I received a year-end financial statement for one of our contractor clients, and the results were truly extraordinary! Not only did they manage to have their biggest revenue year ever, they also had their highest gross profit margin. I asked one of the owners what they would attribute their success to, and I thought his simple, yet profound explanation was worth sharing.
To understand the full story, you have to go back to 2015 when this contractor had their second highest revenue year. The main difference between their results in 2015 and 2019 was they had one of their lowest gross profit margins ever in 2015. As the owner explained, their resources were stretched in every direction from operations to cash flow. They had never worked harder and the bottom-line result was marginal. They quickly realized that they were taking on way too much risk and working too hard for too little reward.
That prompted this contractor to evaluate what went wrong and where they could improve. One of the major issues they discovered is they weren’t matching the projects they were pursuing with their true operating capabilities to perform the work. This might sound like an obvious problem, but it’s one that many contractors face. With constantly dwindling backlogs and overhead to cover, it’s easy for people to get caught up in maintaining a backlog instead of being strategic and targeting the right jobs for their organization.
My customer set out with their team to identify what their people were best at. In the process, they discovered they had one superintendent that was capable of handling up to 3 complex projects at a time. This wasn’t being considered when bidding work, and they ultimately took on a greater number of complex jobs than they could handle.
They also analyzed all their projects by market segment, owners, and complexity to determine which jobs were most profitable for them over the past few years. They then ranked their market segments by most profitable to least profitable and identified the percentage of work that they would ideally want to get in each segment, which again was based on their operational capabilities.
This process then began to direct their sales and estimating efforts rather than the other way around. Their estimating process is now much more collaborative whereby they analyze availability of their field resources, the risk and margin potential. In addition to the increased communication and matching of resources, they’ve implemented a goal and accountability system for the company as a whole and all the key management.
My customer’s approach was simple and straightforward but not easy. Afterall, if it was easy, every contractor we work with would have the same extraordinary results that this customer did. I can tell you firsthand that is unfortunately not the case. Very few companies know exactly what they are best at with crystal clarity. Many take the approach of, “Let’s get the work and we will figure it out.” The mental effort to go through this process of understanding what you are truly best at and the discipline to execute it can be very challenging. The good news is the opportunity to do it is available to anyone.