INTRODUCTION
A business plan can provide you, the owner-manager or prospective
owner-manager of a small construction firm, with a pathway to
profit. This publication is designed to help you develop a business
plan.
In building a pathway to profit you need to consider the following
questions: What business am I in? What do I sell? Where is my
market? Who will buy? Who is my competition? What is my sales
strategy? How much money is needed to operate my firm? How will
I get the work done? What management controls are needed? How
can they be carried out? When should I revise my plan? Where can
I go for help?
No one can answer such questions for you. As the owner-manager,
you have to answer them as you draw up your business plan. This
publication is a combination of text and work spaces so you can
write in the information you gather in developing your business
plan.
A Note on Using This Publication.
It takes time, energy and patience to draw up a satisfactory
business plan. Use this publication to record your ideas and the
supporting facts. And, above all, make any needed changes in your
plan as it unfolds. Keep in mind that anything you leave out of
the picture will create an additional drain on your money when
it unexpectedly crops up later. If you leave out or ignore too
many items, your business is headed for disaster.
Remember, your final goal is to put your plan into action. More
will be said about this step later.
What's in This for You?
The hammer, trowel, pliers and wrench are well-known tools of
the construction industry. Management is another tool that you
as the owner-manager of a construction firm must use. Each job
must be planned and organized if the firm is to run smoothly and
efficiently. A business plan will help you increase your management
skills.
Because of the diversification in the construction industry,
you may be engaged in residential, commercial or industrial construction.
You may be either a general or a specialty contractor. Regardless
of which field you're in, the same basic managerial skills are
needed. This plan is a guide to the various areas that managers
are concerned with. As you work through this plan, adapt it to
your particular needs.
When complete, your business plan will help guide your daily
business activities. When you know where you want to go, it is
easier to plan how to get there. Also, the business plan can help
you communicate your goals and the specifics of your operations
to employees, suppliers, bankers and others.
Whether you are just thinking about starting your own firm or
have already started it, the business plan can be a great benefit.
As your management skills increase so will the number of jobs
you can effectively control. The careful completion of this plan
may point out problems and limitations of your operation. This
is important. To be a successful contractor you must not only
know your business thoroughly, but also know your limits and seek
professional advice in these areas.
Why Are You in Business?
Most contractors are in business to make money and be their
own boss -- both very important reasons. But don't forget, no
one is likely to stay in business unless he or she also satisfies
a consumer need at a competitive price -- the reward of which
is profit.
In the first years of business, your profits may seem like a
small return for the long hours, hard work and responsibility
of being the boss. But there are other rewards associated with
having your own business. For example, you may find satisfaction
in helping to put groceries on your employees' tables. Or maybe
your satisfaction will come from building a business you can pass
on to your children.
Why are you in business? _______________________________________________
____________________________________________________________________
____________________________________________________________________
What Business Are You In?
At first glance this may seem a rather silly question. You may
say, If there is one thing I'm sure of, it's what business I'm
in. But wait. Look further into the question. Suppose you say,
I build houses. Are you a speculative or custom builder? Are you
a remodeler? Are you a subcontractor? Can you schedule a complete
job and make money? Defining your business clearly and tailoring
your business plan to your definition will help increase your
profits.
Consider this example. For many years, Bob Rogers had a construction
business that specialized in designing and building commercial
bars. He had enough business to keep him and his crew busy until
the early 1980s, when sales began to fall off. By moving his shop
to smaller quarters with less overhead and by laying off half
his crew, Mr. Rogers was able to maintain his business to his
satisfaction for the rest of his life.
After his death, his son realized that he was not in the business
of building commercial bars but rather of custom finishing. Today
the son's business is prospering. He remodels kitchens and builds
cabinets in private homes and also does other types of finish
work and carpentry. The son's ability to redefine the nature of
the father's business allowed him to gain greater benefits.
In the space below, state what business you're really in.
____________________________________________________________________
____________________________________________________________________
What are your reasons for this choice?
____________________________________________________________________
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MARKETING
When you have decided what sort of construction business you're
in, you have made your first marketing decision. Now, in order
to sell your service or product, you must face other marketing
decisions.
