Business Planning - A Construction Firm's Weakest Link
Planning is critical to a construction contractor. No surprise to all. Planning’s importance has been stated by so many people in so many ways as the one of the key activities to assure business success. We cannot state it differently. We agree. Additionally, we believe that you are not planning when you make up your plan as you go. It is called fire fighting and it is never profitable.
The right kind of planning is essential. The economics, the environment and the business of construction contracting are unique. Therefore, a generalist approach is ineffective. It may be even dangerous given the risk and nature of our industry. Add to that, industry veterans state it is harder to make the same profits than 5 years ago.
A Business Plan is the long term vision and action plan of keeping your business strong. Once created, it must be updated to reflect changes in the market, industry, client base etc. This should be a yearly exercise. To keep the plan the same or to have no plan at all invites the fate of the dinosaurs.
Contractors are smart to review and understand that there are two ready sources of wealth building from construction contracting:
1) Income from a construction firm
2) Selling a well organized and profitable construction firm.
A business plan is a contractor's road map of his or her firm's journey. The business plan is similar to a pre-job plan. Both documents are essential in keeping wasted time and adverse events to a minimum. The reason for planning is simple; it is foolish to make up your process as you go. The business is highly risky. The business is changing. In other words, if you don't have a plan, you don’t have a business, you have a job.
Business Planning is not an exciting event. Contractors want to do something now. They are action biased people who like to see something physically built every day. As we said, a business plan is similar to pre-job plan. However, pre-job planning is energizing since there is a new project to build.
Business planning does not make one's heart quiver with excitement. Since, we don't have a project to build; it becomes a very abstract, dull exercise. Hence, we won't look forward to sitting quietly and thinking through the details of our new business or next year's management work. We tend to procrastinate or abstain from doing it.
Construction people are visually attuned. They love to see physical progress. A business plan is mostly an invisible thing. It is emotionally hard for a contractor to put one together. Once we get past the pain of collecting information from others, doing some reading and writing drafts of our plan, our focus should narrow on what are the real reasons for this document.
Investors are starting to recognize the value of a well run construction firm. That is, as your company matures there is a value of your firm. Others are looking to invest or buy your contracting business outright. A premium will be paid by an outsider to acquire a strong business. Construction contracting and service firms are being sold to those who are looking for a high return on their investment. There is a substantial amount of “unhappy” money in the world. Wealthy investors are not satisfied with the rate of return on CD’s or blue chip stocks. This is evidenced by many current trends we have observed including the growth of hedge funds and the reemergence of venture capitalists.
Planning has a high return on investment. Creating and executing a thoughtful plan allows the owner to have a life outside of construction. A business plan is a leverage point. It answers the twin questions of:
1) How to increase the dividends paid to the owners each year?
2) How increase the value of the firm so that the sale price will be maximized?
For more information on this critical subject, purchase a copy of my McGraw-Hill book, Managing a Construction Firm on Just 24 Hours a Day. We offer a bundle with Excel templates that are featured in the book to help assist in making financial, estimating and project management decisions.
Matt Stevens is President of Stevens Construction Institute, Inc. A management consulting firm which works only with construction contractors. Learn more at www.stevensci.com
For further information about our public training schedule, click here. For a customized approach for your firm, please send me a note at mstevens@stevensci.com.
