Understanding Business Growth Plateaus…and Beyond
By Leslie Shiner, MBA, Owner and Senior Industry Advisor, Intuit Construction Business Solutions

Working with contactors of varying sizes over the years, I have watched many who believe that growth is the key to success and increased profit.  This strategy may work for some, but it is not a solid path to success.  Why?  Because construction companies often suffer from what we call “growth plateaus”.

Growing Pains

Most contractors start by working in the field.  Soon they discover they need a field crew and subcontractors to meet increasing demand.  As they produce quality products, their business grows.  During the day, they work in the field, managing their crew and subs, returning to their office at night to finish paperwork.  Soon they discover that they need to start delegating to others.  Since paperwork is not a favorite task, contractors typically delegate bookkeeping and office management.

Many small companies run successfully at this level — with the owner controlling estimating and project management. However, with economic factors in play, the equilibrium can shift.  For example, there may be greater demand for their services.  The contractor thinks about hiring someone to help – perhaps a project manager or an estimator.  But that can backfire. Have you ever thought that you had a great year because you doubled your volume, but instead, you lost your shirt?

Leaps and Bounds

Smooth and consistent growth does not happen in construction. Instead, growth occurs in large jumps. Look at the volume you generate with your crew and level of management.  If you are operating at maximum capacity, a small increase in volume may require more than a small increase in expenses. It will be difficult to achieve the same profit margins with this significant increase in costs. 

For example, what resources do you need to increase your volume by 20%?  A full time project manager perhaps?  If so, you must consider the annual cost of this new employee, including benefits and taxes.  Will the profit you expect to achieve from the extra 20% volume cover these costs?  Typically not. 

This is why contractors have such trouble achieving consistent profit as they grow. The idea that you can maintain steady growth in construction is a myth.  I’ve often heard contractors say, “I know I could grow if I just got out of the day to day stuff and spend more time selling.”  But to focus on sales you need a project manager, who is not typically 100% billable. 

Therefore, growth must be analyzed, planned, and monitored.  Understanding your costs and distinguishing between direct job costs and overhead will help you manage growth for profitability.  Direct expenses vary with volume — increased work will increase these costs.  Be careful to include all labor costs, from payroll taxes and liability insurance to overhead, such as cell phones, vehicle expenses, and training.  Now you can better judge how much costs will increase when increasing volume.

Breaking Through the Plateau

Most contractors battle a growth plateau — they achieve a good profit, attempt to grow, then find their profits disappear.  Many contractors give up.  However, if you plan for growth, you can break through this plateau.  You must determine what volume will bring in enough money to cover higher costs.  You may need to suffer decreased profits for a while.  Be sure to determine how much profit loss you can accept and for how long.  As you measure your progress, you can re-evaluate your strategy based on your process.

Growth can be painful and not all contractors should strive for growth.  Many contractors have a “lifestyle” business — one that comfortably supports them without the headaches associated with growth.  They revel in their successes and take on only the amount of work they can handle.   Other contractors want to grow.  These contractors must be ever vigilant to plan for growth, budget for growth, and measure results against projections.  When they bump up against the growth plateau, the must focus on breaking through that barrier to see the benefits of operating a larger and successful company.

Leslie Shiner—author, speaker, and trainer—has more than twenty years of experience working as a financial and management consultant for the construction industry. As the owner and principal of The ShinerGroup, she has helped both small and large construction companies better understand their business practices and maximize their profits. Ms. Shiner is the Senior Industry Advisor of Intuit Construction Business Solutions, a provider of software solutions for the construction industry. She firmly believes training and education is instrumental in the growth and success of those in the contracting field. [ return to top ]