Everyone loves to profess how difficult the construction industry is. These critics like to point out how this business chews up companies and spits them out. While there are plenty of people out there criticizing the business, not enough of them are offering construction business management solutions. Instead of teaching business owners how to manage a construction business, these nay-sayers just point out the challenges.
Instead of painting a picture of doom and gloom, this article discusses some critical tips on how to manage a construction business. From workforce and cash flow, to marketing and risk management, these tips will help business owners run more efficient and profitable businesses.
10 top principles of managing a construction business
This line of work has some unique challenges, but construction business management isn’t entirely different from managing businesses in most other industries. These tips from leaders in almost every industry prove it.
1. People need motivation
“Management is nothing more than motivating other people.” – Lee Iacocca
For a company to grow, its people need to feel motivated. They need a company vision and direction they can believe in. Establishing a company goal that everyone can work toward together can be a critical motivating factor.
Create a mission statement that describes exactly what your company believes in. This statement can provide the concrete evidence most people need to feel good about what they’re doing.
Also, as the company achieves its goals, share the success with your workforce. Recognize those folks for their hard work and thank them for aligning with you on the way to the top. Recognition goes a long way toward motivating your employees.
2. Business policies remove uncertainty
“Surround yourself with the best people you can find, delegate authority, and don’t interfere as long as the policy you’ve decided is being carried out.” – Ronald Reagan
If a business plan is a roadmap to success, your business policies make up the GPS that keeps the business on course. Learning how to manage a construction business entails putting these policies together so you can streamline decision-making.
It’s essential to have an employee handbook or set of policies to follow, but there are other policies to put in place as well:
- Develop a credit policy that determines who you’ll extend credit to and how much risk you’re willing to take.
- Put a collection policy in place that establishes when to send invoice reminders and when to turn accounts over to a collection agency.
- Establish a policy that clearly outlines how to handle lien rights. Will you send preliminary notices on all your projects or just the risky ones? (Hint: Send them on every project). Also, when is the threshold for filing a mechanics lien?
Nailing down the who, what, when, where, and how of all these policies will create faster decisions with consistent, measurable results.
3. Your employees are your most valuable asset
“Train people well enough that they can leave. Treat them well enough so they don’t want to.” – Richard Branson
Your business can’t go anywhere without the right people, so kick the “everyone is replaceable” mindset to the curb. You need to show your people that they matter. Give them the tools they need to succeed and the opportunity to better themselves.
Not every business has the means to reimburse tuition or provide company trucks. But little things matter as well: Allowing employees to leave early for family events, offering training, throwing holiday parties, and other small bonuses all say a lot about how much you value your people. Also, recognizing employees who go above and beyond will motivate them to work harder and produce for you.
When your company atmosphere is one of appreciation and empowerment, you’ll attract the best employees.
When labor shortages arise, your company will be in the best position to grow as it will be fully staffed with top-tier talent. And, when those job alerts come through their email, they’re a lot less likely to submit a resume — even if the job pays a little more — because they know they’re appreciated where they are.
4. Effective marketing requires a deep understanding of your customer
“Running a business without marketing will kill it.” – Paul Cookson
It doesn’t matter if you’re a new homebuilder, an established commercial contractor, or an international infrastructure outfit: You need to market your business. How you go about marketing your business will depend on your customer.
Homebuilders and remodeling contractors often rely on advertising where their customers can find it, such as billboards, social media, and mailers. Those methods won’t work for commercial contractors. Instead, they need to focus on building relationships that lead to repeat business and referrals. For public works-type contractors, developing a team full of go-getters that can submit and win bids is the best form of marketing.
Whichever your business model, be sure you’re focusing your marketing efforts where they can make the biggest impact.
5. Cash flow is king
“We were always focused on our profit and loss statement. But cash flow was not a regularly discussed topic. It was as if we were driving along, watching only the speedometer, when in fact, we were running out of gas.” – Michael Dell
It’s true for all industries, but in construction, cash flow is the key to survival. Companies with positive cash flow can grow and take on more projects, while those without it struggle to keep the lights on.
