6 Traits for Success in the Construction Industry
The commercial and industrial building and construction industry in Australia generated $15.8 billion in 2011–12. The five largest players generated 16% of this revenue, leaving the other 3,100 businesses to compete for the balance of construction work.
As there are relatively low barriers to entry for new competitors into the market, it is essential to continuously improve your operations in order to stay ahead of the game.
So what do the successful few have in common? Here are 6 traits of high achieving businesses in the construction industry:
1. Relationship with subcontractors: Due to the high dependency on subcontracted labour, having a group of skilled subcontract labourers and maintaining good relationships with them is essential.
2. Relationship with banker: A banker who knows your business will give you a better chance at funding large projects or providing the short-term working capital required. Since the GFC, banks are requiring businesses to provide three way forecasts (i.e. profit and loss, balance sheet and cash flow, all integrated) before they consider any funding requests. Detailed assumptions behind your forecasts will increase the integrity of the numbers presented and give you the best chance at success.
3. Cash Flow Forecasting: A rolling 13-week cash flow forecast is an often under-utilised tool. Successful businesses, with the aid of a cash flow forecast, can assess their ability to generate cash to fund current and future working capital requirements. This identifies, very quickly, what cash ‘flash points’ are looming on the horizon, so that you can put steps in place early to navigate around them. This will also increase your credibility with creditors if you can give them early warning of any delay in payments to them. The 13-week cash flow forecast is also a tool that is often used to seek funding from an external party.
4. Nimble operation: There is no point tendering for and successfully securing a contract if the profit is not adequate. Be prepared to walk away from a low margin job as this is unsustainable. It only takes one hump in the road during a job to suddenly lose your already slim margin, or make a loss. Having a nimble operation will allow you to be more selective in the work you take on.
5. Adequate insurance: Continuous disclosure to your insurance provider, via a thorough annual review, of expected turnover, maximum project value (don’t be conservative) and contractors used on jobs will increase your chances of a public liability or contracts works payout. Often businesses are unaware of what they are actually insured for. Typical claims include weather, burglary or vandalism, accidental and consequential damage. Director and officer insurance is also worth considering (e.g. covering fines for breaking legislations or statutes). If you have any doubt, seek a second opinion from an insurance broker, such as Master Builders Insurance.
6. A strong balance sheet: Careful management of gearing levels (i.e. debt), working capital (receivables, payables and stock) and asset utilisation levels are directly related to a business’ ability to absorb operational shocks. Ensure that written policies are implemented in relation to receivables and payables and that appropriate key performance indicators are used to track asset utilisation. Tight control over these areas will help to minimise business interruptions and provide a solid basis for future growth.
Continuous improvement in the above traits will put your business in a stronger position and help you stay ahead of the curve.
This article first appeared in the April/May issue of Master Builders Magazine.
Kevin Higgins is a Client Director at Vantage Performance, a national award-winning company specialising in business transformation and turnaround. One of Kevin’s client assignments in the construction industry resulted in Vantage Performance being awarded the TMA State Turnaround of the Year Award in 2012.