For years I have lectured on the different contractor business structures and how you can make money at each stage, but how businesses are less profitable between these plateaus. These steps are a natural transition and follow the sales growth of the company, but failure to maximize your profit at one level before going to the next level can create devastating stress.
Professional Tradesperson: This contractor still works in the field, charges high prices and gets most work by referral. This contractor model will have $200,000-$300,000 in sales. The owner works as foreman, has one or two other employees, and does a few estimates at night or on the weekend. Because these owners are on each and every job, they do not need a lot of systems or recordkeeping. They also don’t need a lot of advertising, as they don’t have to sell very many jobs to keep busy. They typically do good work, so referrals are strong. If you like to work with your hands, don’t like to manage or are a control freak, this model might work for you.
There are several drawbacks to this model. First, it is hard to stay small because when you do good work and are just earning wages, your business can grow very quickly. When this owner stops physically working on the job, the numbers no longer work. Another mistake is that most contactors who work at this level don’t charge enough. They basically charge a little above wages — say $25 to $35 an hour — and never make it financially. Such a low rate just does not cover costs, and they need to be charging $40 to $45 an hour. For example, the average cost to operate a heavy-duty pickup truck including gas, insurance and replacement cost is $14,000 a year. That’s why many contractors of this size drive older trucks. This owner also needs disability insurance and to save for retirement.
Home Alone Contractor: This contractor does $500,000 to $1 million in sales. These contractors typically have administrative help and an inexpensive facility. They are beginning to develop key lead field people and the owner sells and project manages work. The biggest mistake contractors make at this level is having inadequate administrative help. Contractors tend to have an inexperienced family member or a $10-$12-an-hour employee who just answers the phone. Contractors by nature tend to be disorganized. A strong, organized administrative person can do the books, job cost, screen and set your appointments, order material, call customers for colors and to schedule. The right person will not need to be told what to do, but will rather take charge and guide you. I would rather see a contractor at this level have a really good person at $16-18 an hour for 20 hours a week than a weak person full time at $12 an hour.
Because this type of company just has two or three crews, owners can still check jobs regularly, and with the office person doing administrative tasks, they can spend much of their time selling. This type of contractor can make $100,000 to $200,000 salary and profit.
Common mistakes for contractors of this size include adding salespeople and production managers without competent office staff and systems. This results in much less profit and the disorganization factor sets in. Without a plan to develop lead people and proper planning, the owner can become a glorified jobsite babysitter and material picker-upper.
Owner-Driven Organization: This contractor does $1 million to $1.5 million in sales and is the most profitable model. This model is much like the Home Alone model, except the owner is a high-energy sales machine and the administrator is extremely strong and manages details. Strong foremen have also been developed, so jobsite babysitting is held to a minimum. One senior field person might help schedule, do warranty work, etc., but they still spend enough time in the field to pay for themselves. This type of contractor can make $200,000 to $400,000 a year and can be extremely profitable, but it is all based on owner capacity.
When these types of owners max out and begin to add assistants, project managers, salespeople, etc., profits do not grow with this expansion. Many of these owners simply want to sell and do not have the personality or will not take the time to manage other managers. Again, our advice for this type of owner is to have disability insurance and at least someone in the organization who can measure and estimate jobs should he become sick.
Contractor Management Team: This business will have sales between $2.5 and $50 million and is all about the owner’s ability to manage managers. Owners of this type of business have to realize that it is no longer about their being a star but rather their ability to create stars. This business will have managers over departments and/or branches, or a controller who can maximize IT and constantly works to build a field organization to do the work. Owners who appreciate the analytical nature of business tend to do better and enjoy this type of business. This organization is an institution and not as dependent on the owner to drive sales. Many contractors strive to get to this point but a lot of them do not have the patience or personality to manage this type of business.
In summary, you may not agree with my findings but 30 years of contractor consulting backs this up. We also have propriety numbers to prove it. Allowing growth to push you beyond the maximum profit level of each business type is going to create more stress and less profit. If you want to discuss it, just give me a call at 800 864-0284.
