At some point, we may find ourselves wondering how things might have been different if an alternate path had been chosen during a critical decision. These crossroads shape our existence, enhance our experience, and affect our outcomes.
Business choices are made with an expectation for future results. After four decades of being immersed in the construction industry, I have seen many owners struggle with these important decisions. But successful contractors are the ones that learn from prior experience.
This article explores the top five things contractors might tell their younger selves if given the chance to go back in time.
Simply stated, to be successful in the construction industry requires navigating many types of risk including financial, safety, environmental, and contract. As Neil Armstrong once said, “There can be no great accomplishment without risk.”
While it is nearly impossible to avoid these risks in the construction industry, successful contractors have found best practices to recognize, monitor, and overcome them.
Learning from yesterday’s history and experience is the best way to plan for tomorrow. What advice would you give your younger self? Would you change any significant choices that have had the most impact on your business over the years? If so, would you be on a different path or at a different point on the same path?
Be honest with who you are today and who you were yesterday as you contemplate that conversation with the younger you and consider the following areas.
1. Cash Is King
Self-made millionaire Steve Siebold studied more than 1,200 of the world’s wealthiest people over the past 30 years and found that they admit money can solve most problems.
If you have a problem and you have cash, then you no longer have a problem. Accumulating cash in your business can help provide comfort, peace of mind, and a cushion for the next downturn.
Regarding cash flow, it’s often said that managing cash is just as important, if not more important, than managing the job. No matter how great the job is running, if money isn’t coming in to pay bills, then a contractor could be only one job away from disaster. In short, properly managing a job includes properly managing its cash flow.
Thomas C. Schleifer, PhD, also wrote about a similar perspective — “Contractors rarely have enough cash on the balance sheet to see them through down markets, particularly if banks pull back on their lines of credit which happens in market downturns. For the duration of this disrupted market and potential for recession, move cash flow management to the top of your CFO’s priority list and leave it there.”1
Contractors that are tight on cash today or think they should have more cash in the business would tell their younger selves the following pieces of wisdom.
Live within or below your means.
This is most impactful by a decrease in distributions. The company should be self-sufficient, support an appropriate surety bond program, and minimize leveraging with excess debt. Leaving adequate cash in the company can help reach goals quicker.
Pass on that construction project that ended up at a loss.
This is nearly impossible to know at the beginning of a contract, but contractors can easily go back and identify the warning signs at the end of a project (e.g., divisive contract negotiations, strained or underdeveloped relationships, unreasonable time constraints).
Rent equipment for the short term rather than using cash to purchase underutilized equipment.
Even though the short-term cost may be more expensive, the option to terminate the short-term lease after the equipment has been used for its purpose can free up significant cash in the long term. (If you run out of cash, it’s not like you can fund payroll with iron.)
Do more tax planning.
Since most construction companies are pass-through entities for tax reporting purposes, the cash to pay those tax liabilities should be distributed out of the company to the owner(s) to cover the taxes generated from company profits. Taxes can be one of the largest cash outlays for a construction company, generally behind only wages, equipment, and materials. Minimizing the amount of tax paid over time should be strategic, not accidental.
In looking back, these strategies could put more cash back into a construction company.
2. Spend Money to Make Money
While this may sound like an oxymoron after reading the previous section, the two topics go hand in hand. Having a “cash is king” mindset and strategically using cash are both paramount to a contractor’s success.
An underground or heavy highway contractor could save a lot of money on equipment if they just used a shovel to dig holes or excavate. This would all but eliminate equipment maintenance costs, down time due to equipment repair, and rising fuel costs, but contractors would spend astronomically more money on labor due to inefficiencies. Obviously, this is an extreme example, but it proves that spending money appropriately will generate cash flow efficiently.
Let’s review several less obvious examples of when contractors wish they would’ve told their younger selves to spend money to make money.
Purchase or rent new equipment to replace old or extremely used equipment.
Actively managing all assets is critical in making the determination for replacing equipment. The cost of repairs and maintenance and, perhaps more importantly, the down time and underutilization of old equipment usually far exceeds the increase in monthly rental fees or debt costs of new equipment. In addition, new equipment is often more efficient and can increase production. When performing the cost benefit analysis, remember to include expected efficiencies, decreases in downtime, and depreciation advantages into your calculations.
Hire exceptional talent before you need it.
Especially in today’s employment market, good labor is hard to come by — don’t let it pass you by. Your reputation is driven by your labor force; build your team first.
Technology should be viewed as an opportunity cost, not a sunk cost.
It’s true — building information modeling (BIM), estimating and accounting software, and enterprise resource planning (ERP) systems have upfront costs. However, the return on investment (ROI) can be substantial from minimizing loss due to more exact estimates or reduced experience modification scores due to increased safety. Take the time to properly plan your use of tech and pursue tech initiatives in an organized way.
Surround yourself with partners who are construction experts.
Nonconstruction professionals can be very influential to the construction industry, especially in such areas as innovation, technology, and challenging the status quo. Yes, general practitioners have a broad range of knowledge, but how well do they know the particular nuances of your construction business? Contractors can and should learn from professionals across many industries. However, you should only trust the specific details of your construction business to those who are dedicated to the construction industry.
3. Make the Hard Decisions Sooner
Construction company owners make many tough decisions, but none are tougher than inevitable personnel changes — especially during a downturn or financially stressful times.
Don’t wait to make employment decisions.
A construction company owner feels a familial responsibility to its labor force. It’s absolutely the compassionate and ethical way to feel; however, it should not be to the detriment of the entire company. Employees understand these decisions and may be supportive if done the right way. Instead of depleting capital and resources by keeping personnel longer than the contracts can support, consider making those tough decisions sooner.