Growing Your Small Construction Business Part 1: Know Your Costs
Many small business owners don’t even know if they’re making money.
Editor’s note: This is the first article in a three-part series on growing your small construction business. Visit Project: Uptime again soon for the next installment.
Running a small construction business is one thing. Growing it is another.
Some of the rookie mistakes people make involve costs — knowing them and controlling them. If you can get a better handle on your costs, you’ll have a better shot at succeeding at the next level.
Tom Aldrich, a counselor at the South Palm Beach chapter of SCORE Association, which provides free mentoring to entrepreneurs, offered his advice. Aldrich enjoyed a long career in engineering and construction prior to serving in his current role. Here’s what he had to say about costs.
Know your true costs
Keeping records of all your exact costs, including waste, is critical.
“Most small businesses don’t know if they’re making money or not,” said Aldrich. “They live off the cash flow instead of knowing what their costs are so they can bid against other people.” Living off of cash flow is dangerous because at some point during the year, that cash flow will likely dry up.
Another danger of not knowing your costs: You can’t bid effectively. You’ll lose money because you bid too low or lose out on jobs because you bid too high. “Most small contractors don’t know how to bid the job,” said Aldrich.
Estimate more effectively
An important part of growing your business is evolving from time-and-materials estimates to estimates based on your project history once you have enough data.
“The key to estimating is knowing the work. It’s not going into a estimating book. If you go into a book, you’ll never win a project. The only thing an estimating book is good for is to document a change order. They are very, very general and usually high.”
When you do an estimate, be sure to include all costs. Don’t overlook anything, including waste and simple things like touch-ups and cleaning up after subs.
As you continue to do more and more work, as long as you keep good records you can develop your own in-house estimating strategy, by square foot price or complete takeoff of all materials. You can also put in difficulty factors. “It’s a matter of learning how you are able to perform based on past jobs so you can adjust pricing on future jobs,” said Aldrich.
Know the margins you can use
A big part of estimating is knowing the margin you can get away with for profit and overhead. It’s a judgement call any time you put together a bid, and you need some knowledge to make it.
If you’re bidding based on time and materials, you agree to a certain margin on profit and overhead. Aldrich said these days it’s probably 10 percent on overhead and 5 percent on profit. Or you bury them in your hourly rate — but it’s better to add them on top in so you can track your costs more accurately.
No matter what, you need to have a handle on what other people are charging so as not to price yourself out of the market. “People will tell you if you’re charging too much,” said Aldrich.
Shop around for materials
Finding quality materials at the lowest price isn’t easy, but it’s necessary. “You’ve got to be diligent in checking prices. You can’t just go to the local supply house and think you are going to get the best price, because chances are you’re not,” Aldrich noted.
Buying quality is also important because cheaping out will cost you in the end. Let’s say you purchase studs from a big box home supply store. You might discover that 25 percent of the studs are no good because they’re warped, which means spending more to replace them.
There’s no one answer to where to find the materials you need at the right price. “You shop around, look for every advantage that you can possibly get.” The bottom line: “You can’t be lazy when you’re pricing stuff.”
Keep records of waste, and avoid it in the future
In construction, materials waste happens, whether it’s two-by-fours or concrete. You need to account for it when doing your estimates — and also work diligently to reduce it.
“If you want to minimize your waste, keep track of everything you do so you don’t make the same mistake twice. This whole thing is a learning experience.” If you wasted a lot of two-by-fours when framing a previous job because someone bought too many of a certain length, what lengths should you buy for the next project so you don’t waste any?
It helps to have reliable people working for you who will take the time to figure out exactly how much you need and think in terms of keeping costs down, said Aldrich. “Not everybody thinks about saving money or minimizing waste.”
That person should, in short, know what they’re doing. For example, when buying concrete, you can make a pretty exact takeoff based on the amount you’re going to use, but you need to be aware of what the yield is or you might run short. When you buy 10 yards of concrete, you may actually get only 9½. If you find yourself short by half a yard, you’ll need to order 2 ½ more yards, since that’s the minimum load for a concrete truck.
Plan for meeting all your obligations including taxes and insurance
“A lot of people fall behind on their taxes, and it’s one of the worst things you can do,” said Aldrich. “I’ve worked with people who haven’t paid taxes in several years, and that’s just dodging a bullet.” Pay estimated taxes quarterly. Remember to include sales tax where applicable.
Permits and business insurance are other obligations. In addition to business insurance, make sure you have workers comp for your employees, unless you’re using independent contractors (who file 1099s). “A lot of people skip it, and the first time someone gets hurt, you are in deep, deep trouble,” said Aldrich.
Speaking of deep trouble, to protect your personal assets, it’s critical to separate them from your business assets by setting up your business as an LLC.
Lean on SCORE
SCORE is a nonprofit resource partner of the U.S. Small Business Administration. Getting help from a SCORE counselor is free, and there are counselors who can help in all areas of starting and growing a business, whether it’s marketing, finance, accounting or writing a business plan. There are no restrictions on how many times you can talk to SCORE counselors, either in person or through email or video chat.
“It’s the best deal in town,” said Aldrich. “If you’re not happy with one counselor, there’s always someone else that will be able to help you.”
To get started, Google “SCORE” and your city or town to find the chapter near you and call to make an appointment, or go to the national SCORE website to request or search for a mentor.
Marianne Wait is an editor and writer who creates content for Fortune 500 brands.