Your marketing objective is to find enough jobs at the right
times to provide a steady flow of income for your business. Start
by coordinating your jobs to eliminate the down time between them.
An individual who cannot come up with enough ideas to keep a crew
working 12 months a year may not be ready to run a construction
business.
Where Is Your Market?
Describe your market area in terms of customer profile (age,
education, income, etc.) and geography. A customer profile will
help you focus your advertising to reach your potential customers.
For example, if you are a custom builder, you may decide to build
homes in the $100,000-$250,000 price range. This would mean that
your customers will have incomes in the middle-to upper-middle-class
ranges. You may also decide you can earn a profit by building
these homes within a radius of 30 miles from your office. In the
space below describe your market.
Now that you have described what you want in terms of customer
profile and location, what is it about your operation that will
make these people want to buy your product or service? For instance,
quality work, competitive prices, guaranteed completion dates,
effective advertising, unique design, etc., may set your business
apart from competitors. Write your answer below.
____________________________________________________________________
____________________________________________________________________
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Advertising
You have described what you're marketing (your product or service),
who is going to buy it and why they're going to buy it. Now you
must decide the best way to let your prospective customers know
about your product.
In the space below jot down key words and ideas that your customers
should remember about your product or service. This will help
you to create effective advertising.
____________________________________________________________________
____________________________________________________________________
What form of advertising should you choose? Ask the local media
(newspapers, radio and television stations and direct mail printers)
for information about their services and results they offer.
How you spend advertising money is your decision, but don't fall
into the trap that snares many small business managers. They consider
themselves experts on advertising copy and media selection without
any experience in these areas. Be sure to seek professional advice
and compare what different advertisers offer. Complete the work
block to determine what form of advertising is best for selling
your construction services.
Competition
Competition in the construction industry often results in low
profit margins. However, if you are just starting or are a relatively
small firm, you may not be at a disadvantage. Often smaller firms
can compete with bigger outfits because of lower overhead expenses.
For example, your office may be in your home, or you may be able
to work right out of your truck, saving the expense of a field
office.
Competition is largely based on prices, although quality and
efficiency are factors also considered by potential customers.
Poor financial planners have a high failure rate. For this reason,
plan carefully, particularly in the areas of estimating and bidding.
In order to measure your competition, answer the following questions.
Who will be your major competitors?
____________________________________________________________________
How will you compete against them?
____________________________________________________________________
Sales Strategy
The market for the construction industry is unique in many ways.
It depends on such variables as the state of the economy, local
employment stability, the seasonal quality of the work, labor
relations, good subcontractors and interest rates.
Also, as a contractor, you are unavoidably dependent on others,
such as customers or financial institutions, for payment, and
on other contractors for performance of their work. Consider your
cash flow when you estimate and bid on a job. You must be paid
in time to meet your own obligations.
Estimating
Whether an owner-manager in the construction business succeeds
-- i.e., makes a profit -- depends to a great extent on bidding
practices. Therefore, you must make careful and complete estimates.
Many successful contractors attribute their success to their
estimating procedures. Before submitting a bid, they calculate
all job costs by dividing the job into work units and pieces of
material, and then assigning a cost to each item. The total of
these costs will be the direct construction cost. They also estimate
the indirect costs of a job, such as overhead expenses -- the
costs of maintaining the office, trucks, license fees, etc. The
estimate should also include any interest charges on borrowed
money, insurance fees, surety bond premiums, travel expenses,
advertising costs, office salaries, lawyer's fees, etc. These
must also be paid out of gross income.
Trade associations, as one of their services, often provide
members with a package of business forms. The cost estimate form
is usually included in this package. The obvious advantage of
these forms is that they are specifically designed for a particular
trade.
Regardless of what cost estimate form you use, it should include
headings for activity, material, labor, subcontracts and estimated
cost. It also should have areas for direct construction costs,
indirect construction costs, overhead and profit. In addition,
a column for the actual cost compared to the estimated cost of
a specific work item will allow you to evaluate the profitability
of a job after it is completed. This will show you where your
estimates were high or low, and enable you to adjust future bids
on similar projects. This column will also be necessary when it
comes time for your financial accounting.
