Building the Profitable Contractor, Part 3

Management authority James McCarl shares his keys to building a profitable contractor

The most frustrating part of the mechanical construction industry is achieving consistent, sustainable profitability. Few contractors can say they are profitable every year or that they have consistently great returns on the investment in their business.

I want to share what I consider the keys to building a profitable contractor. Earlier we discussed the importance of leadership, retaining good people, proper planning and building a solid foundation. The final keys to success are a focus on best of class, risk management, keeping it simple and having fun.

Best of class focus

As defined by the Construction Finance Management Association, “best of class” is the top 25% of contractors compared with their peers by size, geography and type of work performed. At my company, we set benchmarks to measure success. We used CFMA, Fails Management Institute and Robert Morris Associates measures to develop our scorecard. Like a baseball team looks at its players and the league to see how it is doing, we did the same with our team.

Employees had a personal scorecard that told them our expectations. They were given a report card each year when we did our evaluation. Key parameters tracked company performance alongside personal measures — from profitability and cash flow to safety, attendance and continuing education. We also did a midyear review to monitor performance and determine how we could help employees succeed.

When we held our turnover meeting to discuss a project, all team members came together around one view of the project and one estimate. The key portion of the meeting was setting goals. We projected how much we could improve on an estimate and then developed a plan to achieve that goal.

Each department of the company was held accountable monthly for financial goals set for them in the annual budgets. At the company level, we developed key performance indicators that we regularly reviewed: cash flow, current ratio, debt to equity and others. We created a no excuses, no surprises culture that led to best of class status.

Risk management

Another key to building a profitable contractor is using risk management as a tool to gain competitive advantage. Not all companies have the same risk tolerance, and those that know their tolerance will know which projects they can acquire at higher profit margins.

Successful companies have built risk management into their standard procedures. It is not viewed as a one-time event, but an ongoing effort to identify and eliminate risk and its profit-draining consequences.

As CEO one of my primary duties was to identify and remove “rocks in the road” that could block my team's drive to success. We had systems in place, checklists and a culture that enabled us to identify and mitigate risk at every level of a project and throughout the company. On my Website, www.mccarlgroup.com, I distribute a tool I developed to help companies assess risk.

As I work with associations and contractors, I regularly am reminded of the difficulty most of us have with keeping it simple. We need to focus on finding the easy way to get things done. Too often we make things more difficult than necessary, we erect barriers to success by building roadblocks for team members and, even worse, our customers.

Contractors should flow-chart their important systems to identify any bottlenecks to profitability. They should put themselves in their clients' shoes. Remember, it is about people, not data. Great companies make their customers feel at ease through the professionalism and competence their team members bring to the project. This is not easy to do, but because we know the keys to becoming a profitable contractor and have applied them to our business, we can make it look easy.

Profitable companies know that one key to success is their ability to identify value-added partners. These partnerships enable a contractor to execute additional projects without additional overhead. Successful companies know what they do well and they know what needs to be done. That is the simple path to profitability.

Contractors need to find simple ways to streamline all of their systems, ways to use team members to the best of their ability and ways to make their purchasing systems efficient and less cumbersome. Great companies make the impossible look easy. Think about Tiger Woods and how easy he makes it look. I believe his keys to success could look similar to my list.

Have fun

Harvey MacKay said, “Do what you love, love what you do and deliver more than you promise.” Work should not be drudgery. Take Harvey's advice and profitability will follow.

The application of the eight keys I have discussed will make any company a better, more fun place to work. People want to be associated with a winner, they want to be part of a winning team, and profitability on a consistent basis is possible for contractors who focus on the keys. It is amazing what happens to a consistently profitable company. Companies can give pay raises, bonuses, fringe benefits, new equipment, great training and on and on. Remember, “profit” is not a dirty word, but “loss” is a four-letter word.

F. James McCarl was president for more than 30 years of McCarl's Inc., a family business that he grew into one of the top 50 mechanical contractors in the U.S. McCarl's became a wholly owned subsidiary in 1999 of electric utility PPL Corp., Allentown, Pa. In 2003, McCarl became chairman of The McCarl Group (mccarlgroup.com), which helps family-operated businesses, mechanical contractors and nonprofits maximize their potential through strategic planning and risk management.