Back to the Basics

Experts are predicting growth in all sectors of the construction industry, including residential, commercial, institutional and government. In addition, the number of foreclosures is decreasing and mortgage rates are remaining at historically low levels. In a recovering economy, customers who put off fixing roofs, replacing windows and other construction-related improvements are more motivated to complete these projects.

That’s the good news. While the recovering economy means there are increased business opportunities, it is essential for companies to stay focused on basic business fundamentals. Companies that abandon sound business practices in a rush to take advantage of the upturn in the economy often experience reduced profits, immediate and dramatic reductions of cash flow, and even the potential for bankruptcy.

Identifying Business Fundamentals

Business fundamentals should not vanish just because economic conditions change. Budgeting, knowledge of true costs, cash flow management and determining break-even points are applicable in all economies. When implemented properly, they provide the flexibility needed to adapt to varying business conditions.

Budgeting – Activities such as pre-planning overhead and direct/indirect costs are essential to achieving and maintaining profit margins. On the other hand, reactive approaches to cost issues are the least effective and result in increased expenses and decreased revenue.

True costs – Unfortunately, many owners ignore this fundamental and “guesstimate” the costs of labor, materials and overhead instead of determining their actual business costs. When an owner guesstimates too high, business is lost. But guesstimating too low can reduce or even eliminate the owner’s profitability. There is no such thing as “close enough” when calculating these costs.

Cash flow – A lack of profitability eventually ruins a company. A lack of cash flow kills a company immediately. Accordingly, it’s vital for owners and top management to remember that the job is never complete until all the money is received.

Break even – In today’s competitive environment, some projects must be bid at or near breakeven to maintain cash flow or keep a competitor from winning the job. This is impossible to accomplish if the owner does not know the exact breakeven of the business and specific projects as they are bid.

Joe Percario, owner of Joe Percario General Contractors LLC in Roselle, N.J., understands these business fundamentals well. “Accurate budgeting is even more important when the economy is not doing well because your margins are so slim,” Percario explains.

“You have to stay on the top of your game and manage by the numbers, because the budget you created last year is going to change as costs change,” he says.

As a result of the devastation caused by Hurricane Sandy in 2012 in New York and New Jersey (areas served by Joe Percario General Contractors LLC), the cost of doing business has increased greatly. Already, vendors are notifying Percario about upcoming price increases.

“If you set your 2013 budget a while ago and haven’t been paying attention to adjust your budget based on these increases, then your sales team is selling work at yesterday’s prices,” he continues.

“This means that by the time the job is ready to be built, it could be 10 to 15 percent over cost with the material increases,” he says. “If you are working on a 10 percent profit margin, you just blew your profits and you are doing the job at break-even.”

Applying Business Fundamentals

When owners, executives and managers work together to plan effective strategies, they are able to secure the most profitable projects available. The foundation of successful planning is based on the application of four key concepts, including:

  • Managing risk – How much new business can the firm handle and at what levels of financial, asset and personnel risk?
  • Capital allocation – How will accessible capital be applied? Does the company have enough capital or should the firm’s owner seek more and increase risk?
  • Cash management – What is the cash management plan? How will the money flow be managed in and out of the business? Should the company require more payment up front, or slow the pace of pay going out or a combination of these? Percario understands the appeal of accepting large, “profitable” jobs. However, if the owner has not prepared an overall company budget and doesn’t know the true costs or the breakeven point of doing business, there may not be enough cash flow in the company to financially support the job. “Then, the owner will need to get an extended line of credit and the interest on this loan will eat up any profits,” he says. “Or, the owner may even lose money on this job. By understanding the company’s cash flow and applying cash management principles, the owner may have realized it would have been more profitable to take on a few smaller jobs instead of this big job.”
  • Operational efficiency – Is the company ready for increased workloads? Will the employees step up to the demands of additional new projects? Should the company add any new personnel, and if so, how many should be recruited?

Here are a few additional tips to consider when putting the fundamentals into practice:

  • Focus on customer service excellence.
  • Maintain relationships with inactive and current customers.
  • Don’t cut corners, prices or margins.
  • Don’t take on more than the company can handle financially.
  • Don’t overload overhead while trying to keep up with the increased demand.

Percario believes that running a business without implementing these basic business fundamentals is equivalent to driving a car without the dashboard. “You have no indicators,” he says. “You don’t know how fast you are going or when you will run out of gas. Plus, you need to maintain your vehicle to keep it running, just like you need to maintain your business. When you perform the maintenance work, you get more use out of the vehicle, just like you do when you apply the business fundamentals.”

Satisfying Customers

As contractors rebuild their businesses, it’s important to create and implement programs that ensure long-term relationships with both returning and new customers. For example, contractors can offer on-going service or maintenance agreements.

These are favorable to customers to protect their investments. Additional perks can be included in the agreements, such as reduced service call rates or guaranteed emergency response times. These programs assist in establishing and maintaining relationships that are important in a strong economy and absolutely necessary in a weak economy.

Many contractors have been waiting for a viable economic recovery to begin. Even though there are legitimate indications of a recovery, sticking to the fundamentals, including a culture of customer service excellence, is a smart business strategy.

Rich Fineman is the consulting services director with Global Resources LLC. Located in Northbrook, Ill., Global Resources LLC provides comprehensive business consulting services and business valuation services to companies in the United States and Canada. To receive sample reports of the project execution documents mentioned or for further information, call 855-338-0266, email [email protected], or visit

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