Bidding
Your decision to bid or not to bid on a particular job should
be determined by several factors. First, do you have the capacity
to complete the job on schedule and according to the specifications?
Beware of overextending yourself out of business. You must operate
within your known capabilities. On any job, you must follow all
the details of the work yourself, or find competent supervision.
Bonding
Bonding companies work with construction companies to ensure
that the construction firm fully commits to the terms of its contract.
Usually bonding companies base their fees for bonds on a percentage
of the contract price. For example, if you have a $100,000 and
your bonding company charges 10 percent of the contract price,
you will pay $10,000 for bonds.
There are three main types of bonds. Bid bonds assure that the
successful bidder is prepared to perform the work according to
the terms of the contract. Performance bonds assure completion
of the job according to plans and specifications. Payment bonds
assure anyone dealing with the bonded contractor that he or she
will be paid.
The effect of being a bonded contractor is evident in the area
of competition. The customer, by requiring that the contractor
be bonded, is more or less assured of adequate completion of the
job. Therefore, customers are more likely to compare contractors
on the basis of price.
With the widespread use of bonding requirements, the competition
generated often leads the inexperienced contractor to submit bids
that are unrealistically low. One or two such mistakes can spell
bankruptcy.
Being a bonded contractor is a good advertising point. Another
advantage is that banks are often more lenient toward bonded contractors.
Will you need bonding: ________ often ________ occasionally,
or ________ seldom?
Where will you get your bond?
____________________________________________________________________
What will the terms be?
____________________________________________________________________
Bond companies usually require the contractor to have proven
experience and the financial capability to complete a project.
Meeting these requirements can be a real stumbling block to a
new construction firm.
The U.S. Small Business Administration (SBA) has a surety bond
program designed to help small and emerging contractors who might
previously have been unable to get bonding. SBA is authorized
to guarantee up to $1.25 million or 90 percent of losses incurred
under bid, payment or performance bonds. Applications for this
assistance are available from any SBA field office.
PLANNING THE WORK
Once your marketing efforts result in jobs, the problem becomes
one of production. How will you plan the work so that the job
gets done on time?
No matter how you plan the work, your plan should help you maintain
your production schedule and adjust production to meet changing
conditions, such as bad weather.
As you plan your work schedule, keep in mind the timing of starts
and the timing of the various steps in the construction of your
projects. Don't forget to consider the size and nature of each
job also. With sufficient help and supervisory personnel, you
can engage in your maximum number of projects.
The work schedule should show the various operations in sequence
and assign a working day and calendar day to each. Several operations
may be in progress simultaneously. A glance at your work schedule
will let you know if work is progressing on time. Many companies
offer commercial scheduling boards designed for this purpose.
Below is a partial work schedule to demonstrate how yours may
be set up. Note that there is a column that can be filled in with
either a solid mark or an X to indicate either partial or completed
work. When you look at a particular calendar day, an X next to
it would indicate that you're on schedule. An open square indicates
a delay. Here, then, is a convenient way to spot delays so you
can take corrective action.
You should save your work schedules as a basis for future estimates.
For example, if you are estimating a job similar to one you've
done before, you'll already have information on the steps of production,
what materials you'll need and when, how long the job will take
and any peculiarities that may affect job completion. When you
consider all these things, you'll be more likely to submit an
accurate bid.
Careful records can also indicate how many workers you will
need. If the work falls behind schedule, you may need to bring
more workers to the job to complete it on time. In this way, you
will avoid a possibly larger financial loss from paying a penalty
for late work (if that is called for in your contract). Also,
records will indicate any changes needed in the organizational
structure of your firm.
GETTING THE WORK DONE
If your firm is going to run efficiently, you will need organization
because, as your company grows, you will not be able to do all
the work. You have to delegate work, responsibility and authority.
An organizational chart is a useful device for accomplishing this,
as it clearly shows who is responsible for the major activities
of your business.
At first, many construction companies are single-person shows.
It is up to the owner to do almost everything. In this case the
organizational chart might look something like Chart 1.
