The Components of Contractor Value

The value of a construction company is its ability to make money. This ability is made up of three components:

  1. Managerial Maturity
  2. Financial Capacity
  3. Market Position

Managerial Maturity

By “mature management” I mean a team of experienced managers at the head of each department with a collective successful track record for producing a company’s specialty projects on time and for a profit. This mature team includes a CEO who knows how to run a business as well as to build out a project. 

Financial Capacity

  • The construction industry is a service industry. It does not build and own construction projects that it subsequently sells to its customers. Rather, it provides its customers with construction expertise. It sells them a service in the same way McKinsey & Company sells consulting services to its clients. 
  • Service providers do not run out of money. They are paid in advance with a hefty deposit and paid along the way in advance for the services they provide. 
  • Construction contractors, however, who are also service providers frequently run out of money and go out of business. Why does this happen? Because contractors have been maneuvered into financing their client’s assets. This financing of the client’s assets is still the standard in the industry and causes countless contractors to run out of money and suddenly fail.  
  • But whether we like it or not, this is the current environment in which we do business, so we must make sure we have the capacity to finance sometimes large and complex projects that can run into tens of millions of dollars. 
  • The financial capacity of a contractor is made up of the working capital on their balance sheet, the size of their working capital line of credit still available at the bank, and the capacity their bonding company is willing to provide.

The Financial Capacity Problem

  • The historic low-bid acquisition method shifted the entire cost risk burden onto the contractor, where it remains to this day.  
  • What’s worse, project owners refuse to pay contractors until they prove that a certain portion of the project is complete. Only then, after the fact, do they pay for that portion of the completed project less retainage.
  • In effect, this bid and payment system transformed contractors into the project owner’s role by placing the burden of financing the entire project squarely on their shoulders.
  • Contractors are service providers, not bankers. Contractors have never capitalized their businesses as if they were lenders and remain undercapitalized by providing financing at the level often required. 
  • Bankers do not lend to contractors because of the quality and size of their construction contracts (as they would if contractors were seen purely as service providers) but rather lend only to them based on their undercapitalized balance sheet.  

Market Position

The two most valuable assets contractors possess are the collective expertise of their management group (that I referred to as managerial maturity at the top of this message) and their reputation in the marketplace.

Reputation

By market position I mean reputation. But more than just “good-better-best”, market position means how potential customers view your company as:

  • The quality producer: Whether we realize it or not, we all project a quality image in the marketplace. We are either the Rolex and Mercedes in our markets or the Timex and Nissan. You can slip down from Rolex to Timex, but once you’re Timex it’s almost impossible to become Rolex in the minds of potential customers.
  • Low-cost producer: Because of the implications of a low-bid acquisition system, many contractors strive to be seen as the low-cost producer. The danger in this position is that it can lead to being seen as the low-quality producer or the undependable producer.
  • The biggest producer: Oddly enough, the biggest producer is often seen as the most impersonal, the least responsive, and the most problematic. Be careful what you wish for.
  • The local contractor: This market position can work in your favor but is also a mixed blessing. When potential clients consider you a local contractor that often goes with them thinking you are less professional, easier to push around, and more limited than the regional players.

Plan to be Great

Managers who recognize the three components of contractor value will manage their company toward realizing managerial maturity, financial capacity, and an appropriate reputation.

Next week we’ll discuss how to build a mature management team that can consistently maximize profits. 

For more information on strategic planning, read more at: STRATIGIC

For a broader view on growth, read more here: GROWTH

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