For a small contractor, a workable chain of command is simpler than most owners expect. Once the company reaches a certain size, the owner has only four direct reports: The first is the newly installed “No. 2”; the others are the finance manager, the chief estimator and the sales team. Everyone else in the field and on the projects answers up through that No. 2. Many small contractors never get there, and the reason is usually simple: the owner is only one person; if the company cannot run when he’s on vacation, the work will not get done.
Most small and mid-size construction companies run on a mentality of think small, hire cheap. The owner is still involved in every aspect of the business, and as the company grows they tend to hire the lowest-cost person with only today in mind instead of what you will need when the company doubles. One consultant calls it letting your wallet control your future. Grow 15% to 20% a year and you double in about four years. Successful owners hire experienced professionals who can run projects start to finish, need little supervision, can become leaders, and are paid top dollar.
The most successful construction companies are run by innovative entrepreneurs who focus on the big picture: growing capacity, building loyal customers, aiming for higher-margin work, implementing systems, recruiting top talent, continuous improvement and, as a result, best-in-class performance. They delegate day-to-day tasks such as project management, field supervision, crew scheduling and estimating. Their primary focus is leadership, building their customer base, mentoring managers and holding them accountable for results.
You as Owner Can’t Do the Work Any More
So when should it happen? Here’s a rule of thumb: if you’re a general contractor grossing from $8 million to $20 million annually, you as owner can’t do the work any more. Same goes if you’re a subcontractor with $5 million to $10 million in annual sales and have 20 to 30 field workers. The word “work” in this case means estimating, project management, field supervision and accounting. By this point you should have a solid management team in place: a senior project manager, general field supervisor, chief estimator and financial manager. They run the projects and the company without much oversight from you. But you still have to manage the managers. You hold weekly managerial meetings, review key estimates, help develop your company’s bidding and sales strategy and really keep an eye on the numbers.
Strong Second-in-command
Once a professional team is in place, the owner should promote or hire a strong second-in-command (No. 2). The No. 2 is the top construction operations manager, who should run all operations including project management and field production. The No. 2 reports directly to the owner. The chief estimator, finance and accounting manager and sales team also report directly to the owner. Project managers report to the No. 2, while field supervisors and crew foremen report to their project managers or to the general superintendent. The No. 2’s job is not merely to do the job, but to make sure someone does the job and it gets done right.
Promoting the right person to become Number Two in your company is hard. You really have to think through whether the candidate is the right person. Can he or she coach employees, instill confidence in the customer, make the right decisions and command the respect of employees? Most of all, do you want to build a business with this person?
The consultant tells of meeting the owner of a retail construction company who was doing nearly everything by hand - estimating, managing every project. He had leveled off to what he could accomplish as a solo act. He finally hired a weak project manager and an estimating trainee and grew from $3 million in sales to almost $5 million in a little more than three years. The business leveled off again. The owner kept telling the consultant how expensive strong managers were, and the two of them often discussed whether he should take the risk. He was turning down opportunities to negotiate with some of his best customers and to build many more high-profit projects. He couldn’t even keep up with the work he was doing.
Finally, he found the right guy to become his No. 2 and take over all construction operations. He paid him 50% more than he ever paid a project manager, but today that company is averaging over $20 million in annual sales with a net profit margin up 6%. The backlog is well over $30 million of negotiated high-margin work. Why? Because the owner spends most of his time cultivating clients instead of doing the work and hoping the customers call with low-priced jobs to bid.
Don’t be afraid to hire an experienced professional, even if they cost more than you want to spend. The right person will take most of your problems away by putting systems, structure and a team in place that produces results without your constant supervision. The math is simple: $50,000 more salary per year only takes $500,000 of extra revenue at 10% markup to cover, or $250,000 at 20% markup. The owner can probably generate double or triple that if he stops doing the work and focuses on customers, strategy, systems, profit improvement and mentoring.
Indecision Can Suffocate Your Business
Waiting has its own cost. In another case, the consultant met with the owner of a company to work on how to improve his bottom line. Digging into the company’s problems, the consultant learned that project managers were not following the company’s standard systems. They were billing for most projects four to five weeks late, issuing change orders without prior approval, and writing subcontracts riddled with holes. They weren’t making regular site visits to discuss the project’s schedule. Worst of all, the estimator was hard to communicate with. He wasn’t expanding his list of subcontractors and suppliers, getting only one or two bids per trade. He missed bid deadlines, forgot items in estimates and wasn’t willing to make changes.
To fix project management, they began putting in several new systems and a mentorship program. One project manager immediately quit, and was quickly replaced. The other stepped up his game dramatically, and still works there today. The consultant also insisted he replace the estimator with a good communicator who meets deadlines, builds a strong subcontractor list, attends customer proposal meetings and develops a better estimating template. The owner put off replacing the estimator, because he didn’t want to deal with it. The next year, sales and margins were bad. Lesson: indecision can suffocate your business.
The point for owners is plain: when you are the one cranking out the hours at work, you are not growing talent, and you are not building your customer base. You’re not spending time managing your managers and are spending too much time helping your weak employees get their work done. The sooner you move toward putting in a strong, qualified person to help get things right, the sooner you will be where you want your company to be.
