing your company without a regard for the necessary time to effectively train personnel and obtain the necessary resources often result in no apparent gain in profitability, even though additional volume is performed. In effect, work volume outruns the company’s ability to manage and supervise the construction projects. When this occurs, project management and supervision become over-taxed and the sole focus becomes just getting the project built. Management of the project from a cost perspective gets lost, and change orders and paperwork tend to fall through the cracks. Also, subcontractor change orders are often ignored only to disrupt the relationships, triggering emergency measures to satisfy their payment requests. So, how do you grow efficiently?
The Risk of Taking on Larger Projects
Contractors often think the answer is to minimize the need for additional management resources by simply going after larger projects to increase volume. There is no doubt that controlling project size is difficult in an industry where big jobs lead to growth. Since project management resources may not be readily available to undertake many small projects, it may seem far easier to grow by simply taking on bigger jobs that can be handled by the existing management structure. However, bigger projects most often require more experienced management. When management is not experienced enough to handle a large project (often with a larger degree of difficulty) back charges occur, claims typically arise and profits are blown. Many companies have failed by taking on projects that are dangerously large in comparison to their ability to withstand a loss. But there’s an answer!
Under a controlled growth strategy both project size and degree of difficulty are considered, and the potential for failure is mitigated. And controlled growth allows time for the expansion of systems in addition to providing time for the related training programs to develop. By systematically building the management infrastructure, your company can take on an increasing number of jobs and build the experience and resources necessary to eventually manage larger projects.
In summary, carefully evaluate the mix of project sizes your company undertakes because if something goes wrong on one of these projects that are too big to handle, the consequences can be catastrophic. Both future bonding needs and capital needs can be put in jeopardy, in turn, resulting in business failure. What then is the key? Don’t let your excitement over emerging opportunities cloud the sound business practices that you have used to succeed thus far. Big is not always better!