Contractors come in all sizes and shapes but there are four distinct stages that many fall into. I like to refer to theses stages as wonder, blunder, thunder and plunder. Let’s take a few minutes and talk about each and how the economy will impact contractors in each category.
The Wonder Contractor
These contractors are just starting out. They worked for someone else and decided to start their own businesses. Maybe they felt the grass was greener on the other side, possibly their old bosses would not give them a raise or maybe a couple of customers talked them into leaving to start their own businesses and work for them. Regardless, they are babes in the woods who are wet behind the ears and full of dreams and goals. Most of these contractors mistakenly think they have no overhead. In the beginning, they have very little or no marketing costs because most of their work comes from referrals or customers they stole from their former boss. They use the same truck they drove back and forth to work and may have even accumulated enough tools and materials from their old boss to get started. The wonder contractor basically works for wages. He or she does good work because he or she is the foreman on each and every job. Their prices are also low. When you do good work at cheap prices your business grows. Such growth is not this contractor’s friend, and they soon move into the next stage, we will refer to as blunder.
Prior to talking about blunder, let’s take a moment and talk about how the economy is going to impact wonder contractors. A strong economy allowed a high percentage of these contractors to take root. Demand was high and little marketing was required. As consumer, builder and other requests dropped, they had no way to make the phone ring. Most do not have lettered trucks and many do not even have a business phone listing. So what do they do now? They work longer hours and make less money. Since many do not know their costs, they cut prices in a desperate attempt to obtain work. Over time they will die out, but unfortunately this is going to take a while to happen. Their recession strategy is to simply work harder and hope everything will be OK but that will only keep the wolves from their door for a short period of time.
These contractors have been in business a while but never made a lot of money. They have work, somewhat of a name brand but no cash. They do not know their costs and tend to have more work than they can perform. As demand grew, they simply hired more people. They failed to raise prices, develop foreman to take their place on jobs and had little or no job costing. Frankly, they forgot to pay themselves and felt that by doing more volume they would make more money. Let’s look at the math to understand how they got into this dilemma. Suppose a contractor wanted to make $75,000 a year. Now let’s suppose this contractor had five employees and each of those employees worked 40 hours a week for 50 weeks a year for 2,000 hours. These five employees would generate 10,000 production hours and it would take $7.50 per hour ($75,000 divided by 10,000 hours) to pay for a non-working owner. To make matters worse, production suffered as the working owner stepped off of the job. My experience is that production costs can increase as much as 20 percent.
As volume drops, these contractors will quickly find themselves in even more of a cash bind. Many will cut prices in an attempt to stay busy. Such price-cutting will be a kiss of death. Ironically, if this contractor steps back into the field and works more on the job, he or she may actually survive. Less volume can be a good thing for the blunder contractor.
Long term, this contractor needs to understand and implement basic business practices. Once this has been accomplished they will move into to stage three, thunder.
The Thunder Contractor
These contractors represent 5 percent to 10 percent of the marketplace. They have good businesses and know their costs. They have mature field operations and have developed a strong brand name. They are profitable and drive the market. A recession’s impact on these contractors has much to do with their cash position and how they have managed their wealth. If such contractors overspent on buildings and other assets, they can find themselves in trouble. Cash is king during slow times, and it can be difficult to cut asset expenditures.
Unfortunately, these contractors can face some harsh choices during recessionary times. They have worked hard to build up what they have and cutting back is not easy. There is a tendency to wait too late prior to cutting overhead. Cutting overhead may require letting good people go and reformulating the business plan. The financial position of the owner also impacts these decisions. If he or she has modest personal spending habits, simply taking less income from the business may be an option. If the business is overloaded with family members and other perks, such cuts may not be possible.
The Plunder Contractor
This contractor is mature and through the years has made a fair amount of money. Many have mature businesses overloaded with senior management employees who do not want to change. Mature estimators and project managers may be comfortable and reluctant to develop new customers. Owners may spend more time on their boat and condo than in the business. Such businesses can be at high risk during a recession. Rather than develop a new business plan, everyone may opt for simply adopting a “hanging on” philosophy. Inactive owners who lean too hard on estimators and salespeople to find work may suddenly find the company loaded up with cheap work as these employees attempt to keep their jobs.
Plunder companies must adapt to changing markets and find new leadership. For many companies, this means ownership must get actively involved or replace themselves with someone who is. As the business falters, key people will leave and try to find a job somewhere else.
Regardless of the stage you find your business in, change is the name of the game. Business is an ever-adapting world, and people who do not adapt fall by the wayside. If you would like to discuss your business and how it needs to change, call me at 800 864-0284; I would be happy to talk with you.
