Avoiding Boom and Bust: Grow Your Company the Right Way

3/31/2015 - By Zachary Farrington

-This excerpt is from our Spring 2015 Dimensions Newsletter-

Most contractors who survived the recession did so by slimming down drastically, downsizing their staffs, cross-training employees to perform multiple roles, and working on much tighter margins. Such practices got them through the slowdown, but most agree they don’t want to go through that again.

Instead of enduring another cycle of boom and bust, savvy contractors are looking to grow the smart way this time. The goal is to take advantage of today’s growth opportunities without overextending and setting themselves up for another round of drastic cuts down the road.

Here are three broad areas of focus where careful management can help you smooth out the peaks and valleys of the cycle and achieve more sustainable growth.

Staff Levels, Experience and Operational Structure

As a cost cutting tool, some contractors let go of experienced employees who were earning higher wages, while retaining less expensive but less experienced staff as a skeleton crew. Others took the opposite approach, holding on to only their most reliable and versatile workers who were capable of performing multiple functions, while releasing less experienced staff who were not as adaptable.

Regardless of which approach you used to survive, the reduced staffing levels that were necessary to get your company through the recession will probably not be adequate to support the potential growth in your business in the coming years. The increase in work flow may also require that support and administrative positions that were combined as a cost-cutting measure a few years ago must now be broken up again into separate jobs.

The key in restructuring and rehiring is to invest in positions and people who can increase both the top and bottom lines. Don’t add overhead unnecessarily, but be open to adding staff if the new employees can help you add capacity, improve efficiency, or make better use of the revenue you are bringing in. For example, adding a staffer who can help speed up billing and accelerate your cash flow could result in a positive return on your investment.

Project Size and Scope

Some contractors found it necessary to take on projects outside their traditional areas of expertise in order to keep cash flowing during the slowdown. If this happened with your company, you may find your company’s specialties have gradually changed over the years.

Take a fresh look at your limits and areas of expertise, and make sure you have the right staff and experience for the type of work you’re now pursuing. Be sure you fully understand the contract requirements and scope of work before finalizing a bid, and ask yourself if the work you’re now doing is taking your company in the direction you want it to grow.

Also look at the size of the projects you’re taking on. A single, blockbuster project can help boost top line growth quickly, but it also increases your risk exposure. In many cases, a large project can also mean relatively lower margins than you could earn by taking on several smaller projects instead.

In addition, of course, always be sure you have sufficient bonding capacity, as well as adequate capital or credit lines to avoid running into cash flow problems over the course of the job.

Estimating and Job Costing

Many companies have been using the same rates for estimating labor, material costs and overhead for some time. In order to accurately cost a job, it is critical that these rates be updated and customized to reflect your company’s current experience and structure.

For example, the standard unit costs for labor in many estimating software packages are not likely to accurately reflect all of your specific hard costs, which include hourly wages, employer-paid taxes, Social Security, insurance, benefits and other worker-specific costs. In the same way, your overhead rates and cost allocations should reflect the current financial operations of your company, not just an outdated “rule of thumb.”

By reviewing your company’s estimating practices and adjusting them to reflect today’s growth opportunities, you can help grow your business in a more sustainable way — while remaining flexible enough to respond sensibly to any future slowdowns.