I’m sure we have all heard of construction companies that have expanded, become successful, revenue has increased and their profits have increased, then, the wheels have come off. Profits have fallen and share prices collapse! Some companies even go bankrupt. Where did it all go wrong?
Of course, we all know of the small local builder who kind of ‘bobs along’. They employ only a handful of people, making an average profit most years and every now and then striking it lucky with a really good year. The owner seems content. But then they have a bad year, literally living from hand to mouth struggling to pay their bills, surviving until another good project comes along. Is that what you want to be?
Yet, occasionally we have construction companies that have grown within a generation, from a one-man business to a multimillion-dollar construction empire, that often spans many states and may even have grown into a multinational organization constructing mega projects in other countries. The company is now worth tens or hundreds of millions of dollars, occasionally even worth a billion dollars. Maybe that’s what you would like your construction company to be?
So it is possible to stay small and successful and is it also possible to grow and become successful. So how do you decide what direction your company should follow, and how do you make those decisions successful?
Of course, there are also many companies somewhere in between, which are growing at a steady pace, maybe even with a few contractions when work dries up, then growing again when there’re more opportunities. The one-man company possibly now has a hundred employees and there’s a steady stream of projects.
Why companies should grow
Growing a company successfully is very satisfying. It enables the original owner to move away from being hands-on where they were possibly working in the field on the project all day, while trying to complete paperwork at night and on weekends. It allows the original owner to take management control while relinquishing some of the smaller day-to-day project management duties. It’s often less physically demanding. It allows the owner to take on other bigger responsibilities and learn new skills.
Of course, it also creates new opportunities for employees, who can grow into new roles and take on new responsibilities while learning new skills. Not many people are happy fulfilling the same functions and jobs forever – most of us want to grow and develop. As the company grows, the employees grow, and in doing so employees earn more and can better their lives and the lives of their families.
Of course, a larger company can take on more projects and work with different clients which allows them to diversify so the company isn’t solely dependent on the success of their current projects. Sure there will be some projects that aren’t profitable and the amount of work in some areas will decline for a period, but having a diversified portfolio of projects and clients, preferably covering a number of different regions, will enable the company to better survive the occasional poorly performing project and the unpredictability of the construction industry. In fact, being bigger will mean that the company executes larger projects that could extend over a period of a couple of years, which might enable the company to get through the lean times easier.
Being the owner of a small company is often a lonely job where you alone must make all the decisions, where you alone must solve the problems. Larger companies usually have experienced and skilled people that can shoulder some of the responsibilities, handle the day-to-day problems on projects, and who can provide advice for solving the more difficult problems.
A successful and well-managed construction company provides employment opportunities for many workers – sometimes hundreds or even thousands.
Of course, a successful growing construction company can make the original owner very wealthy. As the company grows it will take on projects in other regions which may bring opportunities to set-up house in another area which may be more suitable for the family.
A larger company means that you can take on larger projects and more challenging projects. At the end of the day building a successful large construction company creates a legacy that others will appreciate, a legacy that’s changed employees’ lives for the better.
Why some growing companies fail
Many construction companies start off successfully. They develop a good reputation and are profitable. The company grows. Then the cracks appear. Quality deteriorates. Projects are no longer profitable. The company starts losing money.
Why does this happen? Well, there are a number of reasons.
- Normally construction companies start off small and the owner is hands-on full-time supervising projects. As the company grows the owner can no longer be hands-on and passes control to managers and staff who aren’t necessarily as focused on ensuring that the projects are successful, and don’t take the same pride in looking after clients and achieving quality work as the owner did.
- Sometimes the new managers are inexperienced. Small businesses often employ mediocre staff because they’re unable (or unwilling) to pay large salaries or attract good people.
- Often owners don’t delegate work correctly. They try and remain in control, but have too much other work and are unable to attend to everything, leaving projects waiting for materials, resources, decisions, and guidance.
- Clients become frustrated when the company isn’t responsive because the owner is busy attending to other business and hasn’t delegated someone else to take the responsibility of managing the project. Clients have become accustomed to dealing directly with the owner and can’t understand why the owner isn’t available anymore.
- In addition, the company undertakes more and bigger projects, sometimes resulting in them having insufficient cash flow. Lack of cash disrupts the procurement of materials and payment of subcontractors, causing delays and, in the worst case, the company goes insolvent.
- Sometimes the company experiences a rapid expansion in a boom period and employs more people, moving into bigger offices and purchasing additional equipment. Unfortunately, these boom periods are short-lived and end just as suddenly as they started. The contractor is left with excess people and equipment in offices that are too large with a high rental.
It’s imperative that the company grows in a controlled manner. The owner must gradually hand over control of various areas of the business to trusted, experienced individuals. The company must progressively increase the number and size of the projects they undertake, ensuring that they always have sufficient cash to finance their operations (including maintaining a buffer for when the unexpected happens) and sufficient resources to carry out the work.
Growing a construction company requires good people and robust systems that can handle the growth and simplify the workload. Managing a large construction company is very different to running a small company.
But, it must never be growth at any cost. Some business owners and managers are driven to grow the business no matter what the conditions are. Large companies have shareholders who expect the company revenue to increase every year, particularly after the company has experienced a few years of stellar growth. Unfortunately, construction has periods of growth and times when work is in short supply. It’s inadvisable to try and expand the company in times when work is limited. Use times of low construction activity as an opportunity to clear out dead wood, get rid of people who no longer fit with the company’s vision, consolidate, and importantly train and reskill people where necessary so that the company is set for better times.
I have seen construction companies stagnate, drifting with the currents, going from one small construction project to the next. However, I was fortunate to work for a company that expanded from a midsize company to a multinational, multibillion-dollar construction company in the space of twenty years, far outstripping larger competitors. Sure, there were the odd hiccups along the way and the path wasn’t always smooth, but we managed these rough patches. This growth provided me with huge opportunities and I was fortunate to be involved in a wide range of different projects. In this time I learned new skills and advanced my career. I also had the opportunity to grow the careers of hundreds of employees, giving them opportunities (including financial) that they almost hadn’t dared to dream of. We successfully delivered thousands of projects to hundreds of satisfied clients. Truly a legacy to be proud of.