In the construction industry, fostering healthy growth can be tricky, forcing subs to be strategic in how they approach scaling their business. According to Josh Luebker, construction consultant and fractional CFO, the strongest indicators of healthy growth are often your working capital capacity and the culture that supports the company. One reveals your growth potential and operational efficiency, while the other determines how stable your growth will be.
In the video above, Luebker shares four areas to focus on if you want to improve efficiency or achieve sustainable growth.
1. Hone In on These Financial Ratios
Financial ratios are useful tools that can measure a business’ vital signs. According to Luebker, the three below are particularly useful for assessing your growth potential:
- Current Ratio: Value of assets / Value of liabilities. Luebker advises aiming for a 2:1 ratio, meaning you could liquidate your assets and pay your debts twice over. The lower this ratio, the riskier you seem to lenders who could support growth.
- Debt-to-Equity Ratio: Company debt / Total equity. This ratio is also used by lenders to gauge risk. Luebker suggests keeping it between 1:1.5 and 1.5:2. If the ratio becomes more than 2, this signals to lenders that you’re more likely to not pay off your debt. That means higher interest rates and lower limits.
- Overhead-to-Revenue Ratio: Overhead % / Revenue %. Luebker considers this the most important ratio for preconstruction and estimating. Time frame is everything when it comes to this ratio. If you use too short a time period, you won’t get an accurate idea of the health of your overhead percentage. He recommends looking at it over a 9-12 month period. If your overhead exceeds 15%, you might as well be paying to do work.
2. Bid Selectively
Luebker emphasizes the importance of being strategic with what you bid. Don’t make the mistake of piling on as much backlog as possible to keep yourself booked out. This approach is a race to the bottom, and a lose-lose for all involved.
Instead, he suggests you:
- Get Data on Your Manpower: Track your current manpower capabilities against labor projections to ensure you can deliver on promises to clients.
- Present That Data to Customers: Use this data to show GCs you have the labor capacity to take on their project in the timeframe they’re looking for.
- Communicate the Scarcity of Your Labor and Availability: Assert that you have limited bandwidth and need to know which clients to commit your resources to. This can force clients to decide more quickly.
- Be Transparent About Why You’re Holding Firm on Price: Clients love to dangle a competitor’s allegedly lower price and ask you to match it. In instances like this, politely decline, saying you’ve accurately quantified the value of your labor, but can’t say the same for your competition and their bidding method (assuming the number they’ve placed in front of you is indeed from another sub).
3. Create a Healthy Financial Culture
Luebker stresses the importance of a company culture that prioritizes billing and collecting invoices.
The following processes should be ingrained into your company:
- A front-loaded schedule of values, including:
- Mobilization
- Permitting costs
- BIM
- General conditions
- Anything that will cost you money in the first 30 days
“You need to be able to bill for that immediately. Otherwise, you’re financing the job,” he advises.
- Like clockwork, at 20, 30 and 40 days, the accounting or project management teams should be following up on unpaid invoices. After 45 days, they should escalate to a Notice of Nonpayment, enabling you to retain your lien rights. Have the team report on this every Monday. It holds true that “the squeaky wheel gets the grease,” so be sure to speak up about and pursue cases of non-payment. If waiting for payment doesn’t feel dire enough to adopt this process, check out this article from Billd on the carrying cost of waiting for payment.
4. Employee Retention and Satisfaction
Often overlooked, employee satisfaction is a huge factor in sustaining growth. Luebker points out that replacing an employee can cost tens of thousands of dollars, when you consider the hiring expenses and lost productivity. For example, the cost of fixing the mistakes of a burnt out employee, the cost of sourcing and interviewing their replacement, the cost of training the new employee and bringing them up to speed… All of this can bleed a subcontractor dry. Companies lose more money to turnover than anything else, Luebker cautions. This is why it quite literally pays to invest in employee retention.
A careful approach to growth will ensure that your business continues to thrive. To hear more of his advice, watch and share the full video from Luebker.
For more ideas on how capital factors into your growth efforts, check out Billd’s whitepaper on How to Build a Working Capital Toolkit.