There are several ways to improve and manage cash flow, including minimizing unnecessary overhead and improving accounts receivable collection practices. Also, reducing the amount of time it takes to get paid by protecting and leveraging lien rights will keep the cash coming in.
6. Automation can improve efficiency — or make it worse
“The first rule of any technology used in a business is that automation applied to an efficient operation will magnify the efficiency. The second is that automation applied to an inefficient operation will magnify the inefficiency.” – Bill Gates
Implementing new technology and processes is a great way to grow, but you have to hammer out the details first. Be sure that everyone on your team knows what their job is and how to do it. Take a look at your processes, identify their weaknesses, and improve upon them. Once you’re able to nail these details down, consider adding automation such as construction management software to your game plan.
But, recognize that magnifying inefficiencies isn’t always a bad thing. If you don’t know something’s not working, you might receive a baptism by fire. However, if you stay nimble and prepared to improve, weakness exposed by automation can be a benefit to your construction business management outlook.
7. You can’t eliminate risk, but you can manage it
“Risk is a function of how poorly a strategy will perform if the ‘wrong’ scenario occurs.” – Michael Porter
It doesn’t matter what industry you’re in, there is always risk to deal with. In construction, materials delays can cause schedules to overrun, employees can get hurt, customers can decide not to pay, and many more scenarios could play out. These are all bad, but you can limit how they impact your business.
First, be sure to carry all the insurance policies you need, including business insurance, general liability, and worker’s compensation. Also, be sure to include negotiation clauses in your contracts to prevent delays from costing you more than they need to. Finally, protect your lien rights to ensure you have recourse if a customer decides that they aren’t going to pay you.
Mechanics liens are the fastest and most effective way to get paid when a customer owes you money, so don’t give up your lien rights by not meeting your state’s requirements.
8. Good accounting leads to better business decisions
“Accounting is the language of business.” – Warren Buffet
Good, comprehensive accounting practices are critical to truly knowing how well your business is doing. You need to know your numbers, including profits, losses, and cash flow, but also how much each day on-site costs and where the money comes from.
Make accounting reports your best friends. Produce financial reports for managerial review on a regular basis. Also, use accurate job costing software to determine the health of your projects and cash flow reports for the health of your business. Without these critical reports, it’s hard to say how well your business is actually doing.
9. Use financing to grow
“Business, that’s easily defined: It’s other people’s money.” – Peter Drucker
Leveraging the power of financing can be critical to learning how to manage a construction business. By utilizing other people’s money, you can front the cost of new jobs, secure necessary equipment, and push your company forward.
And, one of the benefits of smart financing is protecting cash flow. By using credit judiciously for things like materials financing or equipment purchases, you can ensure you have more money coming in each month than going out—the true key to managing a construction business’s cash flow.
10. Profit is a result, not a reason
“Business must be run at a profit or it will die. But when anyone tries to run a business solely for profit, then also the business must die, for it no longer has a reason for existence.” – Henry Ford
If you focus only on profit, you’re missing the big picture. Businesses need reasons to exist, fueled by vision and purpose. This mindset allows the leadership to make smart decisions for the good of the company’s future rather than maximizing profits in the very moment at the cost of growth.
For example, awarding a contract to the lowest bidding subcontractor might not (almost never) be a great idea. Likewise, working for a GC with a bad rep because you’re light on work could be a disaster. Or you could make the mistake of hiring someone without the necessary skills or drive to do the job because they cost a few dollars less per hour. Worse yet, taking a bad financing deal that sounds good in the moment instead of weighing out your options can lead to big issues.
Develop a company vision and live by it. Allow it to steer your decisions so the company grows in the long run, not just in the short term.
Construction issues aren’t as unique as you might think
Those tips are applicable to any industry, not just the one erecting buildings and paving highways. Construction business management might look different on the surface, but the core values of running a successful business still apply. By valuing and motivating people, protecting cash flow, managing money, and managing risk, you’ll how the nuts and bolts of how to manage a construction business, or any business, down in no time.