As the company grows, perhaps specialists are added, such as
an engineer/estimator, an office manager and a general superintendent.
The organizational chart then begins to look like Chart 2.
Often, people with complementary experience and skills, such
as work experience and office experience, will form a partnership.
The organizational chart will look like Chart 3.
In the space below, draw an organizational chart for your company.
Chart 4
President
(Your Name)
Personnel Requirements
Will you carry a permanent crew or hire workers as the need
arises?
____________________________________________________________________
Will you use union or nonunion labor? ______________________________________
How many workers will you need? _________________________________________
What hourly rate will you pay?____________________________________________
What will fringe benefits cost? ____________________________________________
Will you supervise the work yourself or hire a foreman? ________________________
If you hire a foreman, what will his or her salary be?___________________________
Will you need clerical help? ______________________________________________
What will it cost? ______________________________________________________
Equipment Requirements
What special equipment will you need (assuming your work force
will supply its own hand tools)?
Will you need an office or use your home? __________________________
If you will need an office, what will the rent, utilities and
other expenses cost?
____________________________________________________________________
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PUT YOUR PLAN INTO DOLLARS
The basic unit of financial management in the construction business
is the job. The financial aspects of the job must be planned as
carefully as the construction work necessary to do the job. The
payment for each job must cover the direct and indirect construction
costs as well as the allocated share of overhead.
Accounting requirements will vary from company to company and
from trade to trade. Your accountant will help you set up the
accounting system that will best meet your needs. However, you
must make the overall plans yourself. You must develop the goals
necessary to guide and manage your business. This overview will
prove invaluable in establishing a good working relationship with
your banker (or other lender) and your bonding company.
In your financial planning, the first consideration is the source
of income. In dollars, how much business (sales) will you be able
to do in the next 12 months? $ _________
Expenses
In connection with annual sales volume, you need to think about
expenses. For example, how much will it cost you to do $100,000
worth of work? And even more important, what will be left as profit
at the end of the year?
Profit is your pay. Even if you pay yourself a salary for living
expenses, your business must make a profit if it is to continue
and pay back the money and time you have invested in it. Profit
helps your firm to be strong and to have a financial reserve for
any lean periods.
The income projection statement in Appendix A is designed to
help you figure your yearly expenses. To use this worksheet, you
need to get one set of figures -- the operating ratios (expenses
as a percentage of sales) for your line of business. These operating
ratios will help you determine if the figures on your income projection
are in the proper range for your business in your location. If
you don't have these figures, check with the trade association
that serves your area of the construction industry.
Matching Money and Expenses
After you have planned your month-to-month expenses, the next
question is, Will there be enough money coming in to meet these
expenses and to sustain your company in the event that there is
down time until your next job?
The cash flow projection is a management tool that can eliminate
much of the anxiety during lean months. Use the cash flow projection
in Appendix B or ask your accountant to estimate the amounts of
cash that you expect to flow through your business during the
next 12 months.
Remember that the expenses of buying the materials and supplies
for a particular job may occur a month or two before a payment
is made. The estimated cash flow projection should show this.
Is Additional Money Needed?
Your planning may show periods when you will be short of cash.
For example, when you start a job you will need materials and
supplies. It may be a month or two before your first payment.
What do you do in the interim if trade credit will not completely
satisfy your cash needs?
Your bank may be able to help with a short-term loan. A banker
who is to lend you money on either a short- or long-term basis
will want to know your company's financial condition. The bank
officer will ask to see a balance sheet.
A blank balance sheet is included in Appendix C. Even if you
don't need to borrow money, use it as an outline of your firm's
financial condition. You may want to show your plan to the bank
that handles your company's account. It is never too early to
build good relations with your banker. A time may come when you
may have to seek funds from your banker.
CONTROL AND FEEDBACK
To make your plan work you will need feedback at the various
stages of your management process -- i.e., when planning, directing
and controlling the job as well as adequate financing. The management
controls you set up should supply the information you need to
keep your operation on the money.
During the planning stage, you will need to calculate your bid
carefully. To direct a job, you will need your job cost analysis
to make sure that the job is going to make a profit. To control
the job, you must organize your employees' work schedules. Personal
follow up ensures efficient performance by your personnel.
