John Kenney, CPRC, CEO, Cotney Consulting Group
Understanding why roofing contractor businesses can lose money is the best way to prevent that situation. The decisions and events that precede the failure of a roofing business can be categorized and quantified into a group of common causes.
When it comes to understanding the causes, one of the most interesting facts is that the events and decisions that cause or contribute to a roofing contractor’s failure occur during the company’s profitable years. If you look for the causes during the problematic years when a company is losing money or breaking even, you are only examining the result, not the causes.
The events and decisions that precede a company failure occur during the one to three profitable years before the first year of breaking even or loss. Since many companies struggle through several losing years before failure, the time frame can be from one to four or more years before failure is evident.
In researching the events and decisions that cause companies’ difficulties, I found five recurring and industry-wide risk elements to potential profit or failure. These common aspects of business failure are:
1. Increase in project size
2. Unfamiliarity with new geographic locations
3. New and unfamiliar types of installations and services
4. Changes in key personnel
5. Lack of managerial maturity.
In this article series, we will focus briefly on items one through three and look deeper into reasons four and five.
I am not suggesting that you fear growth or change. Many contractors making decisions concerning growth or expansion into new markets, locations or new and unfamiliar types of installations and services do not see them as risky or dangerous. In fact, with proper planning and controls, most of them are not. But, when two or more of these changes are undertaken simultaneously, they can be lethal to the company’s bottom line.
One of the most common elements among contractors who fail is a dramatic increase in project size. Taking on more significant projects is a normal part of growing a roofing company. The switch to larger projects usually occurs during profitable years. However, problems can develop before
the first of the larger projects are completed.
The project size relative to the size of the company and the size of its average projects has a definite relationship to profitability. When a company is operating at a healthy profit doing a specific average-sized project and a certain top-sized one, there is no reason to believe that profit will carry over performing a dramatically larger one.
Most companies can perform well on a two or three-times larger project than it usually does. Let’s say you normally do roof replacements between five hundred thousand and one million dollars. In all likelihood, you can do a two to three-million dollar project. As the size increases, so does the strain on the company’s resources and technical abilities. Nonetheless, within this magnitude, you can probably get the job done. But the critical question is this: Can you make a profit? Using this example, making a profit from a job three to four times greater than the largest project would be impossible without additional resources and careful planning – unlikely without outside help. Large projects can also be a significant drain on cash flow.
When considering these types of projects, ask yourself these questions:
■ Getting the additional resources required might be possible, but how would my company, without a background on a project this large, determine the needed resources?
■ Without experience, how could I carefully plan the work?
■ Do I have the capital available to bankroll this type of project?
While many good business reasons exist for a company to expand into new geographic areas – such as normal growth, lack of work in the primary area and unique opportunities – risks must be recognized and planned for. Again, the question is not whether the organization can perform a similar project in a different location, the question is: Can a profit be made in a new location?
A company accustomed to working in one area can easily assume that their work type is done the same way everywhere. Yet the differences in methods, procedures, regulations and labor conditions can be significantly different and must be considered. Compounding the problem, a roofing contractor often takes a distant project that is much more extensive than anything they have done in the past.
Roofing contractors sometimes change the types of installations and services from their existing specialty. Companies may change, for example, from doing roofs on office buildings to hospital roofs. They may also add other division seven lines, such as wall panels. These shifts in business strategy require research and planning before attempting new types of work.
Unfortunately, some companies will not survive the change. The entrance cost into new types of installations or services is often drastically underestimated. There is always a learning curve associated with this type of change. Hiring a senior person who knows the
new type of work inside and out may not be enough. Your company may have to complete one or more unprofitable jobs before it can execute a new type of work profitably.
Next month, in part two, we will focus on the effects of key personnel changes and a lack of organizational maturity. As a bonus, we also discuss how to evaluate contract profitability.
John Kenney, CPRC has over 45 years of experience in the roofing industry. He started his career by working as a roofing apprentice at a family business in the Northeast and worked his way up to operating multiple Top 100 Roofing Contractors. As CEO, John is intimately familiar with all aspects of roofing production, estimating and operations. During his tenure in the industry, John ran business units associated with delivering excellent workmanship and unparalleled customer service while ensuring his company’s strong net profits before joining Cotney Consulting Group. If you would like any further information on this or another subject, you can contact John at
jkenney@cotneyconsulting.com.
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