IS YOUR PLAN WORKABLE?
Now that you've planned this far, step back and take a look
at your plan. Is it realistic? Can you do enough business to make
a living?
If your plan isn't workable, now is the time to revise it, not
after you've invested your time and money. If you feel that some
revisions are needed before you start your own business, then
make them. Go back to the cash flow projection and adjust the
figures. Show your business plan to someone not involved in developing
the plan. Your banker, contact person at SBA (SCORE counselor)
or any outside advisor may be able to point out strong points
that, if emphasized, could turn into dollars.
If you have serious doubts about your business or your ability
to run it, it might be better to delay going into business until
you feel as comfortable with the tools of management as you do
with the tools of your trade.
IMPLEMENTING YOUR PLAN
When your plan is as specific as possible, you are ready to
implement it. Keep in mind that action is the difference between
a plan and a dream. If a plan is not acted on, it is of no more
value than a pleasant dream that evaporates over the breakfast
coffee.
The first step will be acquiring enough capital to get started.
Do you already have the money? Will you borrow it from friends,
relatives or a bank? What else needs to be done? Look for positive
action steps that will get your business rolling. For example,
where and when will you hire competent employees? Where and how
will you get whatever licenses you need to be a contractor? (These
requirements differ from state to state. A summary of licensing,
prequalification and tax information can be found in the
Summary of State Regulation and Taxes Affecting General Contractors,
available from the American Insurance Association, 1130 Connecticut
Avenue, NW, Washington, DC 20036, ATTN: Publications.)
In the following space, list what you must do to get your business
off the drawing board and into action, and give each item a completion
date.
KEEPING YOUR PLAN CURRENT
Expect business conditions to change and be ready to adjust your
plan accordingly. The difference between successful and unsuccessful
planning is often the ability to watch for changes. Review your
plan once a month. As an owner-manager, you must
The income projection (profit and loss) statement is valuable
as both a planning tool and a key management tool to help control
business operations. It enables the owner-manager to develop a preview
of the amount of income generated each month and for the business
year, based on reasonable predictions of monthly levels of sales,
costs and expenses.
As monthly projects are developed and entered into the income
projection statement, they can serve as definite goals for controlling
the business operation. As actual operating results become known
each month, they should be recorded for comparison with the monthly
projections. A completed income statement allows the owner-manager
to compare actual figures with monthly projections and to take steps
to correct any problems.
In the industry percentage column, enter the percentages of total
sales (revenues) that are standard for your industry which are derived
by dividing
These percentages can be obtained from various sources, such as
trade associations, accountants or banks. The reference librarian
in your nearest public library can refer you to documents that contain
the percentage figures, for example, Robert Morris Associates' Annual
Statement Studies (1 Liberty Place, Philadelphia PA 19103)
Industry figures serve as a useful benchmark against which to
compare cost and expense estimates that you develop for your firm.
Compare the figures in the industry column to those in the annual
percentage column
Determine the total number of units or products or services you
realistically expect to sell each month in each department at the
prices you expect to get. Use this step to create the projection
to review your pricing practices.
The key to calculating your cost of sales is that you do not overlook
any costs that you have incurred. Calculate cost of sales for all
products and services used to determine total net sales. Where inventory
is involved, do not overlook transportation costs. Also include
any direct labor.
Subtract the total cost of sales from the total net sales to obtain
gross profit.
The gross profit margin is expressed as a percentage of total sales
(revenues) it is calculated by dividing
III. Table of contents
IV. The business
Many publications on business management and other related topics
are available from the Government Printing Office (GPO). GPO bookstores
are located in 24 major cities and are listed in the Yellow Pages
under the bookstore heading. Find a “Catalog of Government Publications
at http://catalog.gpo.gov/F
Many federal agencies offer Websites and publications of interest
to small businesses. There is a nominal fee for some, but most are
free. Below is a selected list of government agencies that provide
publications and other services targeted to small businesses. To
get their publications, contact the regional offices listed in the
telephone directory or write to the addresses below:
